New Bookmarks
Year 2008 Quarter 4:  October 1 - December 31 Additions to Bob Jensen's Bookmarks
Bob Jensen at Trinity University

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

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

Choose a Date Below for Additions to the Bookmarks File

December 31

November 30 

October 31

 

 

 

  • December 31, 2008

     

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

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

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

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

    Many useful accounting sites (scroll down) --- http://www.iasplus.com/links/links.htm

    Accounting program news items for colleges are posted at http://www.accountingweb.com/news/college_news.html
    Sometimes the news items provide links to teaching resources for accounting educators.
    Any college may post a news item.

    Bob Jensen's essay on the financial crisis bailout's aftermath and an alphabet soup of appendices can be found at
    http://www.trinity.edu/rjensen/2008Bailout.htm

    Essay

    • Introductory Quotations

    • The Bailout's Hidden, Albeit Noble, Agenda (for added details see Appendix Y)

    • A Step Back in History Barney's Rubble

    Appendix A: Impending Disaster in the U.S.

    Appendix B: The Trillion Dollar Bet in 1993

    Appendix C: Don't Blame Fair Value Accounting Standards This includes a bull crap case based on an article by the former head of the FDIC

    Appendix D: The End of Investment Banking as We Know It

    Appendix E: Your Money at Work, Fixing Others’ Mistakes (includes a great NPR public radio audio module)

    Appendix F: Christopher Cox Waits Until Now to Tell Us His Horse Was Lame All Along S.E.C. Concedes Oversight Flaws Fueled Collapse And This is the Man Who Wants Accounting Standards to Have Fewer Rules

    Appendix G: Why the $700 Billion Bailout Proposed by Paulson, Bush, and the Guilty-Feeling Leaders in Congress Won't Work

    Appendix H: Where were the auditors? The aftermath will leave the large auditing firms in a precarious state?

    Appendix I: 1999 Quote from The New York Times ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''

    Appendix J:  Will the large auditing firms survive the 2008 banking meltdown?

    Appendix K:  Why not bail out everybody and everything?

    Appendix L:  The trouble with crony capitalism isn't capitalism. It's the cronies.

    Appendix M:  Reinventing the American Dream

    Appendix N: Accounting Fraud at Fannie Mae

    Appendix O: If Greenspan Caused the Subprime Real Estate Bubble, Who Caused the Second Bubble That's About to Burst?

    Appendix P:  Meanwhile in the U.K., the Government Protects Reckless Bankers

    Appendix Q: Bob Jensen's Primer on Derivatives (with great videos from CBS)

    Appendix R:  Accounting Standard Setters Bending to Industry and Government Pressure to Hide the Value of Dogs

    Appendix S: Fooling Some People All the Time

    Appendix T:  Regulations Recommendations

    Appendix U: Subprime: Borne of Sleaze, Bribery, and Lies

    Appendix V: Implications for Educators, Colleges, and Students

    Appendix W: The End

    Appendix: X: How Scientists Help Cause Our Financial Crisis

    Appendix Y:  The Bailout's Hidden Agenda Details

    Appendix Z:  What's the rush to re-inflate the stock market?

    Personal Note from Bob Jensen

     


    Marvene is a poor and unemployed elderly woman who lost her shack to foreclosure in 2008.
    That's after Marvene stole over $100,000 when she refinanced her shack with a subprime mortgage in 2007.
    Marvene wants to steal some more or at least get her shack back for free.
    Both the Executive and Congressional branches of the U.S. Government want to give more to poor Marvene.
    Why don't I feel the least bit sorry for poor Marvene?
    Somehow I don't think she was the victim of unscrupulous mortgage brokers and property value appraisers.
    More than likely she was a co-conspirator in need of $75,000 just to pay creditors bearing down in 2007.
    She purchased the shack for $3,500 about 40 years ago --- http://online.wsj.com/article/SB123093614987850083.html

     


    Marvene Halterman, an unemployed Arizona woman with a long history of creditors, took out a $103,000 mortgage on her 576 square-foot-house in 2007. Within a year she stopped making payments. Now the investors with an interest in the house will likely recoup only $15,000.
    The Wall Street Journal slide show of indoor and outdoor pictures --- http://online.wsj.com/article/SB123093614987850083.html#articleTabs%3Dslideshow
    Jensen Comment
    The $15,000 is mostly the value of the lot since at the time the mortgage was granted the shack was virtually worthless even though corrupt mortgage brokers and appraisers put a fraudulent value on the shack. Bob Jensen's threads on these subprime mortgage frauds are at http://www.trinity.edu/rjensen/2008Bailout.htm
    Probably the most common type of fraud in the Savings and Loan debacle of the 1980s was real estate investment fraud. The same can be said of the 21st Century subprime mortgage fraud. Welcome to fair value accounting that will soon have us relying upon real estate appraisers to revalue business real estate on business balance sheets --- http://www.trinity.edu/rjensen/Theory01.htm#FairValue

    CEO to his accountant:  "What is our net earnings this year?"
    Accountant to CEO:  "What net earnings figure do you want to report?"

    The sad thing is that Lehman, AIG, CitiBank, Bear Stearns, the Country Wide subsidiary of Bank America, Fannie Mae, Freddie Mac, etc. bought these
    subprime mortgages at face value and their Big 4 auditors supposedly remained unaware of the millions upon millions of valuation frauds in the investments. Does professionalism in auditing have a stronger stench since Enron?
    Where were the big-time auditors? --- http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms

    September 30, 1999

    Fannie Mae Eases Credit To Aid Mortgage Lending

    By STEVEN A. HOLMES

    In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

    The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

    Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

    In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.

    ''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.'' 
    Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.

    In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.

    ''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the Americ an Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''

    Under Fannie Mae's pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 -- a rate that currently averages about 7.76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point premium is dropped.

    Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary mark et. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.

     

     

     

     




    "New Prerequisites for CPAs," by David Motz, Inside Higher Ed, December 17, 2008 --- http://www.insidehighered.com/news/2008/12/17/cpa

    Business schools in New York and Pennsylvania are getting ready for a boom in accounting enrollments, following changes in state policy on the education they need.

    Looking for a job? See all 122 new postings Browse all job listings: Faculty: 3,578 Administrative: 1,607 Executive: 189 FEATURED EMPLOYERS

    Related stories Making Engagement Data Meaningful, Dec. 12 So Goes the Nation, Nov. 13 General Education in the City, Sept. 5 A Case Study in Case Studies, March 22, 2007 Walking on Eggshells, Aug. 15, 2006 E-mail Print

    Currently, New York and Pennsylvania require that C.P.A. candidates complete a minimum of 120 credit hours — of which at least 24 must be in accounting-related subjects — and have two years’ work experience in public accounting or auditing before they can earn a license.

    As of August 1, 2009 in New York and January 1, 2012 in Pennsylvania, C.P.A. candidates must have completed a minimum of 150 credits hours — of which at least 36 must be in accounting-related subjects — and one year of work experience before they can earn a license. Though these changes do not require an advanced degree beyond the existing prerequisite of a bachelors’ degree, many students seeking a C.P.A. will have to enroll in graduate studies to meet the new minimum requirement for college credit hours. As a result, many students will earn master’s degrees. Advocates of the change argue that this will boost the credibility of their C.P.A.’s and give them an increased ability to practice in other states.

    Most states already have made the shift; New York and Pennsylvania are particularly significant as big states with many business programs.

    To account for these forthcoming changes, colleges and universities in New York and Pennsylvania have to either expand accounting programs or identify other educational pathways for students seeking a C.P.A. license.

    Baruch College of the City University of New York has a large business school, which accounts for about 80 percent of its 16,000 students. Masako Darrough, chair of the department of accountancy, said she expects more students to apply for a master’s program in order to meet the 150-credit-hour threshold. In a fifth year, qualified students at the institution can earn either a master’s degree in accounting or taxation with more than enough credits to meet the new requirement.

    Still, as a third of the business school’s undergraduates major in accounting, Darrough said she is concerned that the institution will not have enough space to serve the potentially growing number of students seeking more credits.

    “We will have to be more selective,” she said of the institution’s master’s programs. “We cannot expand too much because we have a hiring freeze and our classrooms are already quite full as it is. This is a big change for students as well as for us, but we’re trying to help students plan well for the future.”

    The already crowded business school has had to turn away a number of students with degrees from other institutions who were seeking to take additional credits without the goal of an advanced degree, Darrough noted.

    Robert Morris University, in suburban Pittsburgh, is also prepping for the change, encouraging accounting undergraduates to enroll in a program that awards an M.B.A. for an additional year of study. Frank Flanegin, head of the department of accounting and finance, said the university introduced the program as a way to help students meet the upcoming requirement change.

    “There’s no mandate with this change to get another degree – an M.S. in accounting or an MBA,” Flanegin said, noting that about half of the university’s accounting majors go onto seek a C.P.A. “But why would you want to have students take additional credits without earning an additional degree? This provides our accounting majors who know what they want to do with an opportunity to fulfill the requirement.”

    The first class of Pennsylvania students to be affected by the change in requirements — the class of 2012 — will begin at the institution next fall, giving the institution more time to prepare for the change.

    There is, however, a certain amount of skepticism regarding the change’s benefits to the field.

    “It’s going to hurt,” Flanegin said of the additional educational requirements on new accountants. “There’s already a shortage of Ph.D.’s in accounting. Part of me understands why they’re doing this. They’re trying to raise the education level. Accounting has become much more complicated. Just look at the auditors and the mess we have on Wall Street. A lot of that came from accountants. There are a lot of reasons to require more education of C.P.A.’s.”

    Darrough echoed the ambivalent sentiment.

    “Some people think this is an undue burden on students,” she said of the 150-credit-hour requirement. “It’s a costly process [to require additional education of CPA candidates] and some wonder if the benefits outweigh the cost.”

    NASBA 2008 Update:  120 Versus 150-Credit Hour Requirement to Sit for the CPA Examination
    There are now only two states that do not require 150-credits to sit for the CPA Examination, with California being the largest jurisdiction

    DRAFT Education and Licensure Requirements for Certified Public Accountants: A Discussion Regarding Degreed Candidates Sitting for the Uniform CPA Examination with a Minimum of 120 Credit Hours (120-Hour Candidate) and Becoming Eligible for Licensure with a Minimum of 150 Credit Hours (150-Hour Candidate) (120/150 Discussion), Issued by the National Association of State Boards of Accountancy (NASBA) , November 2008 ---
    http://snipurl.com/150nasba  [www_nasba_org] 
     http://www.nasba.org/862571B900737CED/318CD757B9F57F75862574FA00763F36/$file/120_150_Paper_Draft_November_08.pdf

    The above draft has quite a lot of data and provides extensive history of the 150-Hour Rule.

    For a wider history see http://en.wikipedia.org/wiki/Uniform_Certified_Public_Accountant_Examination
    Part of the above Wikipedia module was out of date, so I changed the Wikipedia module on December 13, 2008.

    NASBA has some learning tools at http://www.nasbatools.com/display_page

    Free CPA Examination Review Course --- http://cpareviewforfree.com/
    AccountingWeb Student Zone --- http://www.accountingweb.com/news/student_zone.html 

    For many students, the fee-based CPA Examination Review materials and courses are likely to get better results, especially those that force students to weekly stay on track and those that have multimedia helpers and those that meet onsite as a regular class.

    Accounting Institute Seminars
    Becker CPA Review
    Bisk-Totaltape CPA Exam Review
    Conviser Duffy CPA Review (now merged with Becker)
    CPA Review Twin Cities
    CPAexcel CPA Exam Review
    Dynasty School
    Gleim Publications
    Hoyle CPA Ventures
    Intensive CPA Examination Review
    Kaplan
    Lambers
    Mark's CPA Review
    MicroMash
    Person/Wolinsky CPA Review Courses
    Rigos Professional Education
    The Tutorial Group, Inc.
    Wiley CPA Exam Review
    Wise Guides

    December 13, 2008 reply from Ron Huefner [rhuefner@acsu.buffalo.edu]

    Bob:

    While the NASBA report says that 48 jurisdictions require the 150 hours for CPA licensure, that does not mean, as your e-mail said, that "there are now only two states that do not". There are 54 licensing jurisdictions (50 states plus DC, Puerto Rico, Guam, and U.S. Virgin Islands) and will soon be 55 when the exam becomes active in the Commonwealth of the Northern Marianas Islands. So we have six non-150 states.

    Ron

    December 13, 2008 reply from Amy Dunbar [Amy.Dunbar@business.uconn.edu]

    Bob,
    Did you mean to refer to the licensure requirement? In Connecticut, you can sit for the exam with 120, but you need 150 to be licensed.
    Amy

    Bob Jensen's career helpers are at http://www.trinity.edu/rjensen/Bookbob1.htm#careers


    Wouldn’t it have been helpful if we had more corporate executives and board members who’d had such training in their college years and were primed to question the fundamental assumptions of the industries in which they were engaged? Who didn’t assume that if they got a big bonus at year’s end, they must be doing everything right? Instead, we are left with an economy in near-ruin by the collective action of individuals who, I’m quite sure, got good grades, who knew how to ace the examinations on which they’d been coached, and whose long-term vision stretched no further than the end of the term. That view is great while it lasts, but, like that shiny “A” one crams for on the quiz, the substance is gone before the ink is dry.
    Ralph Hexter (President of Hampshire College), "The Economic Collapse and Educational Values," Inside Higher Ed, December 18, 2008 --- http://www.insidehighered.com/views/2008/12/18/hexter

    Agency Theory Question
    Why do corporate executives like fair value accounting better than shareholders like fair value accounting?

    Answer
    Cash bonuses on the upside are not returned after the downturn that wipes out the previous unrealized paper profits.

    Phantom (Unrealized) Profits on Paper, but Real Cash Outflows for Employee Bonuses and Other Compensation
    Rarely, if ever, are they forced to pay back their "earnings" even in instances of earnings management accounting fraud

    "On Wall Street, Bonuses, Not Profits, Were Real," by Louise Story, The New York Times, December 17, 2008 --- http://www.nytimes.com/2008/12/18/business/18pay.html?partner=permalink&exprod=permalink

    "Merrill’s record earnings in 2006 — $7.5 billion — turned out to be a mirage. The company has since lost three times that amount, largely because the mortgage investments that supposedly had powered some of those profits plunged in value.

    “As a result of the extraordinary growth at Merrill during my tenure as C.E.O., the board saw fit to increase my compensation each year.”

    — E. Stanley O’Neal, the former chief executive of Merrill Lynch, March 2008

    For Dow Kim, 2006 was a very good year. While his salary at Merrill Lynch was $350,000, his total compensation was 100 times that — $35 million.

    The difference between the two amounts was his bonus, a rich reward for the robust earnings made by the traders he oversaw in Merrill’s mortgage business.

    Mr. Kim’s colleagues, not only at his level, but far down the ranks, also pocketed large paychecks. In all, Merrill handed out $5 billion to $6 billion in bonuses that year. A 20-something analyst with a base salary of $130,000 collected a bonus of $250,000. And a 30-something trader with a $180,000 salary got $5 million.

    But Merrill’s record earnings in 2006 — $7.5 billion — turned out to be a mirage. The company has since lost three times that amount, largely because the mortgage investments that supposedly had powered some of those profits plunged in value.

    Unlike the earnings, however, the bonuses have not been reversed.

    As regulators and shareholders sift through the rubble of the financial crisis, questions are being asked about what role lavish bonuses played in the debacle. Scrutiny over pay is intensifying as banks like Merrill prepare to dole out bonuses even after they have had to be propped up with billions of dollars of taxpayers’ money. While bonuses are expected to be half of what they were a year ago, some bankers could still collect millions of dollars.

    Critics say bonuses never should have been so big in the first place, because they were based on ephemeral earnings. These people contend that Wall Street’s pay structure, in which bonuses are based on short-term profits, encouraged employees to act like gamblers at a casino — and let them collect their winnings while the roulette wheel was still spinning.

    “Compensation was flawed top to bottom,” said Lucian A. Bebchuk, a professor at Harvard Law School and an expert on compensation. “The whole organization was responding to distorted incentives.”

    Even Wall Streeters concede they were dazzled by the money. To earn bigger bonuses, many traders ignored or played down the risks they took until their bonuses were paid. Their bosses often turned a blind eye because it was in their interest as well.

    “That’s a call that senior management or risk management should question, but of course their pay was tied to it too,” said Brian Lin, a former mortgage trader at Merrill Lynch.

    The highest-ranking executives at four firms have agreed under pressure to go without their bonuses, including John A. Thain, who initially wanted a bonus this year since he joined Merrill Lynch as chief executive after its ill-fated mortgage bets were made. And four former executives at one hard-hit bank, UBS of Switzerland, recently volunteered to return some of the bonuses they were paid before the financial crisis. But few think others on Wall Street will follow that lead.

    For now, most banks are looking forward rather than backward. Morgan Stanley and UBS are attaching new strings to bonuses, allowing them to pull back part of workers’ payouts if they turn out to have been based on illusory profits. Those policies, had they been in place in recent years, might have clawed back hundreds of millions of dollars of compensation paid out in 2006 to employees at all levels, including senior executives who are still at those banks.

    A Bonus Bonanza

    For Wall Street, much of this decade represented a new Gilded Age. Salaries were merely play money — a pittance compared to bonuses. Bonus season became an annual celebration of the riches to be had in the markets. That was especially so in the New York area, where nearly $1 out of every $4 that companies paid employees last year went to someone in the financial industry. Bankers celebrated with five-figure dinners, vied to outspend each other at charity auctions and spent their newfound fortunes on new homes, cars and art.

    The bonanza redefined success for an entire generation. Graduates of top universities sought their fortunes in banking, rather than in careers like medicine, engineering or teaching. Wall Street worked its rookies hard, but it held out the promise of rich rewards. In college dorms, tales of 30-year-olds pulling down $5 million a year were legion.

    While top executives received the biggest bonuses, what is striking is how many employees throughout the ranks took home large paychecks. On Wall Street, the first goal was to make “a buck” — a million dollars. More than 100 people in Merrill’s bond unit alone broke the million-dollar mark in 2006. Goldman Sachs paid more than $20 million apiece to more than 50 people that year, according to a person familiar with the matter. Goldman declined to comment.

    Pay was tied to profit, and profit to the easy, borrowed money that could be invested in markets like mortgage securities. As the financial industry’s role in the economy grew, workers’ pay ballooned, leaping sixfold since 1975, nearly twice as much as the increase in pay for the average American worker.

    “The financial services industry was in a bubble," said Mark Zandi, chief economist at Moody’s Economy.com. “The industry got a bigger share of the economic pie.”

    A Money Machine

    Dow Kim stepped into this milieu in the mid-1980s, fresh from the Wharton School at the University of Pennsylvania. Born in Seoul and raised there and in Singapore, Mr. Kim moved to the United States at 16 to attend Phillips Academy in Andover, Mass. A quiet workaholic in an industry of workaholics, he seemed to rise through the ranks by sheer will. After a stint trading bonds in Tokyo, he moved to New York to oversee Merrill’s fixed-income business in 2001. Two years later, he became co-president.

    Skip to next paragraph

    Bloomberg News Dow Kim received $35 million in 2006 from Merrill Lynch.

    The Reckoning Cashing In Articles in this series are exploring the causes of the financial crisis.

    Previous Articles in the Series » Multimedia Graphic It Was Good to Be a Mortgage-Related Professional . . . Related Times Topics: Credit Crisis — The Essentials

    Patrick Andrade for The New York Times Brian Lin is a former mortgage trader at Merrill Lynch who lost his job at Merrill and now works at RRMS Advisors. Readers' Comments Share your thoughts. Post a Comment »Read All Comments (363) »

    Even as tremors began to reverberate through the housing market and his own company, Mr. Kim exuded optimism.

    After several of his key deputies left the firm in the summer of 2006, he appointed a former colleague from Asia, Osman Semerci, as his deputy, and beneath Mr. Semerci he installed Dale M. Lattanzio and Douglas J. Mallach. Mr. Lattanzio promptly purchased a $5 million home, as well as oceanfront property in Mantoloking, a wealthy enclave in New Jersey, according to county records.

    Merrill and the executives in this article declined to comment or say whether they would return past bonuses. Mr. Mallach did not return telephone calls.

    Mr. Semerci, Mr. Lattanzio and Mr. Mallach joined Mr. Kim as Merrill entered a new phase in its mortgage buildup. That September, the bank spent $1.3 billion to buy the First Franklin Financial Corporation, a mortgage lender in California, in part so it could bundle its mortgages into lucrative bonds.

    Continued in article

    How to play tricks on fair value accounting by "managing" the closing price of key securities in the portfolio
    Painting the Tape (also called Banging the Close)
    This occurs when a portfolio manager holding a security buys a few additional shares right at the close of business at an inflated price. For example, if he held shares in XYZ Corp on the last day of the reporting period (and it's selling at, say $50), he might put in small orders at a higher price to inflate the the closing price (which is what's reported). Do this for a couple dozen stocks in the portfolio, and the reported performance goes up. Of course, it goes back down the next day, but it looks good on the annual report.
    Jason Zweig, "Pay Attention to That Window Behind the Curtain," The Wall Street Journal, December 20, 2008 --- http://online.wsj.com/article/SB122973369481523187.html?

    Bob Jensen's threads on earnings management are at http://www.trinity.edu/rjensen/Theory01.htm#Manipulation

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

    Bob Jensen's "Rotten to the Core" document --- http://www.trinity.edu/rjensen/FraudRotten.htm


    "SEC Advises No Break in 'Mark' (Fair Value Accounting) Rules," by Michael R. Crittenden, The Wall Street Journal, December 31, 2008 --- http://online.wsj.com/article_email/SB123067591247143735-lMyQjAxMDI4MzMwMDYzNzA1Wj.html 

    The Securities and Exchange Commission recommended against suspending fair-value accounting rules, instead suggesting improvements to deal with illiquid markets and reducing the number of models used to measure impaired assets.

    In a 211-page report to U.S. lawmakers, as expected, the agency's staff Tuesday definitely recommended that fair-value and mark-to-market not be eliminated or suspended. "The abrupt elimination of fair value and market-to-market requirements would erode investor confidence," the report said.

    The banking lobby has argued that financial institutions have been forced to write off as losses still-valuable assets because the market for them had dried up, creating a spiral of write-downs and asset sales.

    The report said that staff found no evidence to suggest that the accounting rules had played a significant role in the collapse of U.S. financial institutions. "While the application of fair value varies among these banks...in each case studied it does not appear that the application of fair value can be considered to have been a proximate cause of the failure," the report said.

    Additionally, the SEC suggests that the Financial Accounting Standards Board narrow the number of accounting models firms can use to assess the impairment for financial instruments.

    Denny Beresford forwarded the above link and recommends that all accounting educators read the full 259 page SEC report that was mandated by Congress --- http://www.sec.gov/news/studies/2008/marktomarket123008.pdf

    Jensen Comment
    The above report makes a good case for financial asset and liability fair value accounting, but does not make a case for similar accounting of non-financial items in a going concern.

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

    Banking industry pressures to abandon fair value accounting are summarized at
    http://www.trinity.edu/rjensen/2008Bailout.htm#FairValueAccounting


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    Seeing how our Accounting Coach helps a student practice, learn, and then evaluate themselves on multiple Financial topics will give you another view of what we have put together.

    In a nutshell, we have a great set of products, we just need to get the work out and we are working hard to do that. In two weeks we will start our Spring semester and over 550 students will be using one or more of our products.

    Let me know if you like to see our work or if you would like a professor registration code for any product.

    Keith Weidkamp
    Sierra College

    PKL Software

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

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


    From IAS Plus IFRS Updates --- http://www.iasplus.com/index.htm

    25 December 2008: 12 IASB pronouncements await EU endorsement
     The European Financial Reporting Advisory Group (EFRAG) has updated its report showing the status of endorsement, under the EU Accounting Regulation, of each IFRS, including standards, interpretations, and amendments. Click to download the Endorsement Status Report as of 23 December 2008 (PDF 89k). Currently, there are 12 IASB pronouncements are awaiting European Commission endorsement for use in Europe (including 3 awaiting EFRAG advice and 8 awaiting an ARC recommendation), as follows:
      Standards
       
    • IFRS 1 First-time Adoption of IFRS – Restructured standard (2008)
    • IFRS 3 Business Combinations (2008)
      Interpretations
       
    • IFRIC 12 Service Concession Arrangements
    • IFRIC 15 Agreements for the Construction of Real Estate
    • IFRIC 16 Hedges of a Net Investment in a Foreign Operation
    • IFRIC 17 Distributions of Non-cash Assets to Owners
      Amendments
       
    • IAS 27 Consolidated and Separate Financial Statements (2008)
    • IAS 32 and IAS 1 Amendments for Puttable Instruments and Obligations Arising on Liquidation
    • Improvements to IFRSs – 2007 (affects various standards)
    • IFRS 1 and IAS 27 Cost of an Investment in a Subsidiary, Jointly-Controlled Entity, or Associate
    • IAS 39 Amendments for Eligible Hedged Items
    • IAS 39 Amendments for Reclassification of Financial Assets

    24 December 2008: IFRS e-Learning in Spanish

    The many visitors to IAS Plus for whom Spanish is their first language may be interested to know that Deloitte is in process of translating our IFRS e-Learning into Spanish. Approximately 20 of the current 37 modules have been translated. These are under review and we are hopeful that they can be released in the first quarter of 2009. Translation of the remaining 17 modules has begun, but it's a bit premature for us to suggest a likely release date. Like the English language version, Deloitte's Spanish IFRS e-Learning will be made available to the public without charge.

    Bob Jensen's threads on language tutorials are at http://www.trinity.edu/rjensen/Bookbob2.htm#Languages

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


    Selected Financial Reporting Council (FRC) Audit Reports in the United Kingdom --- http://www.frc.org.uk/
    "Called to accountWith conflicts of interest rife, the auditing industry is in desperate need of independent oversight," by Prem Sikka, The Guardian, December 14, 2008 --- http://www.guardian.co.uk/commentisfree/2008/dec/14/credit-crunch-auditing

    Selected PCAOB Audit Inspection Reports in the U.S. --- http://www.pcaob.org/Inspections/Public_Reports/index.aspx
    It's interesting to see which firms did inadequate substantive testing (possibly due to costs of substantive testing)

    2007 Inspection Report for Ernst & Young (issued April 29, 2008) ---
    http://www.pcaob.org/Inspections/Public_Reports/2008/Ernst_Young.pdf
    Includes April 24, 2008 reply from Ernst & Young

    2007 Inspection Report for KPMG (Issued August 12, 2008) ---
    http://www.pcaob.org/Inspections/Public_Reports/2008/KPMG_LLP.pdf
    Includes July 30, 2008 reply from KPMG

    2007 Inspection Report for PricewaterhouseCoopers (Issued July 27, 2008) ---
    http://www.pcaob.org/Inspections/Public_Reports/2008/PricewaterhouseCoopers-0627.pdf
    Includes June 19, 2008 reply from PwC

    2007 Inspection Report for Grant Thornton (Issued April 4, 2008) ---
    http://www.pcaob.org/Inspections/Public_Reports/2008/Grant_Thornton.pdf
    Includes March 31, 2008 reply from Grant Thornton

    2007 Inspection Report for McGladrey & Pullen (Issued April 29, 2008) ---
    http://www.pcaob.org/Inspections/Public_Reports/2008/McGladrey_Pullen.pdf
    Includes April 23, 2008 reply from McGladrey & Pullen

    2007 Inspection Report for Deloitte (issued May 19, 2008) ---
    http://www.pcaob.org/Inspections/Public_Reports/2008/Deloitte.pdf
    Includes April 30, 2008 reply from Deloitte
     

    Recall that Deloitte earlier received a $1 million fine by the PCAOB

    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 WSJ.com ---
    http://online.wsj.com/article/SB119734046614120346.html?mod=djem_jiewr_ac
     

    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.

    QUESTIONS: 
    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?
     

    SMALL GROUP ASSIGNMENT: 
    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 --- http://online.wsj.com/article/SB119734046614120346.html?mod=djem_jiewr_ac 

    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.

    December 14, 2008 reply from Roger Debreceny [roger@DEBRECENY.COM]

    Further to this, as reported by Double Entries, the PCAOB has released a summary report of four years of inspections at http://pcaob.org/News_and_Events/News/2008/12-05.aspx 

    Roger

    Washington, DC, December 5, 2008 – The Public Company Accounting Oversight Board today released a report summarizing the inspection findings of the eight domestic accounting firms that were subject to annual inspections over the past four years.

    The PCAOB focuses its inspections on those areas of an audit likely to pose the most significant challenges for an auditor or to pose the most significant risk to investors of misstated financial statements. These include areas that are fundamental to any audit, such as testing of revenue, as well as areas that pose increasingly challenging issues in current market conditions, such as testing of fair value measurements.

    The report describes deficiencies observed in these areas, as well as deficiencies in the following additional audit areas: identifying departures from generally accepted accounting principles (GAAP), auditing of management's estimates, income taxes, and internal control, performing analytical procedures and audit sampling, using the work of specialists, and assessing materiality, audit scope and audit differences.

    The report also includes information on changes in the quality control systems that firms have described in remediation plans submitted in response to the first years of inspection reports. These include changes to their structure, partner evaluation processes, internal inspection programs, procedures for using the work of foreign affiliates, and processes for compliance with independence requirements.

    "The Board's focus on improvements in the firms' audits and quality control systems is critical to our mission to protect investors. This report describes areas where we have found problems, and notes steps the firms have undertaken in response to certain quality control criticisms," said Mark W. Olson, PCAOB Chairman.

    George Diacont, Director of the PCAOB Division of Registration and Inspections, added, " While we are encouraged by the efforts of firms to remediate quality control deficiencies that we have observed, the report highlights the need for continued focus on performing high quality audits. Even in recent years, we are seeing deficiencies in the most important and high-risk areas of the audits, where appropriate levels of care and professional skepticism are needed."

    The eight domestic firms covered by this report -- that have been inspected annually for each of the past four years -- are together responsible for the audits of approximately 66 percent of all U.S.-based public companies. Four of these firms audit public companies representing 98 percent of the total U.S. market capitalization.

    Each of the firms included in this report is based in the United States and has maintained more than 100 public company audit clients over the past four years. During the period covered by the report, PCAOB inspectors reviewed a selection of the firms' audits of client financial statements for 2003 to 2006.

    The report is based on annual PCAOB inspections from 2004 to 2007, which included, among other things, reviews of aspects of more than 1,600 audits. Some of the information in the report has previously been reported in public portions of inspection reports on the individual firms; but the report also includes information not previously made public. Consistent with the Sarbanes-Oxley Act and the Board's Rule 4010, any otherwise nonpublic information from the PCAOB's inspection process that is included in the report does not identify the particular firm or firms to which the information relates.

    The report has been posted to the PCAOB Web site at http://www.pcaobus.org/Inspections/Other/2008/12-05_Release_2008-008.pdf
    It is entitled "REPORT ON THE PCAOB'S 2004, 2005, 2006, AND 2007 INSPECTIONS OF DOMESTIC ANNUALLY INSPECTED FIRMS," PCAOB Release No. 2008-008, December 5, 2008

    Bob Jensen's threads on large auditing firm litigations are at http://www.trinity.edu/rjensen/Fraud001.htm


    Old Fashioned Purchasing Executive Kickback Fraud:  Where were the auditors

    I've had difficulty discovering what firm audited this company. Both external and internal auditors generally give more attention to the purchasing departments companies than any other department, because this department historically in companies is the source of more frauds than most any other department. In this particular company, the internal controls are blatantly out of line. I wonder who audited this company.

    "Executive Stole $65M to Pay Gambling Debts," AccountingWeb, December 23, 2008 --- http://accounting.smartpros.com/x64198.xml

    A Ferrari-driving vice president of Fry's Electronics Inc. who was allegedly such a heavyweight gambler that casinos chartered private planes to fly him to Las Vegas, has been arrested on charges he embezzled more than $65 million from the retailer to fuel his lavish lifestyle and pay off debts.

    Ausaf Umar Siddiqui is accused by the Internal Revenue Service of concocting an incredibly profitable scheme in which he cut side deals with some of Fry's suppliers, buying their goods at higher prices than they would normally get, and buying more of them than he normally would, in exchange for kickbacks of up to 31 percent of the total sales price.

    The IRS alleges in a criminal complaint filed against Siddiqui that he set up a shell company that hid $65.6 million in kickback payments from five Fry's vendors from January 2005 to November 2008. Of that amount, $17.9 million was paid to subsidiaries of Las Vegas Sands Corp., which operates the Venetian Casino Resort, according to the criminal complaint and regulatory filings. Authorities confirmed the payments went to the casino.

    Siddiqui, who lives in Palo Alto, California, was ordered held on $300,000 bond Monday at a hearing in U.S. District Court in San Jose. He has been in custody since Friday, when agents arrested him at Fry's headquarters in San Jose in front of stunned co-workers. The details about his Ferrari and the private jets came out during the hearing Monday.

    His home phone number is unlisted, and it was not immediately clear whether Siddiqui had a defense lawyer. A criminal complaint is one of the preliminary investigative steps for arresting someone and securing an indictment.

    A Fry's spokesman did not return a phone call from The Associated Press left after-hours.

    Siddiqui has not been formally charged yet with the wire-fraud allegations laid out in the criminal complaint. Arlette Lee, spokeswoman for the IRS' Criminal Investigation division, said the judge in the case has given the government 20 days to file formal charges, which she said prosecutors intend to do.

    As Fry's vice president of merchandising and operations, Siddiqui pulled down a legitimate annual salary of $225,000, supervised a staff of 120 and his team was responsible for buying all the merchandise sold in Fry's 34 stores around the U.S., according to the criminal complaint. The stores are mostly located in California and Texas.

    The IRS alleges Siddiqui was able to amass so much illegal money by convincing Fry's executives that he alone should be responsible for a job that is typically handled by independent contractors - the job of the sales representative that brokers deals with the suppliers and the stores for a cut of the total sales price.

    The reps are kept independent so they're not seen as favoring one side or the other in sales negotiations, and their job can be lucrative if they're good at it, with commissions ranging from 3 to 8 percent of the total sales they bring in, according to the complaint.

    The IRS claims Siddiqui started striking side deals with some of the suppliers, in which he would guarantee he'd keep their products stocked on Fry's shelves, in exchange for kickbacks in the form of steep commissions paid to a company he set up called PC International.

    The alleged scheme unraveled when another Fry's executive walked into Siddiqui's office in October and saw spreadsheets on his desk outlining the payments and alleged kickbacks, according to the complaint. Siddiqui was not there, so the executive took the documents, contacted the IRS and handed over the evidence.

    The IRS later examined Siddiqui's bank records and found that a total of $167.8 million was deposited into the bogus company's bank account. Seventy wire transfers totaling $65.6 million came from five Fry's suppliers, who were not named as defendants in the case.

    Fry's Electronics Home Page --- http://www.frys.com/

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


    Public Insurance Companies versus Mutual Insurance Companies

    David Schiff, an industry gadfly and publisher of Schiff's Insurance Observer, has been warning since the late 1990s that earnings-per-share pressures would drive insurers to do dumb things. He was right. Since going public Prudential has spent $11 billion buying back shares at an average cost of $63, Schiff estimates. Those shares are now worth $19. Hartford spent $2 billion the past two years buying back stock. That's as much as the entire company is now worth. The mutuals aren't geniuses at investing--proportionally they own more mortgage securities than do public insurers, according to Etti Baranoff, a professor of insurance at Virginia Commonwealth University and former Texas insurance regulator. It's just that mutuals don't have the same incentives to boost net income. Baranoff also notes that mutuals don't have to file financials under Generally Accepted Accounting Principles. Those principles require public companies to mark down investment securities, some of them distressed and thinly traded, to current market values. The rule has given rise to $40 billion in unrealized losses as of Sept. 30. Perhaps the market has overcorrected, and shares of Hartford and Prudential are a bargain. But their mutual rivals will be snickering for quite a while.
    Bernard Condon and Daniel Fisher, "Mutual Respect, Forbes, December 22, 2008 ---
    http://www.forbes.com/forbes/2008/1222/036.html?partner=magazine_newsletter


    Is it possible to teach this transaction from an IFRS perspective?

    Denny Beresford made a helpful suggestion that one way to teach IFRS is to first look at the transaction itself and then reason out how to account for it under IFRS standards and interpretations. So here's a challenge for your advanced-level accounting students:  How would you account for this one under IFRS?

    What this illustrates is the type of thing that the IASB will have to tackle all alone, without a FASB research staff, when the U.S. depends upon the IASB for its accounting standards. I don't think the IASB fully understands what it is getting into by so desperately wanting to set accounting standards for U.S. companies.

    From the financial rounds blog on December 29, 2008

    How Do You Use Credit Default Swaps (CDS) To Create "Synthetic Debt"?

    There's been a lot of talk in recent months about "synthetic debt". I just read a pretty good explanation of synthetics in Felix Salmon's column, so I thought I'd give a brief summary of what it is, how it's used, and why.

    First off, let's start with Credit Default Swaps (CDS). A CDS has a lot of similarities to an insurance policy on a bond (it's different in that the holder of the CDS needn't own the underlying bond or even suffer a loss if the bond goes into default).

    The buyer (holder) of a CDS will make yearly payments (called the "premium"), which is stated in terms of basis points (a basis point is 1/100 of one percent of the notional amount of the underlying bond). The holder of the CDS gets paid if the bond underlying the CDS goes into default or if other stated events occur (like bankruptcy or a restructuring).

    So, how do you use a CDS to create a synthetic bond? here's the example from Salmon's column:

    Let's assume that IBM 5-year bonds were yielding 150 basis points over treasuries. In addition, Let' s assume an individual (or portfolio manager) wanted to get exposure to these bonds, but didn't think it was a feasible to buy the bonds in the open market (either there weren't any available, or the market was so thin that he's have to pay too high a bid-ask spread). Here's how he could use CDS to accomplish the same thing:
     
    • First, buy $100,000 of 5-year treasuries and hold them as collateral
    • Next, write a 5-year, $100,000 CDS contract
    • he's receive the interest on the treasuries, and would get a 150 basis point annual premium on the CDS
       
    So, what does he get from the Treasury plus writing the CDS? If there's no default, the coupons on the Treasury plus the CDS premium will give him the same yearly amount as he would have gotten if he's bought the 5-year IBM bond, And if the IBM bond goes into default, his portfolio value would be the value of the Treasury less what he would have to pay on the CDS (this amount would be the default losses on the IBM bond). So in either case (default or no default), his payoff from the portfolio would be the same payments as if he owned the IBM bond.

    So why go through all this trouble? One reason might be that there's not enough liquidity in the market for the preferred security (and you'd get beaten up on the bid-ask spread). Another is that there might not be any bonds available in the maturity you want. The CDS market, on the other hand, is very flexible and extremely liquid.

    One thing that's interesting about CDS is that (as I mentioned above), you don't have to hold the underlying asset to either buy or write a CDS. As a result, the notional value of CDS written on a particular security can be multiple times the actual amount of the security available.

    I know of at least one hedge fund group that bought CDS as a way of betting against housing-sector stocks (particularly home builders). From what i know, they made a ton of money. But CDS can also be used to hedge default risk on securities you already hold in a portfolio.


    To read Salmon's column, click here, and to read more about CDS, click here

    Credit Default Swap (CDS)
    This is an insurance policy that essentially "guarantees" that if a CDO goes bad due to having turds mixed in with the chocolates, the "counterparty" who purchased the CDO will recover the value fraudulently invested in turds. On September 30, 2008 Gretchen Morgenson of The New York Times aptly explained that the huge CDO underwriter of CDOs was the insurance firm called AIG. She also explained that the first $85 billion given in bailout money by Hank Paulson to AIG was to pay the counterparties to CDS swaps. She also explained that, unlike its casualty insurance operations, AIG had no capital reserves for paying the counterparties for the the turds they purchased from Wall Street investment banks.

    "Your Money at Work, Fixing Others’ Mistakes," by Gretchen Morgenson, The New York Times, September 20, 2008 --- http://www.nytimes.com/2008/09/21/business/21gret.html

    What Ms. Morgenson failed to explain, when Paulson eventually gave over $100 billion for AIG's obligations to counterparties in CDS contracts, was who were the counterparties who received those bailout funds. It turns out that most of them were wealthy Arabs and some Asians who we were getting bailed out while Paulson was telling shareholders of WaMu, Lehman Brothers, and Merrill Lynch to eat their turds.

    You tube has a lot of videos about a CDS. Go to YouTube and read in the phrase "credit default swap" --- http://www.youtube.com/results?search_query=Credit+Default+Swaps&search_type=&aq=f
    In particular note this video by Paddy Hirsch --- http://www.youtube.com/watch?v=kaui9e_4vXU
    Paddy has some other YouTube videos about the financial crisis.

    Bob Jensen’s threads on accounting for credit default swaps are under the C-Terms at
    http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm#C-Terms

    Bob Jensen's threads on CDO accounting are at http://www.trinity.edu/rjensen/theory01.htm#CDO

    Bob Jensen's threads on FIN 46 are at http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm


    "Understanding Synthetics," by Felix Salman, Portfolio.com, November 28, 2008 ---
    http://www.portfolio.com/views/blogs/market-movers/2008/11/28/understanding-synthetics

    Over the past few days, two very smart people have asked me about a passage in Michael Lewis's cover story for Portfolio in which he talks about synthetic CDOs without actually using the term. They said that they didn't quite understand it, so I'm going to try to explain what a synthetic bond is. Once I've done that, the Lewis passage should be a lot more comprehensible.

    Let's start with a simple single-credit synthetic bond. You're an investor, and looking at the credit markets, you see that IBM debt is trading at attractive levels, especially around the 5-year mark, where they yield about 150bp over Treasuries. You'd really like to buy $100 million of IBM bonds maturing in five years, but IBM isn't returning your calls (they have no desire to borrow money at these spreads), and there aren't any IBM bonds with exactly the maturity you want. What's more, even the bonds with maturities nearby are illiquid, and closely held: there's no way you can just blunder into the market and buy up that many bonds without massively skewing the market, since the overwhelming majority of the bonds are just not for sale.

    So you buy a synthetic IBM five-year bond instead, taking advantage of the much more liquid CDS market. Essentially, you take the $100 million that you were going to spend on IBM bonds, and you put it into a special-purpose entity called, say, Fred. (In reality, it'll be called something really boring like Synthetic Technology Invetments Cayman III Limited, but Fred is easier to remember.) First, Fred takes the $100 million and invests it in 5-year Treasury bonds.

    Next thing, Fred goes out and sells $100 million of credit protection on IBM in the CDS market, using the $100 million of Treasury bonds as collateral. The buyer of protection will pay $1.5 million per year (150 basis points) to Fred, and in return Fred promises to pay $100 million to the buyer in the event IBM defaults, less the value of IBM's bonds at the time. The buyer knows that Fred is good for the money, because it's already there, tied up in Treasury bonds.

    So long as IBM doesn't default, you get not only the $1.5 million per year from the buyer of protection, but also the interest on the Treasury bonds. You wanted to buy IBM bonds yielding 150bp over Treasuries, and that's exactly what you're getting: the 150bp from the CDS counterparty, and the Treasury interest from the Treasury bonds. At maturity, assuming IBM still hasn't defaulted, you get your $100 million back, the CDS contract has expired, and Fred has no contingent liability any more.

    The effect is identical to holding an IBM bond -- and you can even sell your interest in Fred, just like you could sell an IBM bond. If IBM defaults, you lose your $100 million, but you get back the value of an IBM bond -- which again is the same outcome as if you'd bought an IBM bond for $100 million and IBM defaulted.

    But the key thing to note is that IBM itself is not involved in the transaction at all. It doesn't matter how few bonds IBM has issued, there can be many times that amount in synthetic IBM bonds, just so long as there are enough people out there willing to buy and sell credit protection on IBM.

    And just as you can create a synthetic IBM bond, you can create a synthetic bond portfolio, made up of credit default swaps on any number of corporate names or even mortgage-backed securities. The special purpose vehicles in those cases sometimes sell protection on a lot of different names; sometimes they just sell protection on a liquid CDS index. Either way, the returns that those vehicles offer are basically the same as the returns on buying the underlying securities -- if those securities were easily available.

    Now that we've understood all that, we can return to Michael Lewis's piece, where he's talking about a chap called Steve Eisman, who was buying protection in the CDS market, and is sat at dinner next to one of his counterparties, who was selling protection.

    Whatever rising anger Eisman felt was offset by the man's genial disposition. Not only did he not mind that Eisman took a dim view of his C.D.O.'s; he saw it as a basis for friendship. "Then he said something that blew my mind," Eisman tells me. "He says, 'I love guys like you who short my market. Without you, I don't have anything to buy.'¿"
    That's when Eisman finally got it. Here he'd been making these side bets with Goldman Sachs and Deutsche Bank on the fate of the BBB tranche without fully understanding why those firms were so eager to make the bets. Now he saw. There weren't enough Americans with shitty credit taking out loans to satisfy investors' appetite for the end product. The firms used Eisman's bet to synthesize more of them. Here, then, was the difference between fantasy finance and fantasy football: When a fantasy player drafts Peyton Manning, he doesn't create a second Peyton Manning to inflate the league's stats. But when Eisman bought a credit-default swap, he enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets Eisman and others made with firms like Goldman Sachs. Eisman, in effect, was paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all. "They weren't satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn't afford," Eisman says. "They were creating them out of whole cloth. One hundred times over! That's why the losses are so much greater than the loans. But that's when I realized they needed us to keep the machine running. I was like, This is allowed?"

    What Eisman is saying is that there were mortgage-backed securities, and then there were synthetic mortgage-backed securities; when the banks ran out of actual MBS to sell to investors, they sold them synthetic MBS instead. And yes, that was allowed.

    There is some hyperbole here, though. While there were undoubtedly a lot of synthetic MBS issued, they weren't a large multiple of the real MBS issued, as the "one hundred times over" quote would suggest. Which is quite obvious, if you think about it: there weren't a lot of people like Steve Eisman willing to short the MBS market -- and you need them, to take the other side of the trade.

    In fact, most of the synthetic MBS issued were issued by banks which kept the underlying mortgages on their own balance sheet. Rather than put the mortgages directly into a CDO and sell that to investors, they kept the mortgages themselves and bought protection from the CDO on them -- creating a synthetic CDO which mirrored (and which they could sell to hedge) their own holdings. Why did they do that? That's the story of the super-senior tranche, and will have to wait for another day.

    Bob Jensen's threads on FIN 46 are at http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm
    (Includes accounting for synthetic leases)


    Question
    How are for-profit universities doing relative to not-for-profit universities in the recession?

    Facing projections of a 30-percent drop in its endowment, Harvard will freeze salaries for faculty members and nonunion staff members, suspend nearly all searches for tenure-track and tenured professors, and place restrictions on hiring instructional faculty members, The Harvard Crimson reported today.
    Chronicle of Higher Education, December 9, 2008 ---
    http://chronicle.com/news/article/5630/harvard-freezes-salaries-suspends-faculty-searches?utm_source=at&utm_medium=en

    The for-profit college industry, unlike the rest of higher education, is enjoying a financial tailwind that is only likely to improve in the next couple of years. Enrollments this fall at nine major publicly traded college companies grew at a pace faster than the average annual rate of growth for the past three years, while profit margins for this year are projected to be higher than they've been since 2005. And the grim financial outlook that has led to freezes on hiring and new construction at many nonprofit colleges (like Harvard) isn't having the same effect on the for-profit sector, which accounts for about 5 percent of all postsecondary enrollments.
    Goldie Blumenstyke, "Economic Downturn Is a Boon for For-Profit Colleges," Chronicle of Higher Education, December 10, 2008 --- http://chronicle.com/daily/2008/12/8330n.htm?utm_source=at&utm_medium=en
    Jensen Comment
    Goldie is the Chronicle of Higher Education editor who, without announcing who she worked for, took an online governmental (fund) advanced accounting course for credit from the University of Phoenix (a for-profit university). Her report on the experience is quite favorable, although she found the course to be a lot more demanding than she had expected.

    My tidbit on Goldie's experience can be found at http://www.trinity.edu/rjensen/crossborder.htm

    The Chronicle's Goldie Blumenstyk has covered distance education for more than a decade, and during that time she's written stories about the economics of for-profit education, the ways that online institutions market themselves, and the demise of the 50-percent rule. About the only thing she hadn't done, it seemed, was to take a course from an online university. But this spring she finally took the plunge, and now she has completed a class in government and nonprofit accounting through the University of Phoenix. She shares tales from the cy ber-classroom -- and her final grade -- in a podcast with Paul Fain, a Chronicle reporter.
    Chronicle of Higher Education, June 11, 2008 (Audio) --- http://chronicle.com/media/audio/v54/i40/cyber_classroom/

    • All course materials (including textbooks) online; No additional textbooks to purchase

    • $1,600 fee for the course and materials

    • Woman instructor with respectable academic credentials and experience in course content

    • Instructor had good communications with students and between students

    • Total of 14 quite dedicated online students in course, most of whom were mature with full-time day jobs

    • 30% of grade from team projects

    • Many unassigned online helper tutorials that were not fully utilized by Goldie

    • Goldie earned a 92 (A-)

    • She gave a positive evaluation to the course and would gladly take other courses if she had the time

    • She considered the course to have a heavy workload

    Jensen Added Comment
    It wasn't mentioned, but I think Goldie took the ACC 460 course --- Click Here

    ACC 460 Government and Non-Profit Accounting

    Course Description

    This course covers fund accounting, budget and control issues, revenue and expense recognition, and issues of reporting for both government and non-profit entities.

    Topics and Objectives

    Environment of Government/Non-Profit Accounting

    • Compare and contrast governmental and proprietary accounting.
    • Analyze the relationship between GASB and FASB.
    • Analyze the relationship between a budget and a Comprehensive Annual Financial Report (CAFR).
    • Determine when and how to use the modified accrual accounting method.

    Fund Accounting Part I

    • Distinguish between expenses and expenditures.
    • Explain the effect of encumbrances on a budget.
    • Apply the principles of fund accounting.
    • Determine the closing process for the fund accounting cycle.
    • Explain the reconciliation of government-wide financial statements with the fund statements.

    Fund Accounting Part II

    • Apply accounting procedures for recognizing revenues and other financial resources.
    • Record interfund transfers.
    • Prepare fund and non-governmental accounting entries.
    • Prepare a financial statement for a governmental agency.

    Overview of Not-for-Profit Accounting

    • Examine the funds for different types of not-for-profit organizations.
    • Compare and contrast reporting by governmental, not-for-profit, and proprietary organizations.

    Current Issues in Government and Not-for-Profit Accounting

    • Analyze current issues in government and not-for-profit accounting.

    Bob Jensen's threads on asynchronous learning --- http://www.trinity.edu/rjensen/255wp.htm

    Bob Jensen's threads on free online video courses and course materials from leading universities --- http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI

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

    Bob Jensen's threads on the dark side --- http://www.trinity.edu/rjensen/000aaa/theworry.htm

    Bob Jensen's threads on education technology --- http://www.trinity.edu/rjensen/000aaa/0000start.htm


    IAS Plus 2008 End-of-Year Update --- http://www.iasplus.com/iasplus/0812closingout2008.pdf

    Deloitte's IFRS Global Office has published an IAS Plus Update Newsletter – Closing Out 2008 (PDF 163k). The newsletter provides a high level overview of new and revised Standards and Interpretations that are effective for December 2008 and later accounting periods. Where applicable, the newsletter includes hyperlinks to past Deloitte newsletters dealing with the specific Standard or Interpretation in more detail. Those past newsletters are all available on Here on IAS Plus. As always, entities should refer to the Standards and Interpretations themselves to identify all of the changes that may affect their particular circumstances.

    The IAS Plus home page is at http://www.iasplus.com/index.htm


    2008 Quickbooks Update

    December 12, 2008 message from Scott Bonacker [lister@BONACKERS.COM]

    Hello Scott,

     

    Thank you for contacting me.  Here is some information for your records.  Click on any of the hyperlinks below for more information and please let me know if you have any questions. 

    The Instructor's Resource Center for QuickBooks is located at www.accountant.intuit.com/iep. Go to Register Now and enter your institution's information.  If you do not have your license number (it is a required field) you may enter "IEP" in the license number field.    This will give you full access to the fifteen lesson plans, reviews and PowerPoint presentations.  The lesson plans are for your use only.

    DON'T FORGET the Educator's Corner!  Discussion forums, tools, resources and allows the sharing of curriculum from review exercises and quizzes to test questions. 

    Pricing is as follows for software used for instructional purposes:    Site licenses come with a 2 year site license agreement to be filled out by the user and returned to Intuit.   Site licenses are strictly for classroom installation for instructional purposes.

    NEW ! ! - QUICKBOOKS PREMIER ACCOUNTANTS EDITION IS HERE - Access other versions of QuickBooks 2009 through the Accountants Edition with the toggle feature. Click here to learn more!   The appearance and basic workflows are the same as Pro, but you will also have access to all versions of QuickBooks 2009 (Simple Start, Pro and all of the Industry Specific Versions).  

      • 10 Pack $259.95 - QuickBooks 2009 Premier Accountants Edition for Windows  
      • 25 Pack $399.95 - QuickBooks 2009 Premier Accountants Edition for Windows   
      • 50 Pack $599.95 - QuickBooks 2009 Premier Accountants Edition for Windows   
      • 2008 QuickBooks Student Guide $36.95.  The 2009 text is be $45.95, and includes a 140 day trial CD that student can install on their personal equipment.
      • QuickBooks Pro Academic Version  - CLICK HERE for eligibility requirements and description 

    QuickBooks Pro for their individual academic use at a special discounted price:  Bookstores can purchase four or more licenses at 15% discount direct through Intuit's Education Program.  Students can purchase independently by contacting one of Intuit's approved resellers:  Academic Superstore, (800) 817-2347 or Genesis, (800) 433-6326.

    QUICKBOOKS USER CERTIFICATION   CLICK HERE for more information. Get 50% off the regular price!  Get the Training & Exam for only $49.98!  Please let me know if this is something you would like to include in your curriculum.   I will need to assign a code to your class so they receive the discount.  Initially each user will need to sign up for the certification through the web site.  Bulk pricing and sign up will come at a later date.   

     

    INTEREST IN PERSONAL FINANCE AND QUICKEN?  - Go to www.quickeneducation.com for more info.

    Additional Resources and Tools      

    20% off Interactive CD Training! -  A great tool to help you learn and teach QuickBooks in your classroom.  Wonderful for overhead presentations.

    ProSeries PowerTax Library - Free software for educators. For classroom/instructional purposes only. Click here to view the License Agreement

    Ordering Information

    FAX or email - DO NOT MAIL - Purchase Orders and State Tax Exempt Certificate to 520-844-6412 or education@intuit.com

    The Intuit payment address that will appear on your invoice is Intuit Inc., PO Box 513340, Los Angeles, CA 90051-3340

    Credit card and EFT orders are also accepted

    If you have any questions, please feel free to contact me.  

    LISA SCHWARTZ - INTUIT EDUCATION PROGRAM   - TUCSON, AZ   

    (866) 570-3843 - Fax 520-844-6412

    education@intuit.com - www.accountant.intuit.com/iep

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

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

    For Educators
    Bob Jensen's threads on tools and tricks of the trade are at http://www.trinity.edu/rjensen/000aaa/thetools.htm

    "So you want a new desktop accounting package?" by David Carter, AccountingWeb, June 5, 2007 --- http://www.accountingweb.com/cgi-bin/item.cgi?id=103569

    David does not mention my oft-preferred alternative of a Webledger system (such as NetSuite) that can be accessed at a range of needs and sizes and prices with some huge advantages over installing accounting software on your own hardware --- at http://www.trinity.edu/rjensen/Webledger.htm

    Bob Jensen's helpers on accounting software alternatives are http://www.trinity.edu/rjensen/Bookbob1.htm#AccountingSoftware


    February 6, 2008 message from CHRISTINE KLOEZEMAN [ckloezem@PRODIGY.NET]

    At Glendale Community College in California we teach our Financial Accounting and Basic Accounting without a computerized accounting program. I have previously included both a tutorial computerized accounting program and later a commercial accounting program. It took too much time out of the class that meets 5 hours a week.

    Instead we have a Computerized Accounting class that uses Quickbooks Pro that is required for the Accounting AA. We also have Payroll accounting that uses Quickbooks pro. We were using Business Works (lower version of MAS 2000) but Quickbooks was suggested by our Advisory Committee. We also have a Advanced Computerized Accounting class that teaches Peachtree and others. We also require students to take Excel to get both a certificate and an AA.

    Christy


    February 6, 2008 message from Carol Flowers [cflowers@OCC.CCCD.EDU]

    We have the financial /managerial accounting class meeting 5 hours per week and using epacks. However, we have a "computerized accounting" course that stands alone and is required for an AA degree. In that course, the student completes an integrated accounting package and also excel. We also offer stand alone courses in Quickbooks, Payroll and MAS 90/200.

    We have found that our population learns the concepts better with pen and paper (for lack of a better word) and then we use the Computerized Accounting to re-enforce their principles while exposing them to industry software and excel.


    June 7, 2007 message from Ray Slager [slgr@CALVIN.EDU]

    I wonder if anyone is currently using commercial software in their courses. I tried to use QuickBooks at one time but the company makes it very difficult to use. First of all it must be loaded on each computer - not on the network. Secondly it needs to be updated each quarter for the payroll module to work and of course the entire package must be "upgraded" every two or three years. Does anyone know if this is still the case?

    Does anyone use other commercial software that is easier to administer? I currently am using MYOB and find it very easy to use. I currently am looking at their latest version and think it is very promising. It can be loaded on a file server and comes in a "10 pack" - good for use on 10 computers for about $300.

    Ray Slager
    Calvin College

    June 7, 2007 reply from Davidson, Dee (Dawn) [dgd@MARSHALL.USC.EDU]

    We use Peachtree and get the software free for the network. Use this link. http://www.peachtree.com/training/educational_partnerships.cfm 

    Find the license and application forms. Fax them to Peachtree and the software CD will be mailed to you. They send you last year's version - we just received 2006 - but the changes are very minimal year to year. Each spring we send in the forms and get a new CD to be installed on the network for the following school year. We develop our own exercises, but they also have education material available. Hope that helps.

    dee davidson
    Leventhal School of Accounting
    Marshall School of Business
    University of Southern California
    (213)740-5018 tel (213) 747-2815 fax

    dgd@marshall.usc.edu 

    June 7, 2007 reply from Formosa, Jim [Jim.Formosa@NSCC.EDU]

    We are using QuickBooks but are looking at Microsoft's accounting software for small business. We have the same problems you describe with QuickBooks.

    Jim Formosa, MS, CPA
    Certified Senior WebCT Trainer
    Associate Professor of Accounting
    Nashville Community College
    615-353-3420 FAX 615-356-1213

    June 7, 2007 reply from Fisher, Paul [PFisher@ROGUECC.EDU]

    I have found that Peachtree is much better. I am running an older version, but it does not seem to matter. Peachtree provides an educational version that does not lock the student out after 25 visits, and does not have the payroll deadfall. It also has a "tutorial"

    embedded that makes it almost textbook free if you are willing to produce class handouts. I am going to be attempting Timberlake for a construction program. Anyone have experience in that?

    Paul

    June 7, 2007 reply from Prachyl, Cheryl L [cprachyl@UTA.EDU]

    I use Peachtree. They provide a free educational site license. The educational version is one year behind the currently marketed version, but I don't find that to be a problem.

    I tried using Quickbooks for one semester but we had no money in our budget to purchase the software. We got a donation to the department for a one year site license but we had problems with the installation in our labs.

    I have found that Peachtree works well. It also can reinforce the "cycle" approach to business through the navigation aids.

    Cheryl Prachyl
    University of Texas at Arlington

    June 7, 2007 reply from Leslie Kren [lkren@UWM.EDU]

    I use SAP in my cost management courses. SAP is the leading ERP system and using it in the classroom provides exposure to the 'big systems' most of our students see in practice. The startup cost for me was quite high several years ago, but now the SAP University Alliance is quite active and provides summer workshops and substantial assistance with instructional materials to interested faculty.

    Leslie Kren, PhD, CPA
    Associate Professor
    Lubar School of Business
    University of WI - Milwaukee
    3202 N. Maryland Milwaukee, WI 53201
    414 229-6075 fax: 414 229-6957

    lkren@uwm.edu
    http://www.uwm.edu/~lkren/ 


    "A Conspiracy Theory Debunked:  The long-running KPMG tax-shelter case ends with a whimper," The Wall Street Journal, December 20, 2008 --- http://online.wsj.com/article/SB122973258821422991.html?mod=djemEditorialPage

    What started as the "largest criminal tax-fraud case in history" ended this week with a whimper -- one acquittal and three partial convictions for four defendants in the long-running KPMG tax-shelter case. The Justice Department had charged 19 people back in 2005. Two pleaded guilty, while 13 had their charges dismissed after federal Judge Lewis Kaplan found the government had violated their Fifth and Sixth Amendment rights by coercing KPMG into denying them legal assistance, among other offenses.

    The remaining four stood trial this fall. David Greenberg, who was jailed for five months after the government argued he was a flight risk if permitted to post bail, was acquitted on all counts. The other three were convicted on some tax evasion charges while acquitted on others. No one was convicted on the original, underlying conspiracy charge.

    Justice may consider this as a partial vindication, and it is certainly a setback for the three defendants who now face possible jail time on the tax evasion charges. But the fact that the government could not prove its case for a criminal conspiracy calls into question the premise of the entire prosecution. We argued from the beginning that prosecuting tax advisers for selling tax shelters that had never been found illegal in a court of law had an Alice-in-Wonderland quality. This aggressive legal theory produced, in turn, the government misconduct that ultimately led to the dismissals. Now a jury has found that the conspiracy alleged by the government never existed.

    Without a conspiracy, even the convictions the government did secure look dubious and could be overturned on appeal. Whether those convictions stand up or not, there are at least 14 innocent people whose lives were turned upside down and careers ruined by overreaching prosecutors. No moral victory can give back what was taken from them by this regrettable, and abusive, episode.

    Jensen Comment
    The criminal case fell apart for complicated reasons, but that did not exonerate KPMG as a firm nor return its $456 million settlement reached with the IRS.

    After the 2005 $456 settlement from the U.S. Treasury, the Chairman and CEO of KPMG, Timothy Flynn,  issued the following Open Letter.  Among other things, KPMG announced it will almost entirely stop preparing tax returns for "individuals."

    August 29, 2005

    AN OPEN LETTER TO KPMG LLP'S CLIENTS (from Timothy P. Flynn Chairman & CEO KPMG LLP)

    This is to advise you that KPMG LLP (U.S.) has reached an agreement with the U.S. Attorney's Office for the Southern District of New York, resolving the investigation by the Department of Justice into tax shelters developed and sold by the firm from 1996 to 2002. This settlement also resolves the Internal Revenue Service's examination of these activities.

    As a result of this settlement, KPMG LLP (U.S.) continues as a multidisciplinary firm providing high quality audit, tax, and advisory services to large multinational and middle market companies, as well as federal, state and local governments.

    The Public Company Accounting Oversight Board (PCAOB) has reaffirmed that the resolution of this matter with the Department of Justice does not affect the ability of KPMG to perform quality audit services. Additionally, the Department of Justice states in the agreement that KPMG is currently a responsible contractor and expressly concludes that the suspension or debarment of KPMG is not warranted. KPMG currently audits the Department of Justice financial statements.

    Further details on the resolution of this matter can be found in the attached Media Statement that the firm issued today; a Key Provisions and Terms document detailing the settlement; and a Quality & Compliance Measures document that provides an overview of the quality initiatives the firm has undertaken since 2002, including specific changes to Tax operations.

    KPMG accepts the high level of responsibility inherent in performing its role as a steward of the capital markets. Let me be very clear: The conduct by former tax partners detailed in the KPMG statement of facts attached to the agreement is inexcusable. I am embarrassed by the fact that, as a firm, we did not identify this behavior from the outset and stop it. You have my personal assurance that the actions of the past do not reflect the KPMG of today.

    I am proud to be Chairman of this remarkable organization and proud of the tremendous professionals of KPMG. We are resolute in our commitment to maintain the trust of the public, our clients and our regulators. You have my promise that, as our first priority, KPMG will deliver on our commitment to the highest levels of professionalism — integrity, transparency, and accountability.

    We truly appreciate the strong support of our clients throughout this investigation. Your Lead Partner will be contacting you later to make sure that you have the information you need about this matter.

    On behalf of all of our partners and employees, thank you for your continued support.

    Timothy P. Flynn

    Chairman & CEO
    KPMG LLP

    Attachments following below:

    Media Statement

    Key Provisions and Terms

    Quality & Compliance Measures

     

    News

    For Immediate Release Contact: George Ledwith
    KPMG LLP
    Tel. (201) 505-3543

    KPMG LLP STATEMENT REGARDING SETTLEMENT
    IN DEPARTMENT OF JUSTICE INVESTIGATION

    NEW YORK, Aug 29 — KPMG LLP made the following statement today in regard to a resolution reached by the U.S. firm with the Department of Justice in its investigation into tax shelters developed and sold from 1996 to 2002 and related conduct:

    KPMG has reached an agreement with the U.S. Attorney's Office for the Southern District of New York and the Internal Revenue Service, resolving investigations regarding the U.S. firm's previous tax shelter activities.

    "KPMG LLP is pleased to have reached a resolution with the Department of Justice. We regret the past tax practices that were the subject of the investigation. KPMG is a better and stronger firm today, having learned much from this experience," said KPMG LLP Chairman and CEO Timothy P. Flynn. "The resolution of this matter allows KPMG to confidently face the future as we provide high quality audit, tax and advisory services to our large multinational, middle market and government clients."

    As part of the agreement, KPMG has agreed to make three monetary payments, over time, totaling $456 million to the U.S. government. KPMG will also implement elevated standards for its tax business.

    Under the terms of the settlement, a deferred prosecution agreement, the charges will be dismissed on December 31, 2006, when the firm complies with the terms of the agreement. Richard C. Breeden has been selected to independently monitor compliance with the agreement for a three-year period.

    All of the individuals indicted today are no longer with the firm. KPMG has put in place a process to ensure that individuals responsible for the wrongdoing related to past tax shelter activities are separated from the firm.

    "As KPMG's new leaders, Tim Flynn and I are extremely proud of the 1,600 partners and 18,000 employees of today's KPMG," said John Veihmeyer, KPMG Deputy Chairman and COO. "Looking toward the future, our people, our clients and the capital markets can be confident that KPMG, as its first priority, will deliver on our commitment to the highest levels of professionalism."

    With regard to claims by individual taxpayers, KPMG looks forward to resolving the civil litigation expeditiously and with full and fair accountability.

    The resolution of the Department of Justice's investigation into the U.S. firm's past tax shelter activities has no effect on KPMG International member firms outside the United States.

    KPMG LLP SETTLEMENT WITH THE U.S. DEPARTMENT OF JUSTICE
    KEY PROVISIONS AND TERMS

    SCOPE OF SETTLEMENT

    "Global settlement" that resolves both the IRS examination and the DOJ investigation into the U.S. firm's past tax shelter activities and related conduct.

    STRUCTURE OF AGREEMENT

    KPMG "Statement of Facts" accepting responsibility for unlawful conduct of certain KPMG tax leaders, partners and employees relating to tax shelter activities.

    Deferred Prosecution Agreement (DPA)

    –  Filing of charges, directed to past tax shelter activities.

    –  Dismissal of the charges on December 31, 2006, when KPMG has complied with the terms of the agreement.

    –  The agreement provides various remedies to the government, including extension of the term, should the firm fail to comply with the agreement.

    KPMG currently audits the financial statements of the Department of Justice. The Department of Justice states in the agreement that KPMG is currently a responsible contractor and expressly concludes that the suspension or debarment of KPMG is not warranted.

    KEY CONDITIONS TO BE MET BY KPMG LLP

    Monetary Payments

    Fine of $128 million; restitution to the IRS of $228 million; and IRS penalty of $100 million.
    Total of $456 million to the U.S. government.

    Timing: $256 million by September 1, 2005; $100 million by June 1, 2006; $100 million by December 21, 2006.

    Payments will not be deductible for tax purposes, nor will they be covered by insurance.

    Tax Practice Restrictions and Elevated Standards

    Discontinue by February 26, 2006, the remainder of the private client tax practice and the compensation and benefits tax practice (exclusive of technical expertise maintained within Washington National Tax).

    Continue individual tax planning and compliance services for (a) owners or senior executives of privately held business clients of KPMG; (b) individuals who are part of the international executive (expatriate) service program, which serves personnel stationed outside of their home country; and (c) trust tax return services provided to large financial institutions. Any tax planning and compliance services for individuals that do not meet these criteria will be discontinued by February 26, 2006, and no new engagements for individuals that do not meet these criteria will be accepted.

    Prohibit pre-packaged tax products, covered opinions with respect to any listed transaction, providing tax services under conditions of confidentiality, charging fees other than based solely on hours worked (with the exception of revenue sales and use tax audits), relying on opinions of others unless KPMG concurs with the conclusions of such opinion, and defending any "listed transaction."

    Comply with elevated standards regarding minimum opinion and tax return position thresholds.

    Cooperation and Consistent Standards

    Full cooperation with the government's ongoing larger investigation into the tax shelter activities; and toll the statute of limitations for five years.

    All future statements must be consistent with the information in the KPMG statement of facts, and any contradicting statement will be publicly repudiated.

    Compliance and Ethics Program

    Maintain a compliance and ethics program that meets the criteria set forth in the U.S. Sentencing Guidelines.

    Program to include related training programs and maintenance of hotline to contact monitor on an anonymous basis.

    Independent Monitor

    Richard Breeden

    Term: Three years.

    Scope:

    –  Review and monitor compliance with the provisions of the agreement, the compliance and ethics program, and the restrictions on the Tax practice as set forth in Paragraph 6 of the agreement.

    –  Review and monitor implementation and execution of personnel decisions made by KPMG regarding individuals who engaged in or were responsible for the illegal conduct described in the Information.

    Internal Revenue Service Closing Agreement

    An IRS closing agreement is part of the global settlement and DPA, which provides for enhanced IRS oversight of KPMG's Tax practice extending two years following the expiration of the monitor's term.

    Provisions include instituting a Compliance and Professional Responsibility Program that is focused on disclosure requirements of IRC Section 6111 and list-maintenance requirements of IRC Section 6112. (The program is intended to enhance the recordkeeping and review processes that KPMG has in place to comply with existing disclosure and list-maintenance requirements.

     

    December 20, 2008 reply from Robert B Walker [walkerrb@ACTRIX.CO.NZ]

    The inability to secure convictions is certainly a set-back, but we, as accountants, need to consider the morality of our conduct, particularly in view of what has happened in the last year.

    Bankers, lawyers and accountants are afforded a privileged position in society perhaps in the order set out at the beginning of this sentence. Bankers have the right, writ large now, for public support in the wake of their failings. Lawyers have the right to represent in court. Accountants have the right to audit or, at least, some do as audit is concentrated in fewer and fewer hands. These rights are provided by society. Yet these same people occupying a privileged position seem to think it their right to engage in practices to the detriment of those very people who provided them with the privilege in the first place.

    I like to think that there was a golden age of responsibility, probably mythical, in which professionals had a mystical view of their role. A role in which they understood that they stood in the role of trustee of the status of the professions. In the manner of a never ending relay race the current profession assumed the baton from their predecessors and cherished it until time to pass it to their successors. This sense of awe grew from a veneration of the discipline they practiced – in our case it was, and should be again, a reverence for the process of double entry.

    I suspect that taxation has played a central role in the erosion of the golden age. As accountants, lawyer and bankers saw it as their place to take a hostile stance towards the revenue gathering agencies, gradually any sense of awe towards the rule of law diminished. This was replaced by the cult of the individual in which naked self interest replaced any sense of responsibility to the wider community. Self interest is a doctrine empty of any sense of right or wrong. Even Francis Fukuyama in his book ‘The End of History’ understood that in the supposed defeat of socialism (Russian communism) by western liberalism (American capitalism) that there would be a psychological vacancy which he proposed, at the end of the book, to fill with the thought of Friedrich Nietzsche.

    I my analysis the words of Lao Tzu in the Tao Te Ching have great resonance.

    When the people lack a proper sense of awe, then some awful visitation will descend upon them. (verse LXXII)

    Well it happened, didn’t it?

     

    Bob Jensen's threads on KPMG are at http://www.trinity.edu/rjensen/Fraud001.htm#KPMG
    These include many of the details in this complicated case.


    "Highlights of Accounting Systems Research:  Keep up with the latest findings on the impacts of IT investments," by Cynthia Bolt-Lee and Janette Moody, Journal of Accountancy, December 2008 --- http://www.journalofaccountancy.com/Issues/2008/Dec/Highlightsof+ccountingSystemsResearch.htm

    This article is the fourth in a series reviewing research relevant to practicing accountants. Previous articles covered auditing, management accounting and tax. Recent, top-ranked journals that cover accounting and information technology systems were examined to determine results containing practical implications.

    Jensen Comment
    This article reviews a very, very small subset of AIS research, and I would hardly call the articles the "latest findings" since most of them date back two or more years. But in nevertheless is nice to have a summary appearing in a practitioner journal.

    Here are some more current articles on AIS:

    A Discovery-Learning Classroom Case on Accounting Data Transmission Systems David R. Fordham Journal of Information Systems - Teaching Notes 22(2), 1 (2008) (7 pages)

    Modeling an Object-Oriented Accounting System with Computer-Aided Software Engineering Alan S. Levitan, Jian Guan, and Andrew T. Cobb Journal of Information Systems - Teaching Notes 22(2), 8 (2008) (8 pages)

    KaDo: An Advanced Enterprise Modeling, Database Design, Database Implementation, and Information Retrieval Case for the Accounting Information Systems Class Guido L. Geerts and Kinsun Tam Journal of Information Systems - Teaching Notes 22(2), 16 (2008) (22 pages)

    Introducing Students to the Integrated Audit with “Auditing Alchemy, Inc.” Ulric J. Gelinas, Jr., David L. Schwarzkopf, and Jay C. Thibodeau Journal of Information Systems - Teaching Notes 22(2), 38 (2008) (16 pages) 

    Modeling a Business Process and Querying the Resulting Database: Analyzing RFID Data to Develop Business Intelligence A. Faye Borthick, Paul L. Bowen, and Gregory J. Gerard Journal of Information Systems - Teaching Notes 22(2), 54 (2008) (33 pages)

     

    Bob Jensen's sadly neglected threads on ERP in academia --- http://www.trinity.edu/rjensen/245glosap.htm

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


    500 Largest Corporations Registered by the SEC Must Markup Financial Statements with XBRL Tags

    December 17, 2008 message from Neal Hannon [nhannon@GMAIL.COM]

    Some of the largest U.S. companies will have to file their financial reports next year using technology designed to make it easier for investors to read and analyze the data under a rule adopted by U.S. Securities and Exchange Commission on Wednesday. The SEC voted 4-1 to require 500 of the largest public companies to begin filing their financial reports using the technology known as XBRL, or extensible business reporting language, by mid-2009. The SEC voted, also by 4-1, in favor of requiring mutual funds to file their risk and return information using XBRL to make it easier for investors to analyze the performance, risk and fees of thousands of funds. Mutual funds will be required to file the data using the electronic tags by Jan. 1, 2011."

    Pop the champange and throw the confetti! XBRL is finally mandatory for SEC filings starting with quarters and years ending after June 15, 2009. Although the final rule details will not be official until published in the Federal Register, we did learn today that XBRL filings will be required and that liability on the XBRL will be phased in over a two year period. In other words, the XBRL filing of G.E. for the second quarter of 2011, two years after the first filing in 2009, will carry "as filed" status. The one discenting vote, from commissioner Aguilar, was an objection to the push back on liability. Commissioner Aguilar wanted full liability on XBRL filings as of June 15, 2009.

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


    2008 TurboTax Boycott Begins and Wins
    Tax Software Boycott of TurboTax Begins:  I'll Bet You Can't Find the Hidden Fees Disclosed on the TurboTax Website

    Users are not complaining about the functionality of TurboTax. The problem, as they see it, is with pricing changes. For the first time, TurboTax producer Intuit started charging users an additional $9.95 for each additional return whether they print or e-file. Also, readers complain that the 2008 software costs more at checkout, jumping from $44.95 to $59.95. (However, when AccountingWEB went on Amazon, the software could be had at the discounted price of $54.99.) . . . One reviewer seemed to be issuing a battle cry by writing, "Time to start the boycott." Another reviewer had criticism of a more personal nature: "You should fire the person who came up with pay to print!" Of the 182 product reviews as of the evening of December 9, 2008, 171 of them were one-star reviews and only five were five-stars, the highest rating. Of the five five-star ratings, one user named Fernando Ortega said TurboTax is still the best, pointing out that he doesn't have to enter all of his personal information and previous returns manually.
    "TurboTax turmoil: Online reviews pan the top selling software," AccountingWeb, December 2008 ---
    http://www.accountingweb.com/cgi-bin/item.cgi?id=106620

    H&R Block did not raise the software fee and has no additional user fee --- http://newsblaze.com/story/2008120913262200003.mwir/topstory.html
    I shifted to TaxCut years ago and have never regretted doing so --- http://www.hrblock.com/taxes/products/software/index.html
    Maybe it's just me, but I prefer to buy TaxCut in the box at Wal-Mart so that I have a CD for each year to file away. I prefer not to download the software directly, although download updates are free and easy to install.

    Jensen Comment
    It has been popular in the past for a person to file his or her tax return and then use the same software for filing the tax returns of children or parents. No longer will this be possible for free from TurboTax. Presumably the add-on fee has to be paid when spouses file separate returns rather than a joint return. Turbo Tax along with other popular tax software for individuals does participate in the Free File Alliance for taxpayers having less than $54,000 adjusted gross income. This is only  free tax software for the Federal Return, but the accompanying TurboTax State Return costs $26 so all is not free if you need to file both a State and Federal Return using Turbo Tax.

    The new additional return fee irks taxpayers in 2008 just like the TurboTax activation fee in 2003 really irked taxpayers --- http://www.pcmag.com/article2/0,1895,821308,00.asp

    What irks me is how hard it is at the TurboTax Web site about this $9.95 additional return fee. It's almost like TurboTax is playing a game to make it easier to drop the fee if the boycott really becomes serious.

    Another thing that irks me with the TurboTax Web site is that it highlights that users can get a free edition of TurboTax and allows users to start filling in the information. Then it suddenly springs on the purchase fee along the way for users who will have an adjusted gross income above $54,000 after they have started preparing their return. This essentially wastes their time if they decide not to order the Turbo Tax software for $59 directly from TurboTax. For example, someone who decides to pay $54 from Amazon essentially has to start over preparing the return. I think hiding the $54,000 AGI maximum is highly unethical on the part of the TurboTax Website.

    TaxACT  has its standard 1040 product free for download. The deluxe is $7.95 and software for Federal and State combined is $16/95.
    The standard only allows one return, with the others you can do multiple returns. E-file is free --- http://www.taxact.com/
    Low income filers can get a free download of the TaxACT software. I would use this software if it was possible to buy the CD at Wal-Mart. I think Wal-Mart only sells TaxCut and TurboTax CD boxes and manuals.

    I really like the tax preparation hand book and forms that the IRS mails out automatically to some taxpayers and not others. My trick is to print my tax return from the TaxCut software, Then I replace the top two pages with an inked-in 1040 form as if I computed my taxes by hand. Then I mail our return. I think if I filed a computer-printed return in total or e-filed, I would not necessarily receive my handbook automatically each year from the IRS. I could be wrong about this, but the one year that I filed a total computer-printed tax return, the IRS did not mail me the handbook. It's possible to get the handbook for free, but this way I don't have to bother asking for the handbook. By the way, you should file the IRS handbook with your CD so that if the IRS raises questions a couple of years later you have the hand book available for that particular year if needed.

    December 17, 2008 Update on Intuit's Reversal
    "Intuit responds to TurboTax customer revolt," Accounting Web, December 17, 2008 ---
    http://www.accountingweb.com/cgi-bin/item.cgi?id=106668

    Responding to market pressure and consumer outrage, Intuit has reversed its original position and announced that customers using its best-selling TurboTax software can prepare and print multiple returns at no additional cost. Also, free e-filing is included with five Federal returns.

    "We're responding to changing market conditions and customer feedback," said Dan Maurer, general manager of Intuit's consumer division. "We believe this better positions TurboTax in the marketplace with an even stronger value proposition for consumers. It's one more way we help make it easier for TurboTax customers to keep more money in their pockets."

    Last week, AccountingWEB reported that 171 online product reviewers on Amazon.com had panned TurboTax with one-star ratings (as of this writing, the number is at 276). The reason? For the first time, Intuit had started charging users an additional $9.95 for each additional return whether they print or e-file. Also, reviewers complained that the 2008 version of the software costs more than last year's model, from $44.95 to $59.95.

    After the Intuit changes were put in place, one Amazon reviewer gave TurboTax a five-star rating and declared, "We won, you can print unlimited returns for free."

    Under the headline, "Intuit Finds Customer Complaints Too Taxing to Endure," the Washington Post reported the company would refund any preparation fees customers had already paid and an upcoming update to TurboTax software would "remove any mention of the $9.95 additional-return fee."

    TurboTax guarantees taxpayers will get their biggest possible refund. TurboTax customers also benefit from many features, such as built-in guidance for more than 350 possible deductions. Intuit's product line includes QuickBooks and Quicken.

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


    Small Business Helpers from Smart Stops on the Web, Journal of Accountancy, December 2008 --- http://www.journalofaccountancy.com/Issues/2008/Dec/SmartStops.htm

    SMALL OFFICE / HOME OFFICE

    GET YOUR BUSINESS OFF THE GROUND
    www.business.gov
    Known as “The Official Business Link to the U.S. Government,” this site is a virtual one-stop shop for information on running a small business. Operated by the Small Business Administration, this Smart Stop offers guides on starting and managing a business, government contracting, taxes and a host of other topics. There’s also a helpful tool to determine what types of federal, state and local licenses and permits are needed for a variety of businesses, along with contact information for the appropriate agencies. There’s even a separate section filled with information tailored for home-based businesses, which the SBA says account for more than half of U.S. businesses.

    FEEL RIGHT AT HOME
    www.2minutecommute.com
    This blog offers commentary and advice for people who work out of their homes. Recent postings included advice on feeling secure in an insecure economy, a video review of telephone headsets, and an alert about “business opportunity” scams. The site also looks at how to avoid the isolation of working from home by co-working, or sharing space with a group of other self- employed professionals. Postings can be viewed by subject, such as “Business Ideas” or “Financing.”

    MAKE YOUR SMALL BUSINESS WORK
    www.esmalloffice.com
    This Smart Stop offers articles and weekly columns for the small business owner. It features a “Business Guide” with dozens of how-to articles offering advice on everything from writing a press release to analyzing profitability. Other articles are grouped into topics including “Starting Your Business,” “Managing Your Money” and “Government Resources.” The site licenses content from providers such as Commerce Clearing House, the Edward Lowe Foundation and the Kauffman Foundation. You can also sign up to receive a free monthly e-newsletter.

    GENERAL INTEREST

    GET A CREDIT CLUE
    www.controlyourcredit.gov
    Way more fun than a lecture, the U.S. Treasury’s interactive site features The Bad Credit Hotel game, which provides information on keeping up a good credit score. The premise is to solve a mystery in a creepy hotel, with the goal of racking up enough credit tips to get to room 850—the perfect credit score—and unlock bonus information. Along the way, you collect clues on debt management, credit history and credit cards by clicking through to different rooms and clicking on key objects in each room. After collecting enough clues, players get to enjoy the secret perks found in room 850.

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


    Congratulations to KPMG's Bernie Milano, Champion of Raising Support for Minority Doctoral Students in Accounting
    Journal of Accountancy, December 2008 --- http://www.journalofaccountancy.com/Issues/2008/Dec/MilanoReceivesPresidentsAward.htm

    Bernard J. Milano, president and trustee of the KPMG Foundation, received Beta Alpha Psi’s President’s Award, the organization’s highest honor. Milano was BAP president from 1999 to 2000. Stephanie Bryant, director of the University of South Florida’s School of Accountancy and BAP’s 2007–2008 international president, presented the award during a lunch at the BAP national convention in Anaheim, Calif.

    Bryant said that under Milano’s leadership, BAP broadened its scope beyond accounting students to include finance and information systems students and led the creation of the annual Community Service Day in which volunteer members work to improve towns and cities. Milano also helped find funding for BAP’s superior chapter model, which awards cash to chapters with high levels of volunteer and professional activity.

    Beta Alpha Psi is an honorary organization for accounting and financial information students and professionals.

    You can read more about Bernie and the KPMG Foundation fellowships for minority doctoral students --- Click Here


    "Feed the Pig" is the AICPA's terrible name for its free site for helping people with personal finances
     http://www.aicpa.org/financialliteracy/FeedThePig/

    "New Feed the Pig Cirriculum Targets Younger Audience, Journal of Accountancy, December 2008 --- http://www.journalofaccountancy.com/Issues/2008/Dec/NewFTPTargetsYoungerAudience.htm

    Bob Jensen's helpers for personal finance are at http://www.trinity.edu/rjensen/Bookbob1.htm#InvestmentHelpers


    "A Model Curriculum for Education in Fraud and Forensic Accounting," by Mary-Jo Kranacher, Bonnie W. Morris, Timothy A. Pearson, and Richard A. Riley, Jr., Issues in Accounting Education, November 2008. pp. 505-518  (Not Free) --- Click Here

    There are other articles on fraud and forensic accounting in this November edition of IAE:

    Incorporating Forensic Accounting and Litigation Advisory Services Into the Classroom Lester E. Heitger and Dan L. Heitger, Issues in Accounting Education 23(4), 561 (2008) (12 pages)]

    West Virginia University: Forensic Accounting and Fraud Investigation (FAFI) A. Scott Fleming, Timothy A. Pearson, and Richard A. Riley, Jr., Issues in Accounting Education 23(4), 573 (2008) (8 pages)

    The Model Curriculum in Fraud and Forensic Accounting and Economic Crime Programs at Utica College George E. Curtis, Issues in Accounting Education 23(4), 581 (2008) (12 pages)

    Forensic Accounting and FAU: An Executive Graduate Program George R. Young, Issues in Accounting Education 23(4), 593 (2008) (7 pages)

    The Saint Xavier University Graduate Program in Financial Fraud Examination and Management William J. Kresse, Issues in Accounting Education 23(4), 601 (2008) (8 pages)

    Also see

    Bob Jensen's Fraud Updates --- http://www.trinity.edu/rjensen/FraudUpdates.htm
    Bob Jensen's threads on fraud --- http://www.trinity.edu/rjensen/Fraud.htm

    FBI Corporate Fraud Chart in August 2008 --- http://www.aicpa.org/pubs/jofa/aug2008/ataglance.htm#Chart1.htm

    A great blog on securities and accounting fraud --- http://lawprofessors.typepad.com/securities/


    Accounting Theory Controversy

    "The 'Preliminary Views on Financial Statement Presentation": Seven Years of Deliberation for This?" by Tom Selling, The Accounting Onion, December 7, 2008 --- http://accountingonion.typepad.com/theaccountingonion/2008/12/the-preliminary.html?cid=141712056

    December 9, 2008 reply from Bob Jensen

    Hi Tom,

    Thank you for this thought-provoking article.

    Two of the things that confuse me are as follows:

    At the top "Largest Possible Entity" you've illustrated balance sheet and income statement items to be additive. I think there are huge covariances that need to be accounted for. For example, it would seem that as an asset "Knowledge" has a huge covariance with the other balance sheet items.

    At the top "Largest Possible Entity" there may be some interest in the balance sheet by politicians, but it would seem that investors would only be interested in that piece of the rock that they can invest in however that piece of the rock is defined and accounted for for purposes of making portfolio investment decisions.

    Bob Jensen

    Bob Jensen's threads http://www.trinity.edu/rjensen/theory01.htm


    From The Wall Street Journal Accounting Weekly Review on December 4, 2008

    UAW Gives Concessions to Big Three
    by Alex P. Kellogg, Matthew Dolan, Greg Hitt, Jeffrey McCracken and Mike Spector
    The Wall Street Journal
    Dec 04, 2008

    Click here to view the full article on WSJ.com ---
    http://online.wsj.com/article/SB122832097499675993.html?mod=djem_jiewr_AC
     

    TOPICS: Accounting, Budgeting, Cash Flow

    SUMMARY: In preparation for presenting revised turnaround plans to Congress, Detroit's Big Three automakers have negotiated concessions from the United Auto Workers' union to delay cash payments for post-employment health benefits and to suspend the jobs bank program.

    CLASSROOM APPLICATION: Questions focus on the cash budgeting implications of the negotiations with UAW and the requests for Congressional aid, asking students to differentiate cash flow problems from profitability issues.

    QUESTIONS: 
    1. (Introductory) Describe the need for cash by each of Detroit's Big Three automakers. How do these companies determine the cash that will be needed over the next 3 months to one year?

    2. (Introductory) Why is the UAW negotiating terms of its contracts with the Big Three Detroit automakers? Are the industry labor contracts up for renewal? In your answer, comment on the union's relationship to all three major U.S. automobile producers.

    3. (Advanced) "...The union [will] allow the companies to delay billions of dollars in payments into funds that will cover health-care cost for retired workers." Will this concession actually reduce the expense associated with providing post-employment health-care benefits? What help will it provide to the automakers?

    4. (Introductory) "The union also will suspend a controversial 'jobs bank' program..." What is this program? How will suspending it help the Big Three weather the current crisis?

    5. (Advanced) Ford Motor Co. is asking for a line of credit from Congress, while General Motors and Chrysler are asking for low-cost federal loans. If they are granted, what benefit will these plans provide? Will these government supports help to return the auto manufacturers to profitability?

    6. (Advanced) "The Detroit makers insist bankruptcy isn't an option" but others disagree. What can be done through bankruptcy to help ensure that companies can emerge through this process?

    7. (Advanced) What is an Altman Z score? What factors enter into this model? In your answer, be sure to define the term "Z score".

    8. (Introductory) Why do you think Congress is particularly interested in an academic's view on this matter of support for the automakers?

    9. (Introductory) Chrysler "is not viable in its current configuration" according to a former Chrysler executive, Jerome B. York. Why not? What has changed about his company's configuration? What about today's global economy has impacted this company?
     

    Reviewed By: Judy Beckman, University of Rhode Island

     

    "UAW Gives Concessions to Big Three:  Banking Chairman Dodd Is Tapped to Develop Rescue Package in Senate That Could Top $25 Billion," by Alex P. Kellogg, Matthew Dolan, Greg Hitt, Jeffrey McCracken and Mike Spector, The Wall Street Journal, December 4, 2008 --- http://online.wsj.com/article/SB122832097499675993.html?mod=djem_jiewr_AC

    The United Auto Workers union Wednesday offered two major concessions to the Big Three auto makers, as Democratic leaders in the Senate intensified efforts to find compromise legislation that would throw a financial lifeline to the industry.

    Late Wednesday, Senate Banking Chairman Christopher Dodd was tapped to develop a consensus rescue package that could be brought to the Senate floor next week. The Connecticut Democrat, who convenes a hearing Thursday on the industry's latest appeal for assistance, is to focus on legislation that would effectively create a bridge loan for the industry, by diverting funds from an existing loan program originally intended to help the industry retool to meet higher fuel economy standards. The senator would impose much tougher conditions on the aid than a bipartisan bill developed in the Senate last month, congressional aides said.

    The goal of the initiative would be for the Senate to move ahead of the House, where deep divisions exist on the issue. The final cost of the package could exceed the $25 billion originally sought by lawmakers last month. And to fund the measure the senator is also expected to consider drawing on the $700 billion government pool created to rescue financial markets, to form a dual-source of funding for the automakers, congressional aides said.

    Behind the moves is Senate Majority Leader Harry Reid, the Nevada Democrat who pressed Sen. Dodd Wednesday to move forward. Mr. Reid is trying to break a stalemate between Congress and White House on the issue. Sen. Reid declared that a Democratic-backed bill -- which would solely draw on the $700 billion market rescue fund -- couldn't pass Congress, signaling to rank-and-file Democrats that compromise would be needed to avoid another collapse of legislative efforts to help the industry.

    The maneuvering comes as the Detroit companies are set to make a second appeal to Congress for a bailout, and underscores the importance of the UAW's willingness to consider additional concessions.

    Two weeks after insisting his union had already done enough to help the car makers, UAW President Ron Gettelfinger said the union would allow the companies to delay billions of dollars in payments into funds that will cover health-care costs for retired workers. The union also will suspend a "jobs bank" program under which workers continue to collect most of their wages after they are laid off.

    "We're willing to take an extra step here," Mr. Gettelfinger said at a news conference after meeting with UAW leadership in Detroit.

    The union move comes amid increasing concern about the future of General Motors Corp., Ford Motor Co. and Chrysler LLC, and whether the written restructuring plans they submitted to Congress on Tuesday go far enough to return the companies to financial health. Lawmakers gave a cautious welcome to the turnaround plans, but significant opposition remains to giving the companies a bailout.

    On Wednesday, Ford Chief Executive Alan Mulally said he was "very concerned" about the fate of GM and Chrysler after each told Congress it needed an immediate cash infusion to survive. GM said it needs $4 billion this month, and a total of $18 billion; Chrysler said it needs $7 billion by the end of the month.

    "Each revelation by our competitors has been of growing concern," Mr. Mulally said in an interview with The Wall Street Journal. Ford has greater cash reserves than GM and Chrysler, and asked the government to extend a $9 billion credit line that it would tap only if the U.S. recession proves worse than expected or one of its competitors fails.

    Mr. Mulally, along with the CEOs of GM and Chrysler and Mr. Gettelfinger, are due to testify Thursday and Friday before House and Senate committees on how they intend to use low-cost federal loans to reorganize. They appeared last month but lawmakers were unconvinced that they had sound recovery strategies and told them to submit new plans by Dec. 2.

    If the House and Senate panels are persuaded by the new plans, lawmakers could reconvene next week to consider legislation to provide funds.

    Car-industry representatives held a briefing for more than 100 congressional aides Wednesday. Their response was generally positive, with little of the hostility displayed by lawmakers last month when the CEOs of the three makers first testified before Congress, said one person in attendance.

    Rep. Brad Sherman (D., Calif.), a critic of the Detroit auto companies, said the new plans were a big improvement. "The original plan was, 'We flew here on our jets, we have enough room on each jet for the cash, so where's the cash?'" Mr. Sherman said. "This is way better than that."

    Continued in article

    Bob Jensen's threads on the bailout of automobile companies and other non-financial companies are at
    http://www.trinity.edu/rjensen/2008Bailout.htm#Everybody


    In these hard times, how many going concern doubts will force auditors to shift from going concern GAAP to exit value GAAP with going concern doubts expressed in the audit opinions? Also will broken markets for toxic securities, how will exit values be estimated?

    From The Wall Street Journal's Accounting Weekly Review on December 12, 2008

    AIG Faces $10 Billion in Losses on Bad Bets
    by Serena Ng, Carrick mollenkamp, and Michael Siconolfi
    The Wall Street Journal

    Dec 10, 2008
    Click here to view the full article on WSJ.com ---
    http://online.wsj.com/article/SB122887203792493481.html?mod=djem_jiewr_AC
     

    TOPICS: Accounting, Derivatives, Disclosure, Financial Accounting

    SUMMARY: While the article states that AIG faces a potential additional $10 billion in losses on speculative derivatives, the figure actually represents the underlying notional amount of the derivative. AIG responded to the front page article. Their response is listed as a related article. It references disclosure explaining the $10 billion underlying notional amount on page 117 of the 10-Q for the quarter ended September 30, 2008.

    CLASSROOM APPLICATION: The article covers issues related to complex derivative transactions.

    QUESTIONS: 
    1. (Introductory) With respect to derivative securities, what is an underlying notional amount? Give an example of a notional amount in the context of a specific derivative security.

    2. (Advanced) The headline of the article says that AIG faces $10 billion losses on trades. AIG responded in the related article to say that the $10 billion is an underlying notional amount on derivative securities. Is it possible that AIG will face an additional $10 billion in payments related to this amount?

    3. (Introductory) What is the difference between using derivative securities to speculate and using them for hedging? In your answer, define these two terms.

    4. (Advanced) "The $10 billion...stems from...AIG's exposure to speculative investments...which were essentially bets on the performance of bundles of derivatives linked to subprime mortgages, commercial real-estate bonds and corporate bonds." Based on the description in the article, why are these speculative investments not "covered" by the government bailout assistance given to AIG?

    5. (Advanced) In the related article, AIG refers to disclosures on page 117 of its 10-Q filing for the quarter ended September 30, 2008. Refer to the disclosures on that page. What events cause AIG to incur losses and cash payments to counterparties on these securities? Does this description change your answer to question 2?
     

    Reviewed By: Judy Beckman, University of Rhode Island
     

    RELATED ARTICLES: 
    AIG Responds to Wall Street Journal Story
    by WSJBlog
    Dec 10, 2008
    Online Exclusive

    "AIG Faces $10 Billion in Losses on Bad Bets," The Wall Street Journal, by Serena Ng, Carrick mollenkamp, and Michael Siconolfi, The Wall Street Journal, December 10, 2008 --- http://online.wsj.com/article/SB122887203792493481.html?mod=djem_jiewr_AC

    American International Group Inc. owes Wall Street's biggest firms about $10 billion for speculative trades that have soured, according to people familiar with the matter, underscoring the challenges the insurer faces as it seeks to recover under a U.S. government rescue plan.

    The details of the trades go beyond what AIG has explained to investors about the nature of its risk-taking operations, which led to the firm's near-collapse in September. In the past, AIG has said that its trades involved helping financial institutions and counterparties insure their securities holdings. The speculative trades, engineered by the insurer's financial-products unit, represent the first sign that AIG may have been gambling with its own capital.

    The soured trades and the amount lost on them haven't been explicitly detailed before. In a recent quarterly filing, AIG does note exposure to speculative bets without going into detail. An AIG spokesman characterizes the trades not as speculative bets but as "credit protection instruments." He said that exposure has been fully disclosed and amounts to less than $10 billion of AIG's $71.6 billion exposure to derivative contracts on debt pools known as collateralized debt obligations as of Sept. 30.

    AIG's financial-products unit, operating more like a Wall Street trading firm than a conservative insurer selling protection against defaults on seemingly low-risk securities, put billions of dollars of the company's money at risk through speculative bets on the direction of pools of mortgage assets and corporate debt. AIG now finds itself in a position of having to raise funds to pay off its partners.

    The fresh $10 billion bill is particularly challenging because the terms of the current $150 billion rescue package for AIG don't cover those debts. The structure of the soured deals raises questions about how the insurer will raise the funds to pay the debts. The Federal Reserve, which lent AIG billions of dollars to stay afloat, has no immediate plans to help AIG pay off the speculative trades.

    The outstanding $10 billion bill is in addition to the tens of billions of taxpayer money that AIG has paid out over the past 16 months in collateral to Goldman Sachs Group Inc. and other trading partners on trades called credit-default swaps. These instruments required AIG to insure trading partners, known on Wall Street as counterparties, against any losses in their holdings of securities backed by pools of mortgages and other assets. With the value of those mortgage holdings plunging in the past year and increasing the risk of default, AIG has been required to put up additional collateral -- often cash payments.

    AIG's problem: The rescue plan calls for a company funded largely by the Federal Reserve to buy about $65 billion in troubled CDO securities underlying the credit-default swaps that AIG had written, so as to free AIG from its obligations under those contracts. But there are no actual securities backing the speculative positions that the insurer is losing money on. Instead, these bets were made on the performance of pools of mortgage assets and corporate debt, and AIG now finds itself in a position of having to raise funds to pay off its partners because those assets have fallen significantly in value.

    The Fed first stepped in to rescue AIG in mid-September with an $85 billion loan when the collateral demands from banks and losses from other investments threatened to send the firm into bankruptcy court. A bankruptcy filing would have created losses and problems for financial institutions and policyholders all over the world that were relying AIG to insure them against the unexpected.

    By November, AIG had used up a large chunk of the government money it had borrowed to meet counterparties' collateral calls and began to look like it would have difficulty repaying the loan. On Nov. 10 the government stepped in again with a revised bailout package. This time, the Treasury said it would pump $40 billion of capital into AIG in exchange for interest payments and proceeds of any asset sales, while the Fed agreed to lend as much as $30 billion to finance the purchases of AIG-insured CDOs at market prices.

    The $10 billion in other IOUs stems from market wagers that weren't contracts to protect securities held by banks or other investors against default. Rather, they are from AIG's exposures to speculative investments, which were essentially bets on the performance of bundles of derivatives linked to subprime mortgages, commercial real-estate bonds and corporate bonds.

    These bets aren't covered by the pool to buy troubled securities, and many of these bets have lost value during the past few weeks, triggering more collateral calls from its counterparties. Some of AIG's speculative bets were tied to a group of collateralized debt obligations named "Abacus," created by Goldman Sachs.

    The Abacus deals were investment portfolios designed to track the values of derivatives linked to billions of dollars in residential mortgage debt. In what amounted to a side bet on the value of these holdings, AIG agreed to pay Goldman if the mortgage debt declined in value and would receive money if it rose.

    As part of the revamped bailout package, the Fed and AIG formed a new company, Maiden Lane III, to purchase CDOs with a principal value of $65 billion on which AIG had written credit-default-swap protection. These CDOs currently are worth less than half their original values and had been responsible for the bulk of AIG's troubles and collateral payments through early November.

    Fed officials believed that purchasing the underlying securities from AIG's counterparties would relieve the insurer of the financial stress if it had to continue making collateral payments. The plan has resulted in banks in North America and Europe emerging as winners: They have kept the collateral they previously received from AIG and received the rest of the securities' value in the form of cash from Maiden Lane III.

    The government's rescue of AIG helped prevent many of its policyholders and counterparties from incurring immediate losses on those traditional insurance contracts. It also has been a double boon to banks and financial institutions that specifically bought protection on now shaky mortgage securities and are effectively being made whole on those positions by AIG and the Federal Reserve.

    Some $19 billion of those payouts were made to two dozen counterparties just between the time AIG first received federal government assistance in mid-September and early November when the government had to step in again, according to a confidential document and people familiar with the matter. Nearly three-quarters of that went to French bank Société Générale SA, Goldman, Deutsche Bank AG, Crédit Agricole SA's Calyon investment-banking unit, and Merrill Lynch & Co. Société Générale, Calyon and Merrill declined to comment. A Goldman spokesman says the firm's exposure to AIG is "immaterial" and its positions are supported by collateral.

    As of Nov. 25, Maiden Lane III had acquired CDOs with an original value of $46.1 billion from AIG's counterparties and had entered into agreements to purchase $7.4 billion more. It is still in talks over $11.2 billion.

    Bob Jensen's threads on previous AIG accounting fraud --- http://www.trinity.edu/rjensen/FraudRotten.htm#MutualFunds

    Bob Jensen's threads on the AIG bailout of 2008 --- http://www.trinity.edu/rjensen/FraudRotten.htm#MutualFunds


     


    Big Bang IFRS as shown at http://www.trinity.edu/rjensen/theory01.htm#MethodsForSetting

     The roaring SEC-FASB (read that Cox-Herz) Enterprise for replacing domestic accounting standards such as U.S. and Canadian GAAP is analogous to letting the Federation  govern the world. Both the U.N. and the International Accounting Standards Board have lofty intentions, but multinational politics in the Federation is a nightmare to behold.

     

    A November 3, 2008 clarification of my position of the controversy of replacing U.S. accounting standards with international accounting standards

    Notwithstanding Shaum Sunder’s excellent argument against an IASB monopoly and my preference for bright line rules, I’ve viewed all along that “resistance is futile” in trying to prevent the ultimate replacement of U.S. domestic accounting standards with international standards.

    At this point I’m merely trying to prevent both a premature Big Bang (Mary Barth’s wording) or a bunch of Little Bangs (Pat Walter’s wording) prematurely. By prematurely, I mean having at least until 2018 to evolve into this in an orderly manner for business firms, auditors, accounting educators, textbook writers, students, and CPA examiners. Cox is rushing this thing too fast at the SEC, and I think the FASB is trying to avoid having to rewrite FASB standards, interpretations, and guidelines to be consistent with IFRS.

    I think we’ve given the FASB sufficient resources to rewrite U.S. GAAP in an evolutionary manner that will greatly enrich the illustrations and implementation guidelines that are sorely lacking in the present IASB standards. In other words I would like to have FASB Standards and a greatly improved FASB Codification Database after 2018 even if IFRS is virtually written into U.S. GAAP. And yes, I will concede to removing most of the bright line rules! Sigh!

    I also think the U.S. should maintain its leverage by not fully committing to IFRS until the IASB is better able to handle the enormous U.S. economy in terms of a better IASB infrastructure, greatly increased IASB research funds, many more IASB full-time members, and a demonstration that it is not under the thumb of the EU politicians and bankers.

    I also agree fully with Mary Barth that our academy’s accounting researchers worldwide should play a greater role in making IFRS better able handle its eventual monopoly on all accounting standards for the free world.

    I would also like time to let the smell to dissipate concerning how Chris Cox, while Director of the SEC, abused his authority by trying for force international standards down our throats too suddenly in a chaotic Big Bang.

    As to GAAS, I just don’t think we’re ready for International GAAS until we have better international law, especially international law regarding bribery, corruption, white collar crime enforcement, and international civil litigation procedures.
    Bill Ellis forwarded a link comparing U.S. GAAS with international GAAS --- Click Here

    November 26, 2008 message from david.raggay@ifrs-consultants.com

    Forget IFRS for a moment if you will – let us pretend that they don’t exist. Are you of the opinion that rules lead to transactions and events being more faithfully represented than principles?

    If no, would you support a gradual move from current US GAAP to principles-based US GAAP in a manner that allows proper acclimatization by all stakeholders?

    David

    November 27, 2008 reply from Bob Jensen

    Hi David,

    I have argued over and over that rules in many instances lead to greater consistency, easier enforcement, and better safety. My classic examples are traffic rules. The principle “reduce speed in a school zone” just does not work well when some drivers think that reducing speed from 55 mph to 40 mph meets the “principle.” Parents of school children are ever so grateful for bright-line signs posted setting maximum speed to something like 20 mph in school zones.

    In the U.S. over the past four decades, we’ve seen where enormous clients that auditing firms cannot afford to lose have been bullying auditors to points where auditors exercised poor judgments about accounting “principles.” My best example here is when CEO Frank Raines bullied KPMG to violate FAS 133 rules about hedge accounting for heterogeneous macro hedges. As a result of the rules, the government caught Fannie Mae and KPMG. KPMG got fired from the audit and Frank Raines got fired from Fannie Mae and was required to pay over a million dollars in fines.

    Had there only been a “principle” about macro hedging without some bright line rules, chances are that both Raines and KPMG would still be misleading investors at Fannie Mae, because they could argue that they just applied different “judgment” about accounting principles vis-à-vis what judgments other firms and auditors might apply in the same circumstances. It was the Three-Percent rule (now a 10 % Rule in FIN 46) that essentially brought down both Enron and Andersen. Without such a bright line rule, Enron might still be gouging electric power companies, Andersen might still be performing terrible audits, and Andy Fastow might be the new Secretary of the U.S. Treasury.

    My point is that enormous clients are prone to bullying auditors in the U.S. and, without some of the bright line rules in such areas as revenue realization, hedge accounting, and SPE accounting (that 10% rule today), the bad guys would still be cooking the books in the U.S. instead of having to pay up in court --- http://www.trinity.edu/rjensen/Fraud001.htm 

    Obviously, no accounting standards can be exclusively principles-based (IFRS has some bright line rules) or rules-based (U.S. GAAP leaves a lot of leeway for professional judgment in most standards). I think what you’ve overlooking, David, is the history of bright line rules in U.S. GAAP.

    Bright line rules typically were introduced when business firms were abusing the privilege of judgment. These abuses led to many inconsistencies such as when Boeing said it sold an airliner to Eastern Airlines, but Eastern Airlines reported in was only renting the airliner from Boeing. These abuses also misled investors and led to a lot of unearned bonuses because principles-based standards led to greater ability to manage earnings to the penny just to get a bonus (as in the case of Franklin Raines at Fanney Mae).

    Sure it’s easy to point to some bright line rules that have not worked well such as the FAS 13 bright line rules separating operating leases from capital leases. It’s easier to generate a “principle” that there can be no operating leases and make every lease a capital lease. But this is more than just a “principle.” This is a harsh bright line rule that simply sets the bar for operating leases at zero.

    Of course doing away with operating leases entirely is not necessarily a good thing in theory. There is a difference when there’s zero chance of ever being an owner after decades of paying rent under an operating lease such as when a bookstore rents a 1,000 square-foot shop in the Galleria Shopping Mall. The Galleria has no intention whatsoever of ever passing ownership title to a mere 1,000 square feet in a million square-foot mall. The firm that leases the entire million square feet mall itself, however, may well become the owner of the Galleria Mall under a true capital lease after making lease payments for 30 years and then paying an ending one dollar to own the mall.

    Hence there is a difference between the book store’s lease (never a chance to own) and the mall lease allows the lessee to purchase the mall for a dollar after 30 years of paying rent. Standards that consider the book store lease and the mall’s lease as equivalents is not necessarily correct in “principle.”

    My threads on rules-based versus principles-based standards are at http://www.trinity.edu/rjensen/theory01.htm#Principles-Based 
    Neither basis for accounting standards is perfect in every instance, but I hate accounting standards that give greater flexibility to enormous clients to bully auditors and manage earnings to maximize bonuses rather than shareholder value.

    What a more gradual convergence to test principles-based standards slower in the U.S. business environment to see where they are allowing run-away earnings management and financial reporting manipulation. This would allow the U.S. to pressure the IASB to insert some bright line rules, before the U.S. buys into IFRS entirely, where the most egregious earnings management is being attempted under principles-based standards.

    Bob Jensen

     


    Tom Selling explains the timing of the the SEC issuance of the IFRS Roadmap in "G-20 Conference Provides Cover for the SEC to Issue Its IFRS Roadmap," The Accounting Onion Blog on November 15, 2008 --- http://accountingonion.typepad.com/

    November 16, 2008 letter from Bob Jensen to Tom Selling

    Hi Tom,

    Thanks for providing a link to the Roadmap for unconditional surrender of U.S. GAAP. We lost the war, but resistance was futile from the time Chris Cox took over as the Director of the SEC. I surrendered some time ago but was hoping for 2018 rather than 2014 --- http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting
    I think the U.S. could've bargained for more, especially for a better infrastructure and funding of the IASB and a much larger permanent research staff at the IASB.

    Like everything else associated with IFRS, this SEC Roadmap is an illustration of being “Principles Based.” The milestones are very soft with no bright lines --- http://www.sec.gov/rules/proposed/2008/33-8982.pdf

    The SEC Roadmap sets 2014 as the date of unconditional surrender, but leaves the door very slightly ajar for delays in this date depending upon whether certain “milestones” are met. But true to principles-based standards there are no definitive benchmarks for accomplishing the milestones. To me these milestones are more for show than for real. It’s best to assume 2014 is a done deal. Educators and CPA examiners and CPA review courses and students are going to be in a state of turmoil. As for the publishers --- they’re probably dancing in the streets. Cox just killed the used book market. Cox just killed the CPA exam review materials.

    This will affect textbooks at all levels. LIFO has to be expunged from Principles textbooks. Fair value fantasies have to be added to the textbooks. All the bright line rules in Intermediate and Advanced accounting textbooks have to be plucked out and replaced by IFRS principles-based replacements. All basic and financial accounting instructors have to be retooled --- http://www.trinity.edu/rjensen/Theory01.htm#FairValue

    Training firms (including the AICPA, IMA, and large accounting firms) are dancing in the streets. Virtually all business firms that have public accounting audits as well has the public accounting audit firms themselves will have to spend hundreds of millions of dollars on hurried training.

    Let’s conclude by admitting we’ve been Coxed into 2014 this in the waning days before Chris Cox gets fired or is forced to resign. He abused his authority in this just like he abused his authority in deciding not to monitor Wall Street’s Investment Banks before their collapse (Cox admits he made a grave mistake here) --- http://www.trinity.edu/rjensen/2008Bailout.htm#SEC

    I’m willing to surrender unconditionally but not until 2018. However, I doubt that anything short of nuclear war will slow down this Herz-Cox Express Train. Sadly, the Big Four that really got us into this roadmap (Cox is just a front) may not be around in 2014 to enjoy their successful lobbying effort --- http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms

    My threads on this whole IFRS convergence mess are at http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting

    Bob Jensen


    November 16, 2008 reply from Neal Hannon [nhannon@GMAIL.COM]

    Hi Tom,

    As pointed out by the FEI financial blog, the chairman of the FAF has sent a FAF letter to President Bush, G-20 prior to the G-20 summit asking him to preserve accounting standard setting. Here are a few highlights from the letter:

    In a letter posted on the Financial Accounting Standards Board (FASB) website today, Robert Denham, President of the board of Trustees of the Financial Accounting Foundation (FAF) (which oversees the FASB), sent a letter to U.S. President George W. Bush on Nov. 13, asking President Bush to share the letter with members of the G-20 attending the Summit on Financial Markets and the World Economy taking place today and tomorrow in Washington, DC. Following are some of the points in the FAF letter to President Bush, G-20:

    We understand that current issues relating to international accounting standards will be discussed at this [G20] meeting as part of a comprehensive examination of the global financial crisis. The FAF believes that the complex task of setting accounting standards is best done by the experts who comprise the FASB and International Accounting Standards Board (IASB). We are very concerned about recent efforts in the United States and abroad that contemplate political solutions to perceived flaws in certain accounting standards. Political pressures have been brought to bear on the IASB to urgently review and revise its standards, particularly relating to 'mark-to-market' (fair value) accounting. The IASB has already departed from its normal due process to make one such revision in response to this pressure and is being asked by the European Commission to further review its standards for certain financial instruments and to complete its deliberations in time for year-end financial reporting. High-quality accounting standards are best achieved when the standard-setting process is independent and free of political influence. We believe that any legislative outcome that would permit accounting standards to be overturned through a political process will create uncertainty, greatly undermine investor confidence, and dangerously compromise the credibility of financial reporting at a time when the capital markets are under great duress and in need of greater transparency. We encourage the G-20 to support independent standard setting via a robust due process free from political interference. This support will do more to restore confidence in the capital markets than legislating accounting standards in a way that reduces the reliability and transparency of financial information presently available to investors. How can giving an understaffed, under-funded, politically influenced board be a good thing for international accounting, let alone US accounting? The Wall Street Journal (see http://online.wsj.com/article/SB122662346962726733.html  ), in an editorial about the G-20 summit talked about the push for a new international regulator (a natural follow-on to global IFRS) in the following terms: Given the dominant American role in global finance, a new international regulator is one more way for the Lilliputians to tie down Gulliver. We're all for nations working together for common standards that improve business efficiency across borders. But Europe has all too often used its regulatory standards to punish American companies -- witness its antitrust assaults on Microsoft and GE.

    Seems to me that there is an abundance of scepticism to harness against giving up on FASB as the US accounting standard setter.

    Neal


    SEC Director Chris Cox --- Good Riddance in Spite of a Relatively Good Enforcement Year
    Why “Good Riddance?”

    On September 27, 2008 I added the following appendix to my essay at http://www.trinity.edu/rjensen/2008Bailout.htm

    "The SEC in 2008: A Very Good Year? A terrific one, the commission says, tallying a fiscal-year record in insider-trading cases, and the second-highest number of enforcement cases overall. But what would John McCain say?" by Stephen Taub and Roy Harris, CFO.com, October 22, 2008 --- http://www.cfo.com/article.cfm/12465408/c_12469997

    Sadly, Chris Cox will leave office with both U.S. capital markets and the U.S. financial accounting/auditing systems in disarray. It's not so much that he's a bad person. It's just that he was too trusting of the oligopolies when allowing them free hand in policing themselves. That did not work all well as we're now writing into the histories of disasters.

    As a departing (hopefully soon) Director of the SEC, the legacy of Chris Cox will not be commendable in spite of a record number of successful recent SEC court cases against financial fraud. John McCain announced during his campaign that, if elected President of the U.S., one of his first acts would be to fire Chris Cox. In spite of some great leadership against specific targets of fraud, Chris Cox failed to see the dangers in allowing oligopolies to control two industries. In the case of Wall Street, Commissioner Cox decided not to exercise the SEC's power and responsibility of oversight of investment banks. And Wall Street investment bankers took advantage of lax SEC oversight to a point of self-destruction.

    In the case of the accounting industry, Chris Cox decided to allow the oligopoly of the largest international accounting firms to dictate, for all U.S. accounting firms and U.S. industry, abandonment of our rich heritage of U.S. accounting principles in favor of an incomplete set (compared to U.S. GAAP standards) of international accounting standards (IFRS). Although this might be a commendable goal in a couple of decades after the International Accounting Standards Board has the resources and infrastructure and standards in place to take on the giant U.S. economy, the large-firm oligopoly seemingly moved too quickly to make this transition. Possibly the large accounting firms rushed us into IFRS this year because they had Chris Cox under their thumbs. Tom Selling on October 8, 2008 now reveals some of the politics being played by the big firms in this regard and predicts that the new SEC Director will not be so favorably inclined toward a rush to abandon U.S. accounting standards.

    "Speaking Out Against IFRS Adoption? Welcome to the "Loud Minority," by Tom Selling, The Accounting Onion, October 8, 2008 --- http://accountingonion.typepad.com/ 
    As I mentioned in a previous post, PCAOB member Charles Niemeier delivered a tour de force critique of U.S. efforts to adopt IFRS, at a recent New York State Society of CPAs (NYSSCPA) educational event. To its credit, the NYSSCPA's e-zine covered Niemeier's remarks a few days later. On the other hand, the PCAOB sure took its sweet time (weeks) to post the text of his speech on its website.

    Perhaps one reason the PCAOB appears to have dragged its feet is that Niemeier was equally critical, if not more so, of two other "global initiatives" in the financial reporting arena: "reliance on non-U.S. regimes for auditor oversight, and converging U.S. auditing standards to those developed by the International Federation of Accountants." These thoughts were completely overlooked in the NYSSCPA's coverage, and given short shrift by almost everyone else it seems. Evidently, few care whether the PCAOB willingly gores its own ox; but opposing IFRS adoption is like standing between hungry pigs and their troughs.

    IASC to Niemeier: You're Loud and We're Right ('Cuz We Said So)

    With respect to IFRS adoption, NYSSCPAs' coverage of Niemeier was fair, and gets kudos from me for reporting this key reaction:

    "'The impression I got and the reaction from the audience was: it's about time somebody said something about this,' said conference Chair George I. Victor, who is also immediate past chair of the NYSSCPA's Accounting and Auditing Oversight Committee. 'It's David and Goliath and David stood up to Goliath here. Just about everybody in the room agreed with most if not all, of what he said.'" [emphasis supplied]

    You can bet that a Goliath would want the last word, and preferably with no David to contend with. So, the NYSSCPA accommodated Goliath a week later in the person of Philip Laskawy, vice-chairman of the International Accounting Standards Committee Foundation (IASCF), new chairman of Fannie Mae, and former head of Ernst & Young (1994 – 2001). Not all of the questions posed to Laskawy were softballs; however, there can be no denying that numerous disingenuous answers were allowed to prevail with nary a token of protest.

    If a straight-shooting David were present, maybe the encounter would have gone something like this:

    NYSSCPA: The 22 trustees of the IASCF are responsible for the governance, oversight and funding of IASB and the rigorous application of International Financial Reporting Standards (IFRS). Philip A. Laskawy retired as the chairman and CEO of Ernst & Young in 2001, a position he had held since 1994. In addition to his service as a trustee, he currently serves on the boards of several U.S. and foreign-based companies and non-profits.

    David: Another pertinent fact, which may affect your assessment of Mr. Laskawy's credibility, is that he presided over E&Y during a time when, as evidenced by unprecedented sanctions, E&Y committed some of the most blatant independence violations by an international firm since the enactment of the federal securities laws:

    [In 2004, an] SEC administrative law judge fined E&Y $2.164 million (including $1.7 million disgorgement) and bars the firm from accepting any new clients in the U.S. for six months, after finding that the firm acted improperly by auditing PeopleSoft Inc. -- a company with which it had a profitable business relationship. … According to The New York Times, the administrative law judge said the firm "committed repeated violations of its auditor independence standards by conduct that was reckless, highly unreasonable and negligent." (Floyd Norris, "Big Auditing Firm Gets 6-Month Ban on New Business," April 17, 2004) … The SEC alleged that E&Y violated the auditor independence requirements in connection with E&Y's audits of PeopleSoft Inc.'s financial statements from 1994 through 2000. … [Available at http://www.crocodyl.org/wiki/ernst_young; emphasis supplied]

    NYSSCPA: More than one study has reported that companies show higher earnings under IFRS versus GAAP. Can anything be done to smooth the contradictory data investors will be relying upon as IFRS is phased in for more companies in the years ahead?

    Goliath: I have no basis of knowing whether any of those studies are right or wrong. Anyway, that gets adjusted in the market place, but more importantly you'll be able to compare two companies from different countries who are in the same business to see how they're doing.

    David: It sounds like you're not even interested in knowing the answer to these questions. Evidently, the numerous studies cited by Niemeier, and by Professor Teri Yohn in her testimony to Congress amount to an inconvenient truth you would prefer to ignore. Yes, I know you're Goliath, so I'll humor you and pretend that the totality of research on this topic is actually inconclusive. How can you say on the one hand that the market adjusts for differences in accounting, rendering differences between IFRS and GAAP inconsequential; and then say on the other hand that market participants will benefit from enhanced comparability! You seem to be saying that accounting doesn't matter now, but it will when everyone adopts IFRS.

    NYSSCPA: Are you concerned that comparability across companies will decrease if the U.S. conducts a phased-in transition to IFRS?

    Goliath: Nope. U.S. companies aren't comparable anyway, because GAAP changes so darn much. And, I don't think there have been any examples where it's been that impactful on stock prices. Even today, investors are not using GAAP earnings necessarily as a way of determining their recommendations on companies.

    David: Once again, the evidence contradicts your wishful thinking. Those same folks I just mentioned cite evidence that investors do prefer GAAP, and GAAP is more closely associated with stock prices – i.e., investors putting their money where their mouth is.

    Besides, lack of comparability due to changes in GAAP is way overstated; all significant changes to GAAP require retroactive restatements to assure comparability over earlier periods. Also, are you actually saying that once the U.S. takes the plunge on IFRS, there will be the equivalent of world peace, and for the first time since the days of the Old Testament, accounting standards won't change? Unless that's what you are saying, then IFRS won't result in comparability either; you have just thrown comparability, your biggest selling point for global accounting convergence, under the bus.

    NYSSCPA: If the transition goes as expected, the U.S. will be basically giving up control of financial standards to an international body by 2016. We're surprised more people haven't been talking about it.

    Goliath: You really would have to ask them.

    David: "You really would have to ask them" is exactly what the IASCF and SEC should be doing more often and more better – if the goal of U.S. adoption of IFRS is to make a change that investors actually want and can benefit from. Instead of blatantly shilling for IFRS, Goliaths should be spending their time looking for real answers. For example, figure out how to encourage broad-based investor feedback so that rigorous studies by impartial investigators can provide reliable answers to high-stakes questions.

    NYSSCPA: We're also surprised that you haven't gotten more comment letters on the constitution review from stakeholders who would want to weigh in on the oversight of IASB. What's your opinion on that? Do you think all the stakeholders are really paying attention at this point, or maybe it's too far off?

    Goliath: With most things in life there's a very loud minority, and Charles Niemeier truly is part of that minority—very small—who make a lot of noise, but the vast silent majority just goes about and does its thing, and I think that's what's happening here. And by the way, I don't think the presidential election is going to affect the transition to IFRS.

    David: I don't know which insult makes me want to shoot you with my slingshot more: your arrogant disrespect of a man of obvious intelligence and integrity; or channeling Richard Nixon and Spiro Agnew with their infamous Vietnam-era "silent majority" ("vast," no less) schtick. Either way, there can be no denying Niemeier is in the company of some other very smart people: among them, Ed Trott, former FASB member is now speaking out about the questionable political agendas motivating the SEC's proposed roadmap and the EU's adoption of IFRS; Floyd Norris of the New York Times doing pretty much the same; and Shyam Sunder of Yale, who believes that U.S. adoption of IFRS would lead to a mandated monopoly, thereby creating more chaos than order to accounting standards. And, don't forget the reaction of Niemeier's audience at the NYSSCPA program: it sounds like he is the one preaching to the majority choir.

    As to "loud," that better describes the Big Four et. al., and the AICPA with their unabashed promotion of their own self-interest. Now that current events are forcing the SEC to refocus on investor protection, the long-awaited document proposing a "roadmap" to IFRS seems to have disappeared (along with my 401(k) account). That seems to have had no effect on your rhetoric – or that of your former firm. I received an invitation from E&Y to watch a webcast on IFRS 2 (share-based payment) with the following come on:

    "International Financial Reporting Standards (IFRS) is becoming the dominant language of financial reporting worldwide. With the pending release of the SEC's proposed IFRS Roadmap, IFRS adoption in the US is almost official. The question now remains a matter of when will adoption be required and how will companies make the transition. For many, the key will be early preparation and these businesses are developing their transition plans now." [bold and italics in original; underline is mine]

    Given recent events, that sounds awfully loud to me! Other work prevented me from watching the webcast, but I'm betting that there was more of the same hyperbole: probably some useful tips designed to lead to fees for assisting management should they desire to re-engineer their own compensation schemes to get the most out of IFRS in their financial statements. But wait. I forgot that, according to you, the "market adjusts" for these things. I'm also betting that a lot of investors' money will be headed out the window when management figures out how to manage its compensation under IFRS.

    As to the outcome of the elections, don't be surprised if "loud minority" leader Niemeier becomes the next SEC chair! Even though he is a Republican, and Barack Obama is the likely victor, Niemeier has the integrity, experience and profile that the SEC desperately needs at this critical juncture. With three Democrats and a Republican chair who owes nothing to his party, IFRS adoption in the U.S. will be history.

    The bottom line, Goliath, is that the footnotes to Niemeier's speech by themselves were more compelling and interesting than what essentially boils down to your blind eye, blind faith or vested interest responses for the sole objective of selling IFRS. My father taught me to watch out for people, like you and the SEC's John White, who weave "truly" into pompous rhetoric like "loud minority" and "vast silent majority." The reliability of such utterances are usually anything but.

    And by the way, I'm sure you're going to do a truly great job for me at Fannie Mae.

    At least six accounting professors have been trying to actively derail the current SEC Chairman's abusing of his power to rush the replacement of rule-laced U.S. accounting standards with mushy "principles-based" international standards that allow business firms much greater flexibility (read that "subjective judgment") in accounting for earnings and risk. But our efforts to derail or at least postpone the Cox-Herz IFRS Express Train are utterly futile --- http://www.trinity.edu/rjensen/theory01.htm#MethodsForSetting

    As Chairman of the SEC, Christopher Cox should've instead been paying more attention to preventing fraud and preventing the Men in Black (bankers) from bullying their auditors into understating their bad debt reserves for faltering mortgaged-backed securities (e.g., at Bear Stearns) and sinking credit default swaps (e.g., at AIG). Mixing the metaphor here, we might say that Nero was fiddling while Rome was burning.

     

    Bob Jensen's threads on this unconditional surrender of U.S. GAAP are at http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting


    All is not well in the House of IFRS

    "Global Accounting Standards? Not So Fast," SmartPros, November 13, 2008 --- http://accounting.smartpros.com/x63796.xml

    Too Much Interfering

    IASB Chairman Sir David Tweedie told a group of British members of Parliament that he considered resigning his post after going toe to toe with the European Commission [EC] over the use of fair value accounting methods and warned that further interference in accounting rules could destroy the effort to adopt a unified set of standards, according to a story in the Financial Times on Nov. 12. The IASB reportedly agreed to the change only to avoid a worse alternative -- the EC's threat to carve out sections of the IFRS relating to fair value practices.

    The CFA Institute's Centre for Financial Market Integrity opposes the IASB's change, calling it a step backward because it doesn't improve the quality of financial reporting. The CFA would like to see a broader application of fair value into categories where it's currently not required, such as loans and receivables, says Patrick Finnegan, director of the Financial Reporting Policy Group at the Centre.

    "If you think we have problems with transparency of balance sheets now, just wait for what's coming [under IFRS]," warns Kenneth Scott, a senior research fellow at the Hoover Institution and a professor at Stanford University's law school. Reclassification of financial assets "doesn't add anything to asset value. It just fixes the books."

    It's odd that something promoted as beneficial to investors should be called into question for potentially lowering the quality of reporting standards and in turn, preventing investors from analyzing what a company's assets are really worth.

    The key difference between U.S. Generally Accepted Accounting Principles [GAAP] and IFRS is that U.S. standards are based on explicit rules while the international standards' reliance on principles gives companies more room to use their judgment in deciding how to recognize revenue and other key metrics. Adoption of IFRS would also probably trigger a big tax hike for U.S. companies, which would no longer be able to use the last-in-first-out [LIFO] inventory accounting method, which doesn't exist under the international standards. The LIFO method assumes that goods purchased most recently are sold first and that the remaining items have been purchased at earlier periods, yielding a lower gross profit during high-inflation periods than the first-in-first-out accounting method.

    Don't Sue Me

    The debate over switching to accounting standards based on something less explicit than rules comes down to questions about whether the less explicit standard will provide adequate protection against lawsuits, says James Leisenring, director of technical activities in research at the FASB. "You can't understand the debate about gratuitous vs. obligatory guidance [within IFRS] until you understand the litigation system in the U.S.," where companies are more concerned about getting sued than in other parts of the world, he says. "What it's really about is safe harbors. What [IFRS skeptics] really want to know is 'If I do it in a particular way, am I home free or not?'"

    The explicit rules under GAAP may appear to offer safety, but the downside is there are so many of them that the odds of missing one or two are greater, he says. From Leisenring's perspective, the big accounting firms that are drawn to IFRS believe they'll get sued less since it will be harder to point to their mistakes. White agrees that some companies like the freedom allowed under IFRS to interpret standards to suit their convenience, which undercuts auditors' ability to prohibit certain accounting choices.

    The most strident critics of migration to IFRS argue that the primary goal of the SEC and U.S. Treasury Dept. is attracting capital to U.S. markets, rather than ensuring that the highest quality accounting standards prevail. While attracting more capital to the U.S. "is a valid business objective, it's not clear we can do that by going to international financial reporting standards," says Ashwinpaul Sondhi, president of A.C. Sondhi Associates in Maplewood, N.J., who has served on CFA Institute committees.

    Paul Miller, a professor of accounting at the University of Colorado, would prefer to have competing standards, since the only standards all countries would be able to agree on would be very weak ones. He also believes a unified set of standards, rather than being helpful, would stifle much-needed innovation given that most of the existing accounting standards are more than 60 years old. (This is also consistent with Shayum Sunder's research paper --- http://profalbrecht.wordpress.com/2008/10/08/shyam-sunder-ifrs-critic/ )

    Loss of Information

    Some investment advisers, including Sondhi, believe investors have already lost valuable information with the SEC's elimination last year of the reconciliation between GAAP and the non-U.S. GAAP standards used in foreign companies' financial reports. "Reconciliation gave me information and told me about [non U.S. companies'] cash flow generating ability that I didn't have from their financial statements alone," Sondhi says.

    The fact that many analysts in the U.S. and overseas used to rely on the reconciliation suggests they found the differences between GAAP and foreign standards very useful, says Sondhi. He agrees that competition between different sets of standards might result in better information. "I don't know that either side has achieved a level of standard setting that would lead me to say we can do with one," he says.

    Many investment professionals, however, support migrating to a single set of standards, as long as they are of the highest quality. Finnegan at the CFA Institute questions whether the IASB and the FASB can act truly independently given the pressure each has been subjected to by regulators over the past several months as a result of the financial crisis. "When you have that kind of pressure and intervention, you have the possibility of movement to lower-quality standards that's going to appease certain interests at any one point in time, and that's not healthy," he says.

    Criticism of fair value accounting has been no less vehement in the U.S. The SEC has resisted pressure to suspend the standard, but Section 132 of the TARP gives the SEC broad authority to suspend the use of SFAS 157 by issuer class or category of transaction [BusinessWeek.com, 10/14/08].

    Who Feeds the Watchdogs?

    The fact that IASB is funded by corporate contributions also compromises its independence, critics say. Until 2003, the FASB was funded under the same arrangement for 30 years. That changed with the passage of Sarbanes-Oxley, which required the board to be funded by mandatory contributions from the Public Company Accounting Oversight Board [PCAOB], which Congress created to provide better regulatory oversight of the accounting industry.

    Miller at the University of Colorado says a better source of funding for a standards board would be stock exchanges, which could charge a fee to buyers and sellers who use the exchanges to do transactions and presumably are users of financial statements. "I would far rather see money going to an international board from users of financial standards than those who prepare them," he says.

    Another concern is whether the SEC would continue to have regulatory oversight if U.S. companies adopt IFRS. Says Miller: "The big issue is that sending it offshore diminishes our control, and in a time of crisis where accounting has played a part, I don't think it's especially wise to create a new system that diminishes U.S. control over accounting standards."

    Continued in article

    December 18, 2008 reply from David A E Raggay [david.raggay@IFRS-CONSULTANTS.COM]

    Is that to say that FASB is beyond political (and other) interference?

    David

    December 18, 2008 reply from Bob Jensen

    Hi David,

    Of course the FASB is not beyond politics. But it was successfully formed to further distance standard setting from politics. In fact the FASB was formed because a very serious threat from Moss and Medcalf that the SEC would become the U.S. accounting standard body, thereby giving the executive and legislative branches of government more control over accounting standards and appointments of standard setters --- http://www.trinity.edu/rjensen/theory01.htm#AccountingHistory

    Moss and Metcalf came very close to removing the accounting profession from standard setting. The FASB was intended to be an in-between “independent” standard setting body. There are many times when the FASB really demonstrated independence under threatened legislation to overturn such standards as FAS 123-R and FAS 133 (both of which Silicon Valley lobbyists fought hard to overthrow). The SEC, however, has always had powers to overturn the FASB, and it did so with oil and gas accounting after the drilling industry put the SEC in a vice. That episode served to illustrate how political standard setting would’ve become in the hands of the SEC. To it’s credit, the SEC has mostly distanced itself from such standard overrides for more than three decades.

    If I were to criticize FASB independence it might be that the powers on the Board were and still are heavily influenced by executive partner alumni of the largest accounting firms whose alumni generally led the FASB. I don’t want to imply ethics violations in this regard. I do want to imply that the most powerful FASB members had close ties with research partners in their former CPA firms. I think that the research going on within the big firms caught the attention of the FASB more than any other input to FASB deliberations. In many, many instances this was a good thing since our academy utterly and shamefully failed the FASB.

    After 1933, the AICPA and the SEC seriously attempted to generate accounting standards, enforce accounting standards, and provide academic justification for promulgated standards.

    • ASRs of the SEC
    • In a 3-2 vote the SEC followed George O. May's efforts to mandate external audits of securities traded across state lines in the U.S.
    • 1939-1959 A.D.: Accounting standards were generated by the AICPA's Committee on Accounting Procedure (CAP) that issued Accounting Research Bulletins (51 ARBs) --- but the tendency was to overlook controversial issues such as off-balance sheet financing, public disclosure of management forecasts, price-level accounting, current cost accounting, and exit value accounting.  Controversial items avoided by the CAP included management compensation accounting, pension accounting, post-employment benefits accounting, and off balance sheet financing (OBSF).  The CAP did very little to restrain diversity of reporting.
    • 1960-1972 A.D.:  Accounting standards in the U.S. were generated by the AICPA's Accounting Principles Board (APB) that had more members than the CAP and a mandate to attack more controversial reporting issues.  The APB attacked some controversial issues but often failed to resolve their own disputes on such issues as pooling versus purchase accounting for mergers.  
    • 1972-???? A.D.  Accounting standards in the U.S. were, and still are, being generated by the Financial Accounting Standards Board (FASB) that has seven members, including required members from industry, academe, and financial analysts in addition to members from public accountancy.  FASB members must divorce themselves from previous income ties and work full time for the FASB.  The formation of the FASB was a desperation move by CPA's to stave off threatened takeover of accounting standards by the Federal Government (there were the Moss and Metcalf bills to do just that under pending legislation in the U.S. House and Senate).  Unlike the CAP and APB, the FASB has a full-time research staff and has issued highly controversial standards forcing firms to abide by pension accounting rules, capitalization of many leases, and booking of many previous OBSF items (capital leases, pensions, post-employment benefits, income tax accounting, derivative financial instruments, pooling accounting, etc.).  The road has been long and hard on some other issues where attempts to issue new standards (e.g., expensing of dry holes in oil and gas accounting and booking of employee stock options) have been thwarted by highly-publicized political pressuring by corporations.

    History of the U.S. Financial Accounting Standards Board (FASB) and earlier accounting standard setting in the United States --- http://www.trinity.edu/rjensen/Theory01.htm#AccountingHistory

    The funding history of the FASB is interesting in itself until government funds started flowing because of the Sarbanes-Oxley legislation. Like the IASB, some funding came from sales of publications, but the FASB also had a seeded endowment. Since the big accounting firms want IFRS so desperately in a rushed time frame, I think these international firms should also give millions for an endowment of IASB research and publication and Website communications.

    As far as our academy goes, most faculty listened to the accountics researchers who attempted to divert academic thinking away from standards setting.

    Academic Accounting Researchers Dropped Out and Failed the FASB
    Demski’s
    (1973 around the time the FASB was being formed) article, ‘‘The General Impossibility of Normative Accounting Standards,’’ reinforced academic reluctance to weigh in on how practice ‘‘ought’’ to proceed. What quantitative, management accountants read into Demski’s article was that the accounting standard-setting process was hopelessly and inevitably pointless— impossible, even—and that it did not deserve any further effort from them. Academicians began backing off from involvement in standard setting, which caused further separation of teaching from research, but also exacerbated the separation of research from practice. In fact, polls revealed that the most quantitative journals—thus, those least accessible to practitioners—were perceived to have the highest status in the academy (Benjamin and Brenner 1974).
    Glenn Van Wyhe, "A History of U.S. Higher Education in Accounting, Part II: Reforming Accounting within the Academy," Issues in Accounting Education, Vol. 22, No. 3 August 2007, Page 481.

     

    Professor Demski continues to steer us away from the clinical side of the accountancy profession by saying we should avoid that pesky “vocational virus.” (See below).

    The (Random House) dictionary defines "academic" as "pertaining to areas of study that are not primarily vocational or applied , as the humanities or pure mathematics." Clearly, the short answer to the question is no, accounting is not an academic discipline.
    Joel Demski, "Is Accounting an Academic Discipline?" Accounting Horizons, June 2007, pp. 153-157

    Statistically there are a few youngsters who came to academia for the joy of learning, who are yet relatively untainted by the vocational virus. I urge you to nurture your taste for learning, to follow your joy. That is the path of scholarship, and it is the only one with any possibility of turning us back toward the academy.
    Joel Demski, "Is Accounting an Academic Discipline? American Accounting Association Plenary Session" August 9, 2006 --- http://www.trinity.edu/rjensen//theory/00overview/theory01.htm

    Too many accountancy doctoral programs have immunized themselves against the “vocational virus.” The problem lies not in requiring doctoral degrees in our leading colleges and universities. The problem is that we’ve been neglecting the clinical needs of our profession. Perhaps the real underlying reason is that our clinical problems are so immense that academic accountants quake in fear of having to make contributions to the clinical side of accountancy as opposed to the clinical side of finance, economics, and psychology --- http://www.trinity.edu/rjensen/theory01.htm#DoctoralPrograms

    My honest opinion is that many leading accountics researchers are not avoiding the clinical side of accounting out of snobbery. The problem is that clinical research in accountancy is much more difficult than economics and behavioral research. Clinical problems in accountancy are systemic and intractable.

    See my tidbit on “Accounting for Business Firms versus Accounting for Vegetables”
    --- http://www.trinity.edu/rjensen/FraudConclusion.htm#BadNews

     

    Bob Jensen's threads on the IFRS convergence mess are at http://www.trinity.edu/rjensen/theory01.htm#MethodsForSetting


    Commentary on a TAR Paper by Mary Barth

    Mary Barth is a former partner at Arthur Andersen, a distinguished professor of accounting at Stanford University, one of the very best accountancy researchers in the world, a long-time member of the International Accounting Standards Board (IASB), a strong advocate of fair value accounting, and a leading advocate of replacing U.S. GAAP with IFRS international standards ---
    https://gsbapps.stanford.edu/facultybios/biomain.asp?id=37912109

    In a recent publication in TAR she said something that surprised me a bit. In essence she proclaimed that if the abrupt transition of US GAAP with a big bang  (e,g, in 2011) does not transpire the FASB will transition US GAAP to be equivalent to IFRS. This would be a much slower "evolutionary" process since every FASB Standard, Interpretation, and Implementation Guideline would have to be cherry picked to remove most of the bright line rules, many illustrations would have to be revised or deleted, and a majority of FASB Board members would have to vote on each amendment.

    Actually some leading nations did not adopt IFRS with a "big bang." For example, Canada and Australia are working toward converting domestic accounting standards to be consistent with IFRS standards. This will eventually have the same result as a big bang transition, but the process is more evolutionary and leaves in place domestic standards where there are no IFRS standards covering certain transactions because the IASB has either not taken up those issues or cannot agree on a solution at the present time.

    The FASB has for years been working with the IASB to develop new or revised consistency between some FASB standards and IASB standards. The FASB, like virtually all accounting educators, was somewhat taken aback when the Director of the SEC in 2008 announced that the slower cooperative and evolutionary joint effort by the FASB and IASB was going to be replaced by an abrupt big bang adoption of IFRS like it or not.

    "Global Financial Reporting: Implications for U.S.," by Mary Barth, The Accounting Review, Vol. 83, No. 5, September 2008 ---
    Not free at http://www.atypon-link.com/AAA/doi/pdfplus/10.2308/accr.2008.83.5.1159

    This paper identifies challenges and opportunities created by global financial reporting for the education and research activities of U.S. academics. Relating to education, after overviewing the relation between global financial reporting and U.S. GAAP, it offers suggestions for topics to be covered in global financial reporting curricula and clarifies common misunderstandings about the concepts underlying financial reporting. Relating to research, it explains how and why research can provide meaningful input into standard-setting, and identifies questions that can motivate research related to topics on the International Accounting Standards Board’s technical agenda and to the globalization of financial reporting.

    . . .

    Globalization of financial reporting is becoming a reality. However, many challenges remain. There are many around the world unfamiliar with independent standard-setting and an investor focus for financial reporting. They are struggling with the changes but are learning. No change is universally popular, and revolutionary “big bang” change is very difficult. Evolutionary change is somewhat easier to implement and absorb, although changing multiple times is costly. We also have not yet fully resolved the issue of individual country modifications to standards, which stand in the way of truly global financial reporting. Outside of the U.S., there is a concern that the U.S. will dominate. This concern relates not only to our thinking about issues, but also to the way the standards are written. In particular, there is a concern that the U.S. tendency to provide considerable detailed guidance will manifest itself in global standards. Inside the U.S., there is a concern that IFRS lack rigor and, thus, are not high quality. There also is a concern that the standards are not specific enough and enforcement around the world is not strict enough to ensure consistent application. Clearly, there is a tension. However, progress in the last five years toward global financial reporting has been breathtaking, and it continues apace. The SEC permitting use of IFRS in the U.S. would be a major step forward.

    The implications for U.S. academics are profound. The U.S. is deeply involved in and will be affected by global financial reporting. U.S. academics need to educate first themselves and then their students to be able to participate in a global world. There also is a myriad of open questions for research that U.S. academics can address. The capital markets are demanding a single language of business. They are demanding that the single language of business be developed internationally, not solely in the U.S. This demand for a single global language of business will be met. The market forces are too great to stop. The question is how, not whether, it will happen, and how, not whether, U.S. academics will participate.

    Evolutionary change gives U.S. accounting educators, CPA examiners, and textbook writers more time to evolve into international standards. The SEC is not doing any of these groups a favor by creating education chaos with a big bang. Also, this leaves in place the FASB standards, interpretations, and implementation guidelines for which the IASB has not comparable coverage to date. Examples include FIN 46 interpretations on SPE rules, securitizations, and accounting for synthetics such as synthetic leases. The FASB has yet to take action on a number if important FASB standards and interpretations.

    Evolutionary change also gives the IASB more time to add educational and implementation aids since at present IFRS has relatively few illustrations and implementation guidelines. It leaves in place those illustrations and guidelines in U.S. GAAP until the FASB cherry picks them away or revises them in an evolutionary process.

    In the area of fair value accounting I agree with Mary Barth on fair value accounting for financial assets. I strongly disagree on fair value accounting for most non-financial assets. My disagreements are stated at http://www.trinity.edu/rjensen/theory01.htm#FairValue

    On Page 1166 she flatly asserts:

    First, there is no “matching principle.” That is, matching is not an end in itself and matching is not an acceptable justification for asset or liability recognition or measurement. The conceptual framework explains that matching involves the simultaneous or combined recognition of revenues and expenses that result directly and jointly from the same transactions or other events (FASB 1985, para. 146; IASB 2001, para. 95). Matching will be an outcome of applying standards if the standards require accounting information that meets the qualitative characteristics and other criteria in the conceptual framework. Matched economic positions will naturally result in matched accounting outcomes. However, the application of a matching concept in the conceptual framework does not allow the recognition of items in the statement of financial position that do not meet the definition of assets or liabilities (IASB 2001, para. 95). Thus, there would be no justification for deferring expense recognition for an expenditure that provides no future economic benefit or for deferring income recognition for a cash inflow that will not result in a future economic sacrifice.

    I strongly disagree. Neither domestic nor international standards allow early realization of revenue before it is legally earned. The standards just do not allow automobile inventories to be written up to expected sales prices until those sales are finalized. Carrying the inventories at something other than sales value is part and parcel to the "matching principle" eloquently laid out years ago by Paton and Littleton. Both international and domestic standards still require cost amortization, depreciation, and creation of warranty reserves. These are all rooted in the "matching principle" which has not yet died when defining assets and liabilities in the conceptual framework. In most instances the historical cost is still being booked and spread over the expected life of future economic benefits. Even if a company adopted a replacement cost (current cost) adjustment of historical cost of a depreciable asset, those replacement costs still have to be depreciated since old equipment cannot simply be adjusted upward to new, un-depreciated replacement cost.

    Paton and Littleton never argued that the "matching principle" for expense deferral applies to assets that have "no future economic benefits." In that case there would be no benefits against which to match the deferred expense.  Hence there's no deferral in such instances. I do not buy Barth's contention that there is no longer any "matching principle." If there are potential future benefits, the matching principle still is king except in certain instances where assets are carried at exit values such is the case for precious metals actively traded in commodity markets and financial assets not classified as "held-to-maturity."

    For example, consider a manufacturing plant that spends $10 million for parts for construction of custom-made production robots and another $10 million for installation costs. After about five years of operation, suppose exit values are virtually zero for both the parts (now technologically obsolete) and installation costs which never had any exit values in the first place. Exit value at zero or near-zero is misleading since it suggests that there are enormous or even infinite returns from continued successful use of old but functional robots. Replacement cost and historical cost valuations are still based on the matching principle that booked values should be matched against future revenues even if the matching amounts are somewhat arbitrary such as in the case of straight line depreciation of replacement costs. Where the matching principle fails is when expected life falls way short of actual life. Whenever possible, depreciation amounts should be revised for changed parameters.

    On Page 1166, Mary Barth states:

    Second, few financial statement amounts are stated at historical cost. Assets and liabilities are typically initially measured at the value established by an exchange, which is their cost. But, some type of remeasurement is pervasive. The only amounts in financial statements today that are always historical costs are those for cash and land in the transaction currency. Essentially all other amounts reflect changes in time, events, or circumstances since the transaction date. Amounts for short-term assets and liabilities, e.g., inventory, receivables, and accounts payable, are historical costs if they have not been impaired. However, once an entity recognizes an impairment of inventory or an allowance for uncollectible accounts receivable, the amounts are no longer historical costs. Also, entities depreciate or amortize long-term assets and revalue them or write them down when they are impaired, and amortize issue premium or discount on long-term debt. They also remeasure many financial instruments at fair value. Impaired, amortized, revalued, or otherwise remeasured amounts are not historical costs. Thus, framing the measurement debate in financial reporting as historical cost versus fair value misleads and obfuscates the issues.

    Both international and domestic standards call for historical-cost based accounting of many assets that are not impaired and many financial assets and liabilities intended to be held to maturity. Paton and Littleton recognized historical cost write-downs under the "conservatism" principle for impairments. That did not change their usage of the term "historical cost based" financial statements or the basic underlying concept of matching. It simply recognized that historical cost must be adjusted for impairments so as to not to mislead financial statement users by reporting book values in excess of value in use. Paton and Littleton did not argue for write downs to exit values if exit values (in the case of a non-going concern) were the worst possible (liquidation) uses not intended by a going concern.

    Beginning on Page 1167, Mary Barth also states:

    Fifth, the income statement has not become less important than the statement of financial position. Some believe it has because the conceptual framework definitions of financial statement elements are anchored in the asset definition. Income and expenses are defined in terms of changes in assets and liabilities. However, this focus on assets and liabilities—the elements in the statement of financial position—is not because they are more important than income and expenses. Rather, it is because standard-setters have not been able to identify a conceptually consistent and operational way of defining and measuring income and expenses, and thus profit or loss, without reference to assets and liabilities. This approach also is consistent with the concept of economic income being the change in wealth during the period (Hicks 1946).

    Standard setters may wish that the income statement was less important than the balance sheet, but in reality trends in earnings and cash flows are the two most watched patterns by analysts and investors who've by now come to realize that the balance sheet is a mess comprised items measured under different measuring sticks and a summation to net book value that is totally meaningless to anybody. Earnings are residually impacted by asset valuations. However, many exit value adjustments are relegated to AOCI rather than current earnings under such standards as FAS 130 and FAS 133 in order to adjust asset and liability values for fair values that might never be realized due to fair value adjustments.

    In my viewpoint, exit or fair value accounting in many instances is misleading when fair values are assumed to be exit values of non-financial assets. Exit values assume the worst possible use of assets (i.e. liquidations) when in fact what is or will be required in the standards is value in the best possible use. But the best possible use includes higher order covariance components that in nearly every instance are not practical to measure. I discuss these covariance issues at http://www.trinity.edu/rjensen/theory01.htm#FairValue

    In summary, I agree with Mary Barth on the issue that a single set of international accounting standards will one day be in place for virtually all nations in the free world. I also think these should be evolutionary standards where the FASB reworks domestic standards, interpretations, and implementation guidelines to eliminate differences that exist between U.S. GAAP and international GAAP.

    I'm even willing to accept the elimination of many of the bright line rules in U.S. GAAP. However, I worry that more principles-based standards will lead to greater reporting inconsistencies of virtually identical transactions. One of the problems is that principles-based standards and implementation rely increasingly on imperfect conceptual frameworks. It is impossible to lay out conceptual frameworks that are not vague.

    Principles-Based Accounting Relies More on Conceptual Frameworks, and Therein Lies the Problem

    There are strong arguments for not converging domestic standards completely to international standards, including the arguments of Yale’s Shyam Sunder and Chicago’s Ray Ball and others such as Tom Selling, J. Edward Ketz, and David Albrecht.
    Bob Jensen's threads on controversies of standard setting are at http://www.trinity.edu/rjensen/theory01.htm#Principles-Based

    Mark Penno has written a very academic paper on vagueness and logical fallacies in accounting standard conceptual frameworks. This is a very important research study for all accounting educators to read, especially educators who expound principles-based standards. Many of the problems, however, also apply to rule-based standards.

    I especially like the "sorites paradox" illustrated with the heap (soros) of sand illustration.

    "Rules and Accounting:  Vagueness in Conceptual Frameworks," Mark C. Penno, Accounting Horizons, Vol. 22, No. 3, September 2008, pp. 339-351 ---
     

    SYNOPSIS:
    Rules are fundamental to financial reporting, tax regulation, and auditing processes, and therefore the limitations of rule-based structures are of primary interest to accountants. All rule systems are plagued by the problem of vagueness, which implies that some very important decisions cannot be objectively described as “right” or “wrong,” and must be based on an authority’s judgment. This problem becomes most acute when accounting faces rapid technological changes, financial engineering, creative tax planning, or changes in the way that business is done. If the environment were static, explicit rules could eventually be developed for each category and consulted when making classifications. In contrast, dynamic environments present new problems characterized by vagueness. In this paper, I will review several definitions of vagueness, and show how they are tied to a conceptual framework. In particular, I will discuss the potential roles of verifiability, relevance, and consistency under any feasible vague conceptual accounting framework.

    . . .

    TYPES OF VAGUENESS
    Uni-Dimensional Vagueness
    Most of the literature on vagueness studies the uni-dimensional or soritical form of vagueness, with the latter label taken from the “sorites paradox.” To illustrate the paradox, suppose that I assume: If a pile of n + 1 grains of sand is a heap (soros); then a pile of n grains of sand is also a heap. But then, by permitting n to become smaller, I am—by classical logic—led to the inevitable conclusion that one grain of sand is also a heap—which is false. Technically, unidimensional vagueness requires two instances, tT and tF, where tT is definitely-a-member of Category C, and tF is definitely-not-a-member of Category C. As we move along the dimension from tT to tF, we reach an instance, say tj, which is neither definitely-a-member of Category C, nor is it definitely-not-a-member of Category C. That is, its status is indeterminate.. .

    2
    See, for example, Endicott (2000, 2001, 379) who argues “In fact, law is necessarily very vague.” For a treatment of gray areas, see Ullmann-Margalit (1990, 756), who refers to such gray areas in the context of “the wide spectrum of social norms, stretching from the diffuse, informal, non-institutional norms at one end to the institutional and legal ones on the other.”
    3
    See Cuccia et al. (1995) for an introduction to the problem(s) of vague standards in accounting.
    4
    See Dye (2002) for a somewhat different discussion of standards creep.
    5
    Contrast this to Lipman (2006) who asks “Why is language vague?”—to which his abstract replies, “I don’t know."

    The twentieth century witnessed a variety of attempts to resolve this problem. (something like tj). Thus, instead of being forced to decide whether an item is either in the category or not in the category (law of excluded middle), an individual is given a third choice: the status of the item is indeterminate. The flaw with this approach, however, is that we now have to specify a new boundary between true and indeterminate items, and a second new boundary between indeterminate and false items. These boundaries again will not be sharp (requiring us to again partition the interval even further). These additional problems are collectively referred to as higher-order vagueness, with the partitioning exercise reaching the final limit in fuzzy logic, where each item is assigned a number, . . . representing the membership-value (truth-value), or in our case, degree of membership in Category C.

    Other types of vagueness are discussed in the article

    To conclude, I have attempted to demonstrate that any conceptual framework in accounting must acknowledge vagueness. In contrast to the popular notion of vagueness, the roles of certain vagueness-induced criteria such as consistency and relevance were made more precise, and the role of verifiability reconsidered. On a parting note, Lipman (2006) writes: “In short, it is not that people have a precise view of the world, but communicate it vaguely; instead they have a vague view of the world. I know of no model which formalizes this.” While a complete model of vague conceptual frameworks has yet to be developed, it is my hope that this paper might be viewed as a beginning.

    October 19, 2008 reply from Amy Dunbar [Amy.Dunbar@BUSINESS.UCONN.EDU]

    I read Penno’s paper this morning. Fascinating read! I found the following statement intriguing: “[A]n immediate implication of vagueness is that accountants may reach a point where gathering more evidence will not change their minds, yet the accounting determinations remain controversial.” What I take from this is that no matter how much effort is expended, the “answer” relies on judgment because the data do not avail themselves to unique sets, e.g., “R&D” or “not R&D.” As the “R&D” set expands to include data that do not have common characteristics, regulators seek to improve transparency by either “lumping” (defining a unique characteristic that must exist to be in the set) or “splitting” (create subsets in which the data have unique characteristics).

    When I try to make sense of papers like this, I wish I had a stronger background in philosophy, so that I could more fully appreciate the points he makes. I would love to hear what others take away from this paper.

    Amy Dunbar

    UConn

     

    Bob Jensen's threads on controversies of standard setting are at http://www.trinity.edu/rjensen/theory01.htm#Principles-Based


    Here’s a negative externality of the wipeout of FASB standards, interpretations, implementation guides, illustrations, etc.
    A vast amount of openly shared accounting education tutorials, videos, spreadsheets, software, and free textbooks will disappear.
    A lot of accounting cases from Harvard, Stanford, ECCH, and elsewhere will disappear.
    Note that FASB referencing must change even if content changes only slightly (such as expunging of some bright lines)

     

    From: Richard Campbell [mailto:campbell@rio.edu]
    Sent: Monday, December 08, 2008 6:46 AM
    To: Jensen, Robert
    Subject: My nomination for "Sharing professor of the week"

    Bob:
    Check out Susam Crosson's videos at youtube


    http://www.youtube.com/susancrosson

    And check out the comments from grateful students.

    Richard J. Campbell
    mailto:campbell@rio.edu

    December 9, 2008 reply from Bob Jensen

     

    Hi Richard,

     December 9, 2008 reply from Bob Jensen

    I featured Susan’s free accounting videos some time back editions of both New Bookmarks and Tidbits. Since then I’ve maintained links to her videos and other free videos, textbooks, spreadsheets, and other free course materials at http://www.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks

    The changeover to IFRS is going to mess up a lot of the free stuff, especially in intermediate accounting. There will also be things that have to be changed in basic financial and managerial accounting such as extraction of LIFO as an acceptable valuation alternative for inventories. Basic accounting instructors assume that the IFRS changes are minimal for the basic courses, but if you look at the available open shared videos, tutorials, test banks, spreadsheets, and free textbooks there are countless other changes that have to be made. For example, Tom Selling correctly points out that IAS 17 is basically a clone of the amended FAS 13 lease accounting with the bright lines fuzzied up. But everywhere that the open shared materials reference FAS 13, the references and maybe quotations have to be changed to IAS 17.

    In other words, even in places where the substance does not change, the references change. Those professors who think that basic accounting lecture materials and other course materials won’t change much, just have not thought this out. Every little place where a reference to a FASB standard, interpretation, EITF, etc. is mentioned (even in a footnote) has to be changed to reduce confusion for students.

    Either students and faculty have to give up on using open share materials or the providers like Susan have to redo most of their videos, tutorials, test banks, spreadsheets, and free textbooks. The changeover to IFRS did not will not being doing those of us that openly share hundreds of files any favors. Will Susan remake all her free videos? Will Jensen remake all his free videos? Think of the open shared accounting materials that have to be changed at http://www.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks

    We expect the authors of commercial materials to take the time and trouble to change their textbooks and textbook supplements. It’s asking a lot, however, to expect authors of free open sharing books, videos, tutorials, and test banks to redo there openly shared materials because of changes due to the replacement of US GAAP with IFRS.

    At first I breathed a sigh of relief that most of my open sharing tutorials, videos, glossary, and other materials on accounting for derivative financial instruments actually point out differences between FAS 133 and IAS 39. This technically means less updating for me. But after I thought about it, these materials add a lot of noise for users who will no longer give two hoots learning how FAS 133 differs from IAS 39. They will only want to learn IAS 39 as efficiently as possible, and IAS 39 is a whole lot easier to learn than FAS 133 since IAS 39 completely ignores a lot of the hard stuff, especially stuff taken up for FAS 133 by the Derivatives Implementation Group --- http://www.fasb.org/derivatives/
    Will I pull all the DIGs out of my FAS133/IAS39 free online glossary? I doubt it ---
    http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm

    We assume that publishers of current textbooks will persuade the authors to rework their textbooks. But I wonder is those repositories of individual teaching cases (Harvard, Stanford, ECCH, etc,) have considered all the changes to content and references that must be changed in the teaching cases and teaching notes that reference FASB literature. In some cases, the authors of these cases are no longer living or have long since retired or have zero interest in reworking old cases. A lot of such cases will no longer be available for use in accounting courses.

    Bob Jensen

    Bob Jensen’s threads on the FASB vs. IFRS controversy can be found at http://www.trinity.edu/rjensen/theory01.htm#MethodsForSetting

     


    Principles-Based Accounting Relies More on Conceptual Frameworks, and Therein Lies the Problem

    Mark Penno has written a very academic paper on vagueness and logical fallacies in accounting standard conceptual frameworks. This is a very important research study for all accounting educators to read, especially educators who expound principles-based standards. Many of the problems, however, also apply to rule-based standards.

    I especially like the "sorites paradox" illustrated with the heap (soros) of sand illustration.

    ""Rules and Accounting:  Vagueness in Conceptual Frameworks," Mark C. Penno, Accounting Horizons, Vol. 22, No. 3, September 2008, pp. 339-351 ---
     

    SYNOPSIS:
    Rules are fundamental to financial reporting, tax regulation, and auditing processes, and therefore the limitations of rule-based structures are of primary interest to accountants. All rule systems are plagued by the problem of vagueness, which implies that some very important decisions cannot be objectively described as “right” or “wrong,” and must be based on an authority’s judgment. This problem becomes most acute when accounting faces rapid technological changes, financial engineering, creative tax planning, or changes in the way that business is done. If the environment were static, explicit rules could eventually be developed for each category and consulted when making classifications. In contrast, dynamic environments present new problems characterized by vagueness. In this paper, I will review several definitions of vagueness, and show how they are tied to a conceptual framework. In particular, I will discuss the potential roles of verifiability, relevance, and consistency under any feasible vague conceptual accounting framework.

    . . .

    TYPES OF VAGUENESS
    Uni-Dimensional Vagueness
    Most of the literature on vagueness studies the uni-dimensional or soritical form of vagueness, with the latter label taken from the “sorites paradox.” To illustrate the paradox, suppose that I assume: If a pile of n + 1 grains of sand is a heap (soros); then a pile of n grains of sand is also a heap. But then, by permitting n to become smaller, I am—by classical logic—led to the inevitable conclusion that one grain of sand is also a heap—which is false. Technically, unidimensional vagueness requires two instances, tT and tF, where tT is definitely-a-member of Category C, and tF is definitely-not-a-member of Category C. As we move along the dimension from tT to tF, we reach an instance, say tj, which is neither definitely-a-member of Category C, nor is it definitely-not-a-member of Category C. That is, its status is indeterminate.. .

    2
    See, for example, Endicott (2000, 2001, 379) who argues “In fact, law is necessarily very vague.” For a treatment of gray areas, see Ullmann-Margalit (1990, 756), who refers to such gray areas in the context of “the wide spectrum of social norms, stretching from the diffuse, informal, non-institutional norms at one end to the institutional and legal ones on the other.”
    3
    See Cuccia et al. (1995) for an introduction to the problem(s) of vague standards in accounting.
    4
    See Dye (2002) for a somewhat different discussion of standards creep.
    5
    Contrast this to Lipman (2006) who asks “Why is language vague?”—to which his abstract replies, “I don’t know."

    The twentieth century witnessed a variety of attempts to resolve this problem. (something like tj). Thus, instead of being forced to decide whether an item is either in the category or not in the category (law of excluded middle), an individual is given a third choice: the status of the item is indeterminate. The flaw with this approach, however, is that we now have to specify a new boundary between true and indeterminate items, and a second new boundary between indeterminate and false items. These boundaries again will not be sharp (requiring us to again partition the interval even further). These additional problems are collectively referred to as higher-order vagueness, with the partitioning exercise reaching the final limit in fuzzy logic, where each item is assigned a number, . . . representing the membership-value (truth-value), or in our case, degree of membership in Category C.

    Other types of vagueness are discussed in the article

    To conclude, I have attempted to demonstrate that any conceptual framework in accounting must acknowledge vagueness. In contrast to the popular notion of vagueness, the roles of certain vagueness-induced criteria such as consistency and relevance were made more precise, and the role of verifiability reconsidered. On a parting note, Lipman (2006) writes: “In short, it is not that people have a precise view of the world, but communicate it vaguely; instead they have a vague view of the world. I know of no model which formalizes this.” While a complete model of vague conceptual frameworks has yet to be developed, it is my hope that this paper might be viewed as a beginning.

    October 19, 2008 reply from Amy Dunbar [Amy.Dunbar@BUSINESS.UCONN.EDU]

    I read Penno’s paper this morning. Fascinating read! I found the following statement intriguing: “[A]n immediate implication of vagueness is that accountants may reach a point where gathering more evidence will not change their minds, yet the accounting determinations remain controversial.” What I take from this is that no matter how much effort is expended, the “answer” relies on judgment because the data do not avail themselves to unique sets, e.g., “R&D” or “not R&D.” As the “R&D” set expands to include data that do not have common characteristics, regulators seek to improve transparency by either “lumping” (defining a unique characteristic that must exist to be in the set) or “splitting” (create subsets in which the data have unique characteristics).

    When I try to make sense of papers like this, I wish I had a stronger background in philosophy, so that I could more fully appreciate the points he makes. I would love to hear what others take away from this paper.

    Amy Dunbar
    UConn

     

    There are strong arguments for not converging domestic standards completely to international standards, including the arguments of Yale’s Shyam Sunder and Chicago’s Ray Ball and others such as Tom Selling, J. Edward Ketz, and David Albrecht.
    Bob Jensen's threads on controversies of standard setting are at http://www.trinity.edu/rjensen/theory01.htm#Principles-Based


    Question
    Can we put the following quotations to a test in a logic course in the philosophy department?

    "Some Lessons of the Financial Crisis," by Stephen Schwarzman, The Wall Street Journal, November 4, 2008 --- http://online.wsj.com/article/SB122576100620095567.html?mod=djemEditorialPage

    Third, you need full transparency for financial statements. Nothing should be eliminated. Off-balance-sheet vehicles that suddenly return to the balance sheet to wreak havoc make a mockery of principles of disclosure.

    Fourth, you need full disclosure of all financial instruments to the regulator. No regulator can do its job of assessing risk and systemic soundness if large parts of the financial markets are invisible to it. A regulator must be able to monitor all derivatives, including, for example, $60 trillion in credit default swaps.

     

    Sixth, we need to abolish mark-to-market accounting for hard-to-value assets. There is now emerging a broad realization that mark-to-market accounting has exacerbated the current crisis. We are not talking about publicly traded equities with a readily ascertainable value. The problem involves securities held for investment purposes, and those instruments during certain times of the cycle for which there is no readily observable market. These securities and instruments would be fully disclosed to the regulator. However, a financial institution would not be forced to suddenly take huge write downs at artificial, fire-sale prices and thus contribute to financial instability.

    Bob Jensen's threads on a bull crap case against fair value accounting are at http://www.trinity.edu/rjensen/2008Bailout.htm#FairValueAccounting

    Bob Jensen's threads on earnings management are at http://www.trinity.edu/rjensen/theory01.htm#Manipulation


    From The Wall Street Journal Accounting Weekly Review on September 12, 2008

    Information Age: Closing the Information GAAP
    by L. Gordon Crovitz
    The Wall Street Journal

    Sep 08, 2008
    Page: A17
    Click here to view the full article on WSJ.com ---
    http://online.wsj.com/article/SB122083366235408621.html?mod=djem_jiewr_AC
     

    TOPICS: Accounting, Financial Accounting, Financial Accounting Standards Board, GAAP, Generally accepted accounting principles, International Accounting Standards Board, SEC, Securities and Exchange Commission

    SUMMARY: This opinion page piece begins with three jokes about accountants that may be offensive to students, then commences the narrative with the assertion that accountants may now "...deserve some respect after all [because] accountants in the U.S. are signing up for a fundamental rethinking of how they do their jobs [and]...as a result, it should finally be possible for global investing and trade to operate on a common understanding, or accounting, of businesses." The piece goes on to emphasize that IFRS are principles-based whereas U.S. GAAP is based on rules, to argue that U.S. GAAP complexity often masks economic reality, and that the relative size of the published volume of U.S. GAAP rules is a "nine-inch, three volume set of pronouncements, whereas IFRS is a slim two-inch book." Related articles from a Lehigh faculty member, Jim Largay, and a member of the FASB's Small Business Advisory Council broaden the perspective somewhat and highlight the tax implication of IFRS precluding the use of LIFO.

    CLASSROOM APPLICATION: Discussing the current state of transition to IFRS, the notions of principles-based versus rules-based standard setting, and the practical implications of this significant change in U.S. reporting can be done in any financial, international, or MBA accounting class.

    QUESTIONS: 
    1. (Introductory) What was the recent SEC announcement on change in accounting for U.S. publicly traded companies? Did the SEC actually announce "...that the U.S. will abandon Generally Accepted Accounting Principles" (GAAP) as promulgated by the Financial Accounting Standards Board (FASB)?

    2. (Introductory) Throughout this opinion page piece, the author refers to U.S.-based accounting pronouncements as GAAP and international standards as IFRS. Define the terms generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS). Identify a more appropriate term to describe U.S. promulgated financial reporting standards to parallel the term IFRS.

    3. (Advanced) Define the terms "principles-based" and "rules-based" financial reporting standards. What is the argument by Professor James Largay in the related article, about the likely progress of IFRS in this fashion?

    4. (Introductory) One related article is written by a member of the FASB's Small Business Advisory Committee. Does the SEC's planned acceptance of IFRS impact reporting by non-public U.S. businesses? Support and explain your answer.

    5. (Advanced) What is the problem with tax reporting, as U.S. companies switch to IFRS? In the U.S. in general, must tax accounting and financial statement reporting be done similarly? Support and explain your answer.

    6. (Advanced) Mr. Crovitz argues that the complexity of U.S. GAAP reporting standards at times result in masking economic reality. What are the objectives and qualitative characteristics of financial reporting in relation to this issue? How is it that U.S. financial reporting may stray from these goals?
     

    Reviewed By: Judy Beckman, University of Rhode Island
     

    RELATED ARTICLES: 
    New Accounting Standard Offers Benefits, Problems
    by Leonard Steinberg, E.A. and James Largay, PhD
    Sep 10, 2008
    Page: A14
     

    "Closing the Information GAAP," by L. Gordon Crovitz, The Wall Street Journal, September 8, 2008; Page A17 --- http://online.wsj.com/article/SB122083366235408621.html?mod=djem_jiewr_AC

    What's the definition of an accountant? Someone who solves a problem you didn't know you had in a way you don't understand.

    What's an auditor? Someone who arrives after the battle and bayonets the wounded.

    And drum roll, please: What are Generally Accepted Accounting Principles? The difference between accounting theory and practice.

    No joke, accountants are the Rodney Dangerfields of business. But perhaps they deserve some respect after all. Accountants in the U.S. are signing up for a fundamental rethinking of how they do their jobs. As a result, it should finally be possible for global investing and trade to operate on a common understanding, or accounting, of businesses.

    The Securities and Exchange Commission recently announced that the U.S. will abandon Generally Accepted Accounting Principles -- for almost 75 years, the bible for U.S. accountants -- joining more than 100 countries around the world instead in using the London-based International Financial Reporting Standards. Pointing to the "remarkably quickening pace of acceptance of a true lingua franca for accounting," SEC Chairman Chris Cox set out a timetable for all U.S. companies to drop GAAP by 2016, with the largest companies switching as early as next year.

    There are specific differences between the two systems; for example, the international system only allows the first-in, first-out inventory accounting system. The most important difference is that the international standard is based on principles, whereas GAAP is based on rules. GAAP suffers from the complexity of trying to set rules for all situations, a complexity that often masks economic reality.

    GAAP rules fill a nine-inch, three-volume set of pronouncements plus interpretive information. In contrast, IFRS is a slim two-inch book. GAAP was crafted in part by the pressures of the U.S. legal system. Companies have been glad for GAAP rules as defenses for claims of accounting irregularities. But these rules often only pretend to provide clarity. There are hundreds of pages of GAAP covering how to account for derivatives, but this didn't stop opaque pricing mismatches, which helped create the credit crunch. GAAP rules allowed trillions of dollars in securitized financial assets and liabilities to stay off the books of U.S. financial firms, while the international standard, by focusing on the true underlying economics, kept these on the books for firms based elsewhere.

    It's surprising that there is no common language for measuring the performance of companies. Until recently, all major countries had their own accounting rules, but IFRS has become the approach of choice. Inconsistent approaches to accounting make it hard to compare an energy company based in Texas with one based in Amsterdam, a bank in New York with one in London, or a biotech firm in Boston with one in Singapore. A single set of accounting rules would mean more effective global disclosure and transparency. It would reduce costs for multinationals that must now prepare multiple books. It would also make U.S. exchanges more competitive for listings by eliminating accounting differences.

    A measure of the importance of a single standard is the dislocation that getting there will cause. It will mean rewriting business school texts and retraining of corporate finance departments. The forensic accountants who sniff out problems will have to develop instincts using a new set of measures. The transition will also be tough on investors. Under the SEC proposal, larger companies in the same industry would switch to the international standard before smaller companies do. Investors for the transition period would have to compare similar companies using different accounting.

    The big U.S.-based accounting firms generally support the abandonment of GAAP. Skeptics could call this switch in systems the equivalent of the accountant full-employment act for many years, but the profession itself also recognizes that GAAP often fails to reflect underlying economics.

    A PriceWaterhouseCoopers briefing document for executives on the accounting change notes that changes will also be necessary in the law. "If an accounting and reporting framework that relies on professional judgment rather than detailed rules is to flourish in the U.S., the legal and regulatory environment will need to evolve in ways that remain to be seen." These include that "regulators will need to respect well-reasoned professional judgments."

    A system based on principles could create new defenses for company boards and accountants who try to do the right thing, if they fully disclose why they thought that a particular accounting treatment made sense. The law will have to adjust to accept more ambiguity in accounting, as a necessary condition for reporting with maximum accuracy.

    As technology has shown in other areas of life, agreed-upon standards and accepted operating systems drive usage and efficiency. Common measures add value to information. If even the belt-and-suspenders accounting profession is willing to take on the risks of switching its basic system for assessing businesses, we're truly in an era when anything that adds to understanding belongs in the asset column, while anything that undermines transparency is a liability.

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


    IFRS (or maybe just the EU) Accounting Rule Flexibility in Action

    "Accounting Changes Help Deutsche Bank Avoid Loss," Reuters, The New York Times, October 30, 2008 --- Click Here

    New accounting rules allowed Deutsche Bank to dodge a loss in the third quarter, the company said Thursday as it also announced heavy losses in proprietary trading.

    Josef Ackermann, the chairman of Deutsche, which is Germany’s flagship bank and once was seen as having escaped the worst of the market turmoil, declared a year ago that the financial crisis for his bank was over.

    On Thursday, however, Mr. Ackermann departed from the optimism that had led him to declare seeing the light at the end of the tunnel several times over.

    “Conditions in equity and credit markets remain extremely difficult,” he said, warning that the bank could cut its dividend to shore up capital in a “highly uncertain environment.”

    Also Thursday, Germany’s finance minister, Peer Steinbrück, said that a number of German banks were expected to turn to Berlin for help. Mr. Steinbrück appeared to make a veiled reference to Deutsche Bank when he told a newspaper that those seeking help could include banks that had publicly opposed taking it in the past. Mr. Ackermann recently was quoted as saying he would be “ashamed” to take taxpayer money.

    Deutsche Bank made a pretax profit of 93 million euros ($118.5 million) in the third quarter, a result possible only because of changed accounting rules. These allowed it to cut write-downs by more than 800 million euros, to 1.2 billion euros, during the period.

    The new rules, sanctioned by Brussels lawmakers, soften the old system that demanded all assets reflect market prices.

    Deutsche Bank, for example, has more than 22 billion euros of leveraged loans — commitments often made to private equity investors to lend money to buy companies.

    Farming out these loans had become difficult as worried investors retreated to safe havens and their value had fallen. The new accounting rules allow Deutsche to hold some of these loans on their books at a fixed price.

    Like all other banks, Deutsche is grappling with a freeze in interbank lending. Banks around the world have largely stopped lending to one another after the Wall Street investment bank Lehman Brothers collapsed in mid-September.

    The crisis prompted the German government to start a rescue fund of 500 billion euros, under which it can give guarantees for banks seeking financing on this market or by issuing bonds, for example.

    November 3, 2008 reply from Patricia Walters [patricia@DISCLOSUREANALYTICS.COM]

    Beware, believing what's reported in the press as truth. Reporters generally do not study accounting as part of the academic experience.

    To the best of my knowledge, the recent change made by the IASB was to converge with US GAAP in permitting companies to re-classify financial assets from held for trading to available for sale. This move does not permit these assets to be held at other than fair value. It does report the change in fair value to equity, rather than in income.

    This change was made specifically to create a level playing field across Europe and the US. The same change was made in Canada for the same reason.

    Do I regret they made this change? Yes. I suspect they do too, but the alternative was to let the European Commission "do their own thing" in this crisis.

    Regards,
    Pat

    November 3, 2008 reply from Dennis Beresford [dberesfo@TERRY.UGA.EDU]

    Pat,

    Actually, as I understand it the IASB change allows companies to reclassify securities out of the mark to market through income category (i.e., trading) to held to maturity in which case the securities will be carried at cost. Further, the change can be made retroactive to July 1 before most of the market disruption occurred. U.S rules allow this only in "rare" circumstances.

    See http://www.iasb.org/NR/rdonlyres/BE8B72FB-B7B8-49D9-95A3-CE2BDCFB915F/0/AmdmentsIAS39andIFRS7.pdf  which includes a dissent by Jim Leisenring and John Smith from the U.S.

    Denny Beresford

    November 3, 2008 reply from Bob Jensen

    Hi Pat and Denny,

    But isn’t it interesting banks are suddenly reclassifying their portfolios seemingly to avoid reporting losses? Is this good judgment based upon principles-based standards or earnings management under flexible accounting standards?

    Surely the reporters are all wrong and these reputable banks are merely using good judgments under principles-based standards. Certainly they would not use flexible accounting rules to manage earnings!

    Are we making a mockery out of accounting “standards?” What you are saying Pat is that the IASB would rather change an accounting standard under political pressure from the EU than to face up to another EU carve out of IFRS. Surely this is a mockery since the change in IFRS to suit the EU (and U.S.) affects all other nations using IFRS who are not in the EU and the U.S.

    What you are really telling us Pat is that IFRS adapts to threats from the EU when you stated:

    Do I regret they made this change? Yes. I suspect they do too, but the alternative
    was to let the European Commission "do their own thing”  . . .

    Pat Walters

    I call this making a mockery out of the conceptual framework that dictates that accounting standards are to be based upon what is the best accounting for investors. Instead the IASB acted in fear that the EU would “do-their-own-thing” accounting standards for banks. Of course there’s some history of this in the U.S., notably dry hole accounting for oil and gas. But the FASB has a better record of going nose-to-nose with Congress on FAS 133 and FAS 123-R.

    FASB standards are sometimes flexible to a fault as well. Surely Franklin Raines would not (ha, ha) reclassify just enough macro mortgage portfolios under FAS 133 rules to meet the e.p.s target (to the penny) to get his bonus before he was fired as CEO of Fannie Mae --- http://www.trinity.edu/rjensen/theory01.htm#Manipulation 

    How can those of you teaching ethics and intermediate accounting and auditing look your students straight in the eye?

    Should accountancy be reclassified in the Literature Department since financial reports are becoming more flexible fiction than fact?

    Bob Jensen

    November 3, 2008 reply from Tom Selling [tom.selling@GROVESITE.COM]

    The following statement by Pat is not fully correct:

    “…the recent change made by the IASB was to converge with US GAAP in permitting companies to re-classify financial assets from held for trading to available for sale. This move does not permit these assets to be held at other than fair value. It does report the change in fair value to equity, rather than in income.”

    The revisions to IAS 39 (and FAS 133) permit loans and receivables that were being measured at fair value to be reclassified to “held to maturity”, if the entity does not intend to sell them in the “foreseeable future” (whatever the heck that means). Thus, fair value accounting would cease for these assets. Moreover, there would be a new rule for measuring impairment on these assets, which diverges from GAAP.

    Best,

    Tom Selling

    November 3, 2008 reply from Bob Jensen

    Hi Tom,

    What the reclassification to “held-to-maturity” means in these times is that nobody else (now not even our government) is foolish enough to buy this hopeless dog that the bank can’t possibly unload. Paulsen’s new bail out plan entails buying into bank equity rather than buying up the banks’dog/junk mortgages. The trick now is to get these dogs on the books at historical cost as “held-to-maturity” rather than, choke, fair value.

    Interestingly, this is precisely what Fannie Mae’s CEO, Franklin Raines, was doing when cherry picking which investments to designate as “held-to-maturity” in his earnings management scheme to pad his bonus --- http://www.trinity.edu/rjensen/theory01.htm#Manipulation 

    Think of the irony. The good mortgages that perhaps increased in value with declining interest rates are marked upwards to fair value as “available-for-sale” or “trading” securities. The dogs that should be unloaded are instead designated as “held-to-maturity.”

    A clever professor here could design a case where all the good mortgages are sold for profit, the enormous executive bonuses are paid, and the shareholders are left with the “held-to-maturity” dog kennel that is grossly overvalued on the balance sheet. What’s even worse is that this is possible under FASB and IASB accounting standards. Our standard setters are now telling us there’s nothing wrong with being left with the dog kennel. The shareholders’ class action lawyers think otherwise.

    Is this what we call making investors our number one concern when setting accounting standards?

    My problem here is that in theory I can and do in my FAS 133 seminars make a darn good case for not marking up HTM securities to fair value. But then I never envisioned the dog kennel problem.

    I think the IASB is a bit tougher than the FASB on a decision to sell HTM investments before maturity. In IFRS it’s a bit like breaking the honor code. You may sell an insignificant sick puppy on occasion from the HTM dog kennel, but you must never sell a valuable dog before its maturity date without putting the other sick HTM dogs in the kennel up for sale as well. Selling them all might result in huge losses under the new IASB/FASB rulings allowing for the placement of very sick dogs in an HTM kennel to avoid recognizing huge losses in their value. Thus when Deutsche Bank put a lot of sick dogs in the HTM kennel to shore up 2008 reported earnings (actually to avoid a huge reported 2008 loss), Deutsche Bank better be prepared on its honor to keep virtually all of them in the kennel until they expire.

    The following is a direct quotation from IAS 39.

    B.19 Definition of held-to-maturity financial assets: 'tainting'

    In response to unsolicited tender offers, Entity A sells a significant amount of financial assets classified as held to maturity on economically favourable terms. Entity A does not classify any financial assets acquired after the date of the sale as held to maturity. However, it does not reclassify the remaining held-to-maturity investments since it maintains that it still intends to hold them to maturity. Is Entity A in compliance with IAS 39?

    No. Whenever a sale or transfer of more than an insignificant amount of financial assets classified as held to maturity (HTM) results in the conditions in IAS 39.9 and IAS 39.AG22 not being satisfied, no instruments should be classified in that category. Accordingly, any remaining HTM assets are reclassified as available-for-sale financial assets. The reclassification is recorded in the reporting period in which the sales or transfers occurred and is accounted for as a change in classification under IAS 39.51. IAS 39.9 makes it clear that at least two full financial years must pass before an entity can again classify financial assets as HTM.

    Bob Jensen

    Bob Jensen's threads on earnings management are at http://www.trinity.edu/rjensen/theory01.htm#Manipulation

    Claims of IFRS Accounting Rule Flexibility --- http://www.trinity.edu/rjensen/theory01.htm#MethodsForSetting


    Press Release from IAS Plus on October 13, 2008 --- http://www.iasplus.com/pressrel/0810reclassifications.pdf

    IASB amendments permit reclassification of financial instruments

    The International Accounting Standards Board (IASB) today issued amendments to IAS 39 Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures that would permit the reclassification of some financial instruments. The amendments to IAS 39 introduces the possibility of reclassifications for companies applying International Financial Reporting Standards (IFRSs), which were already permitted under US generally accepted accounting principles (GAAP) in rare circumstances.

    The deterioration of the world’s financial markets that has occurred during the third quarter of this year is a possible example of rare circumstances cited in these IFRS amendments and therefore justifies its immediate publication. Today’s action enables companies reporting according to IFRSs to use the reclassification amendments, if they so wish, from 1 July 2008.

    These amendments are the latest in a series of steps that the IASB has undertaken to respond to the credit crisis. The IASB has worked with a number of other regional and international bodies, including the Financial Stability Forum (FSF), to address financial reporting issues associated with the credit crisis. In responding to the crisis, the IASB notes the concern expressed by EU leaders and finance ministers through the ECOFIN Council to ensure that ‘European financial institutions are not disadvantaged vis-à-vis their international competitors in terms of accounting rules and of their interpretation.’ The amendments today address the desire to reduce differences between IFRSs and US GAAP in a manner thatproduces high quality financial information for investors across the global capital markets.

    Sir David Tweedie, Chairman of the IASB, said:

    In addressing the rare circumstances of the current credit crisis, the IASB is committed to taking urgent action to ensure that transparency and confidence are restored to financial markets. The IASB has acted quickly to address the concerns raised by EU leaders and others regarding the issue of reclassification. Our response is consistent with the request made by European leaders and finance ministers; it is important that these amendments are permitted for use rapidly and without modification.’

    For more information about the IASB’s response to the credit crisis, see the Website at http://www.iasb.org/credit+crisis.htm.

    Reclassification of Financial Assets (Amendments to IAS 39 Financial Instruments:  Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures) is available for eIFRS subscribers from today. Those wishing to subscribe to eIFRSs should visit the online shop or contact:

    IASC Foundation Publications Department,
    30 Cannon Street, London EC4M 6XH, United Kingdom.
    Tel: +44 (0)20 7332 2730 Fax +44 (0)20 7332 2749

    Email:
    publications@iasb.org Web: www.iasb.org

     

    The following table illustrates how reclassification will be dealt with following this announcement by IFRSs when compared with US GAAP.
      US GAAP Amended IAS 39

    Reclassification of securities out of the trading category in rare circumstances

    Permitted Permitted (as amended)

    Reclassification to loan category (cost basis) if intention and ability to hold for the foreseeable future (loans) or until maturity (debt securities)

    Permitted Permitted (as amended)

    Reclassification if fair value option previously elected

    Not Permitted Not Permitted

    Melamed's Lament
    We may be wasting our time debating convergence of U.S. and International GAAP for capital markets.
    Capital markets themselves are at a very critical juncture and may become extinct!

    "Amended IAS 39: Exploding the Myth of an Independent IASB," by Tom Selling, The Accounting Onion, November 3, 2008 --- http://accountingonion.typepad.com/theaccountingonion/2008/11/amended-ias-39.html

     

    Jensen Comment
    In fairness, the IASB did a commendable job crafting IAS 39, although there's no doubt it could not have done so without the help of the FASB and other help from the FASB. IAS 39 was hammered out under great pressure from the U.S. SEC to get an international standard out on derivatives accounting before the SEC would even consider adopting IFRS for foreign registrants. You can read about the evolving history of derivative instrument accounting scandals and the evolution of IAS 39 and its amendments at http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds
    Especially revealing about the early history of IASC/IASB standards, and IAS 39 in particular, is Paul Pacter's presentation at

     

    History of the International Accounting Standards Board (IASB) ---  http://www.iasb.org/About+Us/About+the+Foundation/History.htm
    A ommentary on the history of the IASC and IASB by Paul Pacter --- http://www.trinity.edu/rjensen/acct5341/speakers/pacter.htm#001
    Paul is the Webmaster of
    The IAS Plus International Standards Blog of Deloitte. That blog provides an excellent summary of the history of IAS 39 and all its amendments to date --- http://www.iasplus.com/standard/ias39.htm
    Paul is the Webmaster of The IAS Plus International Standards Blog of Deloitte. That blog provides an excellent summary of the history of IAS 39 and all its amendments to date --- http://www.iasplus.com/standard/ias39.htm
    Also see http://static.managementboek.nl/pdf/9780471726883.pdf



    In its early history, the IASB was extremely influenced by lobbying forces in industry and politics. This is because conformance with the IASB's international standards was virtually voluntary in all member nations, and the large industrial nations were not even members. Then, in its efforts to get its standards recognized or required by the major stock exchanges (see IOSCO), the IASB generated some tougher standards. Winning over the European Union is the biggest feather in the IASB's hat to date, and currently the IASB is working harder than ever to win over the SEC, the FASB, and the NY Stock Exchange. Sadly, it has had to revert to political concessions both before and during the 2008 economic crisis to win over banks in the EU and the US. In fairness, however, the FASB also made an uncharacteristically fast cave-in to the banking industry during the 2008 economic crisis.

    November 3, 2008 reply from Dennis Beresford [dberesfo@TERRY.UGA.EDU]

    Actually, as I understand it the IASB change allows companies to reclassify securities out of the mark to market through income category (i.e., trading) to held to maturity in which case the securities will be carried at cost. Further, the change can be made retroactive to July 1 before most of the market disruption occurred. U.S rules allow this only in "rare" circumstances.

    See http://www.iasb.org/NR/rdonlyres/BE8B72FB-B7B8-49D9-95A3-CE2BDCFB915F/0/AmdmentsIAS39andIFRS7.pdf  which includes a dissent by Jim Leisenring and John Smith from the U.S.

    Denny Beresford

    Although most accountants are not particularly happy with the bull crap coming out of Washington and Brussels these days, most of us have no choice but to accept what is happening in this worldwide economic crisis --- http://www.trinity.edu/rjensen/2008Bailout.htm#FairValueAccounting

    As far as the big bang versus the evolution in the conversion of U.S. GAAP to international standards, here is my stance for what it's worth:

    Notwithstanding Shaum Sunder’s excellent argument against an IASB monopoly and my preference for bright line rules, I’ve viewed all along that “resistance is futile” in trying to prevent the ultimate replacement of U.S. domestic accounting standards with international standards.

    At this point I’m merely trying to prevent both a premature Big Bang (Mary Barth’s wording) or a bunch of Little Bangs (Pat Walter’s wording) prematurely. By prematurely, I mean having at least until 2018 to evolve into this in an orderly manner for business firms, auditors, accounting educators, textbook writers, students, and CPA examiners. Cox is rushing this thing too fast at the SEC, and I think the FASB is trying to avoid having to rewrite FASB standards, interpretations, and guidelines to be consistent with IFRS.

    I think we’ve given the FASB sufficient resources to rewrite U.S. GAAP in an evolutionary manner that will greatly enrich the illustrations and implementation guidelines that are sorely lacking in the present IASB standards. In other words I would like to have FASB Standards and a greatly improved FASB Codification Database after 2018 even if IFRS is virtually written into U.S. GAAP. And yes, I will concede to removing most of the bright line rules! Sigh!

    I also think the U.S. should maintain its leverage by not fully committing to IFRS until the IASB is better able to handle the enormous U.S. economy in terms of a better IASB infrastructure, greatly increased IASB research funds, many more IASB full-time members, and a demonstration that it is not under the thumb of the EU politicians and bankers.

    I also agree fully with Mary Barth that our academy’s accounting researchers worldwide should play a greater role in making IFRS better able handle its eventual monopoly on all accounting standards for the free world.

    I would also like time to let the smell to dissipate concerning how Chris Cox, while Director of the SEC, abused his authority by trying for force international standards down our throats too suddenly in a chaotic Big Bang.

    As to GAAS, I just don’t think we’re ready for International GAAS until we have better international law, especially international law regarding bribery, corruption, white collar crime enforcement, and international civil litigation procedures.
    Bill Ellis forwarded a link comparing U.S. GAAS with international GAAS --- Click Here

    Bob Jensen

    Far more dangerous is what is happening around the world to destroy capital markets and create government dominance in the allocation of capital and resources in the world. Both FASB and IASB standards may soon be irrelevant footnotes in our history books. We may soon all be government accountants. Won't that be fun?

    From Vanderbilt University (you have to watch this video to the ending to appreciate it)
     A Keynote Speech by Leo Melamed --- Click Here 
    http://www.owen.vanderbilt.edu/vanderbilt/About/owen-newsroom/owen-podcasts/podcasts/FIC-Melamed-keynote.html
     Who is Leo Melamed? --- http://en.wikipedia.org/wiki/Leo_Melamed
     Bob Jensen's Primer on Derivatives --- http://www.trinity.edu/rjensen/2008Bailout.htm#Primer

    November 9, 2008 reply from David A E Raggay [david.raggay@IFRS-CONSULTANTS.COM]

    Bill Ellis wrote, inter alia: “I’d been asked if I knew a reference comparing US GAAP and IFRS GAAS”.

    I’m not sure if this site will totally solve your query. IFRS are accounting standards issued by the IASB – they are the international version of US GAAP, in a manner of speaking. The International Federation of Accountants (IFAC) is the proponent of (inter alia) International Standards on Auditing (ISAs). To my understanding, these standards do not specifically relate to the audit of IFRS statements.

    See the publication Facts about IFAC at: http://www.ifac.org/MediaCenter/files/facts_about_IFAC.pdf 

    David


    Demski’s (1973) article, ‘‘The General Impossibility of Normative Accounting Standards,’’ reinforced academic reluctance to weigh in on how practice ‘‘ought’’ to proceed. What quantitative, management accountants read into Demski’s article was that the accounting standard-setting process was hopelessly and inevitably pointless— impossible, even—and that it did not deserve any further effort from them. Academicians began backing off from involvement in standard setting, which caused further separation of teaching from research, but also exacerbated the separation of research from practice. In fact, polls revealed that the most quantitative journals—thus, those least accessible to practitioners—were perceived to have the highest status in the academy (Benjamin and Brenner 1974).
    Glenn Van Wyhe, "A History of U.S. Higher Education in Accounting, Part II: Reforming Accounting within the Academy," Issues in Accounting Education, Vol. 22, No. 3 August 2007, Page 481.


    A CPV Analysis Case

    From The Wall Street Journal Accounting Weekly Review on September 5, 2008

    Electronic Arts Bets Big on a New Game
    by Christopher Lawton
    The Wall Street Journal

    Sep 02, 2008
    Page: B1
    Click here to view the full article on WSJ.com ---
    http://online.wsj.com/article/SB122031227102788791.html?mod=djem_jiewr_AC
     

    TOPICS: Cost Accounting, Cost Management, Cost-Volume-Profit Analysis, Managerial Accounting, Product strategy

    SUMMARY: Electronic Arts Inc. will release this week its "much hyped" game Spore, "which game guru Will Wright has been working on since 2005." EA Inc. "has been losing money for six quarters, in part because its longtime strategy of turning out sequels for its Madden football game and other best sellers has run out of steam. Also, The Sims franchise has generated more than $1 billion in revenue since its inception." The company needs this new title to restore "its reputation for developing original game concepts, given the hype surrounding the game; delivering anything less than a blockbuster would be a major blow to EA."

    CLASSROOM APPLICATION: Cost volume profit analysis is the topic primarily questioned in the review, but revenue recognition and product strategy also are touched on.

    QUESTIONS: 
    1. (Introductory) What does Electronic Arts (EA) produce? What are the major costs incurred in the company's production process?

    2. (Advanced) How does EA earn its revenue? Specifically describe how this revenue is recognized under authoritative U.S. accounting requirements for this type of product, with reference to that authoritative guidance.

    3. (Introductory) What is Cost-volume-profit analysis? What corporate outsider is described in the article as using this type of analysis?

    4. (Advanced) Assuming that the cost information presented in the article is correct, what do you think is the break-even number of units for this product? Specifically describe all information you use from the article to make this assessment.

    5. (Advanced) Given your answer to question 4, what do you think are the challenges facing Electronic Arts with the release of this new game?
     

    Reviewed By: Judy Beckman, University of Rhode Island
     

    "Electronic Arts Bets Big on a New Game:  Spore's Performance Seen As Crucial for Reputation, Revenue of Software Firm," by Christopher Lawton, The Wall Street Journal,  September 2, 2008; Page B1

    This week, Electronic Arts Inc. will release Spore, one of the most talked-about titles in videogame history. It had better be good.

    The Silicon Valley software company has been losing money for six quarters, in part because its longtime strategy of turning out sequels for its Madden football game and other best sellers has run out of steam. Spore, which game guru Will Wright has been working on since 2005, is vital for boosting EA's revenue and restoring its reputation for developing original game concepts.

    But Spore is arriving more than a year late, which EA attributes to the need to polish the game and work on features such as social networking. And besides development work, the company has been grappling with a tough marketing task: explaining what Spore is all about.

    Mr. Wright and the game studio he co-founded, Maxis, blazed a lucrative trail with the Sims series, which began in 1989 with the idea of virtually managing the growth of cities. EA purchased Maxis in 1997, and continues to publish Sims titles, including a hit series called The Sims where players oversee the lives of simulated people. The franchise has generated more than $1 billion in revenue since its inception.

    Spore, which hits store shelves in Europe on Friday and in North America on Sunday, goes much further. Players shape the evolution of everything from tiny organisms to mature creatures to planets and galaxies. The most unusual feature is that users' creations are not only theirs to view; they become part of the environment experienced by other players.

    EA declines to disclose how much it spent to develop Spore, or its marketing budget. Michael Pachter, an analyst with Wedbush Morgan Securities, estimates that EA spent $50 million to develop the game. Factoring in marketing, distribution and manufacturing costs, he estimates the company needs $75 million in sales from the game to break

    Given the hype surrounding the game, delivering anything less than a blockbuster -- which generally means sales of one million units or more for a PC game -- would be a major blow to EA. Mr. Pachter says he expects EA to sell two million copies of the game by the end of the year.

    EA faces the challenge of promoting Spore without giving customers the idea the game is too complicated. "If you told somebody you were going to be playing a game where you controlled life from a primordial soup to intergalactic travel and you have responsibility for the entire galaxy, that can seem like a pretty daunting task," says Patrick Buechner, vice president of marketing for EA's Maxis unit.

    EA decided not to release a simplified demo of the game -- a common practice for new releases -- saying it wouldn't give players the scope of what's possible with Spore. Instead, the company in June began offering a free software download called Spore Creature Creator. It allows players to create virtual life-forms, starting with a generic torso and later adding features such as eyes, arms, legs and claws.

    Once a creature is built, players can color it, save it and show it off online. There are a number of Spore fan Web sites that show off the creatures people are building. EA also has an official YouTube channel where more than 100,000 creatures have been uploaded.

    The free software links users to a Web page where they can purchase a full version of the game.

    Continued in article


    Are credit-default swaps living up to the hype?

    Credit Default Swap (CDS) at http://en.wikipedia.org/wiki/Credit_default_swap

    A credit default swap (CDS) is an instrument to transfer the credit risk of fixed income products. Using technical terms, it is a bilateral contract, in which two counterparties agree to isolate and separately trade the credit risk of at least one third-party reference entity. The buyer of a credit swap receives credit protection. The seller 'guarantees' the credit worthiness of the product. In more technical language, a protection buyer pays a periodic fee to a protection seller in exchange for a contingent payment by the seller upon a credit event (such as a default or failure to pay) happening in the reference entity. When a credit event is triggered, the protection seller either takes delivery of the defaulted bond for the par value (physical settlement) or pays the protection buyer the difference between the par value and recovery value of the bond (cash settlement). Simply, the risk of default is transferred from the holder of the fixed income security to the seller of the swap. For example, a mortgage bank, ABC may have its credit default swaps currently trading at 265 basis points (bp). In other words, the annual cost to insure 10 million euros of its debt would be 265,000 euros. If the same CDS had been trading at 7 bp a year before, it would indicate that markets now view ABC as facing a greater risk of default on its mortgage obligations.

    Credit default swaps resemble an insurance policy, as they can be used by debt owners to hedge, or insure against credit events such as a default on a debt obligation. However, because there is no requirement to actually hold any asset or suffer a loss, credit default swaps can also be used to speculate on changes in credit spread.

    Credit default swaps are the most widely traded credit derivative product.[1] The typical term of a credit default swap contract is five years, although being an over-the-counter derivative, credit default swaps of almost any maturity can be traded.

    "The Meltdown That Wasn't:  A primer on credit default swaps, the latest Beltway scapegoat," The Wall Street Journal, November 15, 2008 --- http://online.wsj.com/article/SB122670411909729683.html?mod=djemEditorialPage

    On Friday, the Federal Reserve, SEC and CFTC announced an agreement to begin anointing "central counterparties" for the credit default swap market. Before the pols create still more institutions that are too big to fail, and further endanger taxpayers, they might want to spend time defining the problem they intend to solve.

    The same goes for House Oversight Chairman Henry Waxman. On Thursday he held his latest hearing designed to blame everything other than failed housing policy for the credit debacle. Eager to avoid being scapegoated, hedge-fund managers at the hearing agreed that the credit default swap market is a problem in need of a regulatory solution. But no matter how many financiers can be made to swear under the hot lights that credit default swaps are the problem, reality is not cooperating with this politically convenient theory. This derivatives market continues to perform better than the market from which it is derived.

    Mr. Waxman's committee exists to stage show trials; he doesn't have jurisdiction to legislate about credit markets or anything else. But his media events are helpful to his comrade in exculpation, Barney Frank. The House Financial Services Chairman is among the most desperate to blame something other than housing, where he famously vowed to "roll the dice" with Fannie Mae. He too has fingered credit default swaps and now promises "sensible" regulation. If he does to this market what he did to housing, he will again be rolling the dice with other people's money.

    Credit default swaps are contracts that insure against a borrower defaulting on its bonds. The buyer of a CDS contract essentially pays annual premiums and the seller agrees to pay back the principal if the issuer of the bonds doesn't. It's different from insurance in that an investor doesn't actually have to own the underlying bonds -- he can simply buy a CDS as a way to make a bearish bet on a company or to offset other risks.

    Shattering Beltway illusions, the unregulated CDS market is holding up better than the regulated bond market. Here we are more than a year into the credit meltdown and the CDS market is offering more liquidity than the actual cash market. Eraj Shirvani at Credit Suisse notes that "over the last 18 months, the CDS market -- not the bond market -- has been the only functioning market that has consistently allowed market participants to hedge or express a credit view."

    Large investors have often struggled mightily this autumn to find buyers for their bonds, but they could still trade CDS. The U.K. government seems to agree this is a good thing. Her Majesty's Treasury has recognized the CDS market as an efficient mechanism for setting prices by using it as the benchmark to set the rates in its Credit Guarantee Scheme for banks.

    In the U.S., meanwhile, the market has spoken, and CDS contracts are the way that investors now price credit. This means Congress should tread very carefully unless it wants to prolong the downturn. In an environment in which fewer companies are able to issue bonds and trading is light, a liquid CDS market that can put a price on credit will hasten the day when more companies are able to borrow money to build their businesses. A Congressional overreaction or too heavy a hand from the New York Fed could delay needed capital from reaching Main Street.

    But the Beltway crowd has a vague sense that while they may not understand this market, financial Armageddon will result when a major participant fails. Lehman Brothers was supposed to be exhibit A. The firm was on one end of roughly $5 trillion in CDS contracts, according to Moody's, and Lehman was itself the subject of $72 billion in CDS, in which other investors were betting on Lehman's success or failure. Here was the doomsday scenario, with a major player in CDS going bankrupt.

    It turned out to be the meltdown that never melted. Amazing as it is to Washington ears, those greedy, crazy people running large financial institutions did a decent job of managing their exposures to Lehman. When large banks and insurance companies were vulnerable to Lehman, many had offsetting trades that paid off when Lehman went bust. The net amount of $6 billion owed by sellers of credit protection on Lehman was far smaller than expected and was arrived at through the same orderly settlement auction process that has smoothly managed about a dozen such failures -- and all without government regulation.

    This is not to say that Lehman's failure didn't damage credit markets. But the problem was not a failure of the CDS market, nor was Lehman's failure caused by CDS. Toxic mortgages killed Lehman. Once Lehman went bust, CDS contracts added relatively little stress to other banks. The stress came from the failure of a big investment bank, which made people unwilling to lend to other banks.

    Identifying major systemic risks in the CDS market has proven much harder than the pols expected. The big dealers that trade CDS often demand collateral from customers who owe them money on a trade. But these big dealers usually don't post collateral when the roles are reversed and they owe the customer. While this is not necessarily a sweet deal for small hedge funds doing business with a Goldman or a J.P. Morgan, it minimizes counterparty risks for the major firms. Also, the large dealers generally make their money facilitating trades for customers, not betting one way or another on corporate defaults. So if they sell a lot of credit protection to one customer, they will seek to buy it from somebody else.

    AIG, by contrast, was almost entirely a seller of CDS. By selling credit protection on mortgage-backed securities, the firm used CDS to make a big bet on housing, which again is the cause of this crisis. Meanwhile, the search continues for the major counterparty that would have been destroyed by AIG's collapse.

    As for Mr. Waxman, he should spend more time investigating the cause, not the effects, of market turmoil. Mr. Frank would seem to be the perfect witness.

     

    Also see http://www.trinity.edu/rjensen/2008Bailout.htm#Bailout

    Bob Jensen's threads on CDSs are under the C-terms at http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm#C-Terms


    "Coming Soon ... Securitization with a New, Improved (and Perhaps Safer) Face,   Knowledge@Wharton, April 2, 2008 ---
    http://knowledge.wharton.upenn.edu/article.cfm;jsessionid=a83051431af9532a7261?articleid=1933

     

    "FASB Issues FSP Requiring Enhanced Disclosure for Credit Derivative and Financial Guarantee Contracts,"  by Mark Bolton and Shahid Shah, Deloitte Heads Up, September 18, 2008 Vol. 15, Issue 35 --- http://www.iasplus.com/usa/headsup/headsup0809derivativesfsp.pdf

    September 18, 2008

    Vol. 15, Issue 35

    The FASB recently issued FSP FAS 133-1 and FIN 45-4,1 which amends and enhances the disclosure requirements for sellers of credit derivatives (including hybrid instruments that have embedded credit derivatives) and financial guarantees. The new disclosures must be provided for reporting periods (annual or interim) ending after November 15, 2008, although earlier application is encouraged. The FSP also clarifies the effective date of Statement 161.2

    The FSP defines a credit derivative as a "derivative instrument (a) in which one or more of its underlyings are related to the credit risk of a specified entity (or a group of entities) or an index based on the credit risk of a group of entities and (b) that exposes the seller to potential loss from credit-risk-related events specified in the contract." In a typical credit derivative contract, one party makes payments to the seller of the derivative and receives a promise from the seller of a payoff if a specified third party or parties default on a specific obligation. Examples of credit derivatives include credit default swaps, credit index products, and credit spread options.

    The popularity of these products, coupled with the recent market downturn and the potential liabilities that could arise from these conditions, prompted the FASB to issue this FSP to improve the transparency of disclosures provided by sellers of credit derivatives. Also, because credit derivative contracts are similar to financial guarantee contracts, the FASB decided to make certain conforming amendments to the disclosure requirements for financial guarantees within the scope of Interpretation 45.3

    Credit Derivative Disclosures

    The FSP amends Statement 1334 to require a seller of credit derivatives, including credit derivatives embedded in hybrid instruments, to provide certain disclosures for each credit derivative (or group of similar credit derivatives) for each statement of financial position presented. These disclosures must be provided even if the likelihood of having to make payments is remote. Required disclosures include:

    In This Issue:

    • Credit Derivative Disclosures

    • Financial Guarantee Disclosures

    • Effective Date and Transition

    • Effective Date of Statement 161

    1 FASB Staff Position No. FAS 133-1 and FIN 45-4, "Disclosures About Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161."

    2 FASB Statement No. 161, Disclosures About Derivative Instruments and Hedging Activities.

    3 FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.

    4 FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.

    • The nature of the credit derivative, including:

    o The approximate term of the derivative.

    o The reason(s) for entering into the derivative.

    o The events or circumstances that would require the seller to perform under the derivative.

    o The status of the payment/performance risk of the derivative as of the reporting date. This can be based on a recently issued external credit rating or an internal grouping used by the entity to manage risk. (If an internal grouping is used, the entity also must disclose the basis for the grouping and how it is used to manage risk.)

    • The maximum potential amount of future payments (undiscounted) the seller could be required to make under the credit derivative contract (or the fact that there is no limit to the maximum potential future payments). If a seller is unable to estimate the maximum potential amount of future payments, it also must disclose the reasons why.

    • The fair value of the derivative.

    • The nature of any recourse provisions and assets held as collateral or by third parties that the seller can obtain and liquidate to recover all or a portion of the amounts paid under the credit derivative contract.

    For hybrid instruments that have embedded credit derivatives, the required disclosures should be provided for the entire hybrid instrument, not just the embedded credit derivative.

    Financial Guarantee Disclosures

    As noted previously, the FASB did not perceive substantive differences between the risks and rewards of sellers of credit derivatives and those of financial guarantors. With one exception, the disclosures in Interpretation 45 were consistent with the disclosures that will now be required for credit derivatives. To make the disclosures consistent, the FSP amends Interpretation 45 to require guarantors to disclose "the current status of the payment/performance risk of the guarantee."

    Effective Date and Transition

    Although it is effective for reporting periods ending after November 15, 2008, the FSP requires comparative disclosures only for periods presented that ended after the effective date. Nevertheless, it encourages entities to provide comparative disclosures for earlier periods presented.

    Effective Date of Statement 161

    After the issuance of Statement 161, some questioned whether its disclosures are required in the annual financial statements for entities with noncalendar year-ends (e.g., March 31, 2009). To address this confusion, the FSP clarifies that the disclosure requirements of Statement 161 are effective for quarterly periods beginning after November 15, 2008, and fiscal years that include those periods. However, in the first fiscal year of adoption, an entity may omit disclosures related to quarterly periods that began on or before November 15, 2008. Early application is encouraged.

     

    From The Wall Street Journal Accounting Weekly Review on June 13, 2008

     
    SEC, Justice Scrutinize AIG on Swaps Accounting
    by Amir Efrati and Liam Pleven
    The Wall Street Journal

    Jun 06, 2008
    Page: C1
    Click here to view the full article on WSJ.com ---
    http://online.wsj.com/article/SB121271786552550939.html?mod=djem_jiewr_AC
     

    TOPICS: Advanced Financial Accounting, Auditing, Derivatives, Fair Value Accounting, Internal Controls, Mark-to-Market Accounting

    SUMMARY: The SEC "...is investigating whether insure American International Group Inc. overstated the value of contracts linked to subprime mortgages....At issue is the way the company valued credit default swaps, which are contracts that insure against default of securities, including those backed by subprime mortgages. In February, AIG said its auditor had found a 'material weakness' in its accounting. Largely on swap-related write-downs...AIG has recorded the two largest quarterly losses in its history."

    CLASSROOM APPLICATION: Financial reporting for derivatives is at issue in the article; related auditing issues of material weakness in accounting for these contracts also is covered in the main article and the related one.

    QUESTIONS: 
    1. (Introductory) What are collateralized debt obligations (CDOs)?

    2. (Advanced) What are credit default swaps? How are these contracts related to CDOs?

    3. (Advanced) Summarize steps in establishing fair values of CDOs and credit default swaps.

    4. (Introductory) What is a material weakness in internal control? Does reporting write-downs of such losses as AIG has shown necessarily indicate that a material weakness in internal control over financial reporting has occurred? Support your answer.
     

    Reviewed By: Judy Beckman, University of Rhode Island
     

    RELATED ARTICLES: 
    AIG Posts Record Loss, As Crisis Continues Taking Toll
    by Liam Pleven
    May 09, 2008
    Page: A1
     


    "SEC, Justice Scrutinize AIG on Swaps Accounting," by Amir Efrati and Liam Pleven, The Wall Street Journal,  June 6, 2008; Page C1 ---
    http://online.wsj.com/article/SB121271786552550939.html?mod=djem_jiewr_AC

    The Securities and Exchange Commission is investigating whether insurer American International Group Inc. overstated the value of contracts linked to subprime mortgages, according to people familiar with the matter.

    Criminal prosecutors from the Justice Department in Washington and the department's U.S. attorney's office in Brooklyn, New York, have told the SEC they want information the agency is gathering in its AIG investigation, these people said. That means a criminal investigation could follow.

    In 2006, AIG, the world's largest insurer, paid $1.6 billion to settle an accounting case. Its stock has been battered because of losses linked to the mortgage market. The earlier probe led to the departure of Chief Executive Officer Maurice R. "Hank" Greenberg.

    Officials for AIG, the SEC, the Justice Department and the U.S. attorney's office declined to comment on the new probe. A spokesman for AIG said the company will continue to cooperate in regulatory and governmental reviews on all matters.

    At issue is the way the company valued credit default swaps, which are contracts that insure against default of securities, including those backed by subprime mortgages. In February, AIG said its auditor had found a "material weakness" in its accounting.

    Largely on swap-related write-downs, which topped $20 billion through the first quarter, AIG has recorded the two largest quarterly losses in its history. That has turned up the heat on management, including CEO Martin Sullivan.

    AIG sold credit default swaps to holders of investments called collateralized-debt obligations, or CDOs, backed in part by subprime mortgages. The buyers were protecting their investments in the event of default on the underlying debt. In question is how the CDOs were valued, which drives both the value of the credit default swaps and the amount of collateral AIG must "post," or essentially hand over, to the buyer of the swap to offset the buyer's credit risk.

    AIG posted $9.7 billion in collateral related to its swaps, as of April 30, up from $5.3 billion about two months earlier.

    Law Blog: Difficulties in Valuation 'Best Defense'

     

    Bob Jensen's threads on CDOs are at
    http://www.trinity.edu/rjensen/theory01.htm#CDO

    Bob Jensen's timeline of derivative financial instruments scandals and new accounting rules ---
    http://www.trinity.edu/rjensen/FraudRotten.htm

    Bob Jensen's threads on credit derivatives are under the C-Terms at
    http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm#C-Terms

     



    "Chicago Business School Gets Huge Gift," by Robert Guth, The Wall Street Journal, November 7, 2008 --- Click Here

    The University of Chicago's business school will get a $300 million boost to its endowment -- and a new name -- from David Booth, an investor who has tried to avoid the limelight until now.

    The gift, among the largest donations ever to a U.S. university, comes as endowments have been hit hard by the financial meltdown, and many potential donors are tightening purse strings. The 61-year-old Mr. Booth, chief executive of the Dimensional Fund Advisors mutual fund, said Thursday that he will donate $300 million of his firm's stock to the business school, from which he graduated in 1971.

    The Chicago school will change its name to the University of Chicago Booth School of Business and use the funds to hire and retain professors, and to expand its publications, said Edward Snyder, the school's dean.

    The gift represents a coming-out for Mr. Booth, who is largely unknown outside the rarefied world of academic research and in finance. In the 27 years since founding Dimensional, Mr. Booth has played a behind-the-scenes role, while his now-retired partner, Rex Sinquefield, was the public face of the company.

    Mr. Booth said he is nervous about stepping into the public with the grant and namesake school. "My life as I know it will be changing," he said in an interview.

    Mr. Booth made his money applying concepts of "passive investing," which eschews the research-intensive task of picking individual stocks for a strategy of holding large portfolios of hundreds of stocks that as a group better represent the overall market.

    Founded in 1981, Dimensional now manages about $120 billion in assets through 300 different funds and accounts.

    In the past year, Dimensional has posted mixed returns, according to data from Morningstar Inc., with some of its big funds comfortably ahead of the competition, while others lag behind. Still, it has avoided the kind of catastrophic performance that has wrecked the long-term track record of other value investors.

    The gift will be a portion of the Dimensional shares held by Mr. Booth's family trust, said a University of Chicago spokesman. The university will get an income stream from the shares, he said.

    Mr. Booth grew up in Kansas and, in 1969, landed at the Chicago business school, where he was a research assistant to Eugene Fama, who fathered the "efficient markets hypothesis" that now guides modern investing.

    Jensen Comment
    The timing is interesting since the tax deduction will be higher now than that it will be if the Dow keeps dropping toward $5,000. Could it be that David Booth is predicting further huge drops in the market that earlier on made him a billionaire? Then again the market could make a dramatic recovery making his gift all the more valuable to the University of Chicago Business School.

    Later in his career Fama had second thoughts about market efficiency and the famous Capital Assets Pricing Model (CAPM) upon which the majority of empirical capital markets research has assumed in the past few decades. --- http://en.wikipedia.org/wiki/Capital_Asset_Pricing_Model

    In recent years, Fama has become controversial again, for a series of papers, co-written with Kenneth French, that cast doubt on the validity of the Capital Asset Pricing Model (CAPM), which posits that a stock's "beta" alone should explain its average return. These papers describe two factors above and beyond a stock's market beta which can explain differences in stock returns: market capitalization and "value". They also offer evidence that a variety of patterns in average returns, often labeled as "anomalies" in past work, can be explained with their 3 factor model.
    Wikipedia --- http://en.wikipedia.org/wiki/Eugene_Fama#Efficient_market_hypothesis

    What's interesting is how we give awards to economic researchers who conclude one thing from their research and then give awards to these same researchers for destroying their previous conclusions. Isn't economics still a branch of astrology?


    SEC = Suckers Endup Cheated
    David Albrecht, Bowling Green University"

    The Performance of the SEC is shameful:  In 2005 the SEC was warned that Madoff was running a Ponzi scheme
    Due-diligence firms use the fees collected from their clients to hire professionals to meticulously review hedge firms for signs of deceit. One such firm is Aksia LLC. After painstakingly investigating the operations of Madoff's operation, they found several red flags. A brief summary of some of the red flags uncovered by Aksia can be found here. Shockingly,
    Aksia even uncovered a letter to the SEC dating from 2005 which claimed that Madoff was running a Ponzi scheme. As a result of its investigation, Aksia advised all of its clients not to invest their money in Madoff's hedge fund. This is a perfect case study showing that the SEC is incapable of protecting investors as well as free-market institutions can. The SEC is becoming increasingly irrelevant and people are beginning to take notice. It failed to save investors from the house of cards made up of mortgage-backed securities, credit default swaps, and collateralized debt obligations that resulted from the housing bubble. Now it has failed to protect thousands more individuals and charities from something as simple and old as a Ponzi scheme!
    Briggs Armstrong, "Madoff and the Failure of the SEC," Ludwig Von Mises Institutue, December 18, 2008 --- http://mises.org/story/3260

    The chairman of the Securities and Exchange Commission, a longtime proponent of deregulation, acknowledged on Friday that failures in a voluntary supervision program for Wall Street’s largest investment banks had contributed to the global financial crisis, and he abruptly shut the program down. The S.E.C.’s oversight responsibilities will largely shift to the Federal Reserve, though the commission will continue to oversee the brokerage units of investment banks. Also Friday, the S.E.C.’s inspector general released a report strongly criticizing the agency’s performance in monitoring Bear Stearns before it collapsed in March. Christopher Cox, the commission chairman, said he agreed that the oversight program was “fundamentally flawed from the beginning.” “The last six months have made it abundantly clear that voluntary regulation does not work,” he said in a statement. The program “was fundamentally flawed from the beginning, because investment banks could opt in or out of supervision voluntarily. The fact that investment bank holding companies could withdraw from this voluntary supervision at their discretion diminished the perceived mandate” of the program, and “weakened its effectiveness,” he added.
    "S.E.C. Concedes Oversight Flaws Fueled Collapse," by Stephen Labaton, The New York Times, September 26, 2008 ---
    http://www.nytimes.com/2008/09/27/business/27sec.html?_r=1&hp&oref=slogin

    Bernard Madoff, former Nasdaq Stock Market chairman and founder of Bernard L. Madoff Investment Securities LLC, was arrested and charged with securities fraud Thursday in what federal prosecutors called a Ponzi scheme that could involve losses of more than $50 billion.

    It is bigger than Enron, bigger than Boesky and bigger than Tyco

    "Madoff Scandal: 'Biggest Story of the Year'," Seeking Alpha, December 12, 2008 ---
    http://seekingalpha.com/article/110402-madoff-scandal-biggest-story-of-the-year?source=wildcard

    According to RealMoney.com columnist Doug Kass, general partner and investment manager of hedge fund Seabreeze Partners Short LP and Seabreeze Partners Short Offshore Fund, Ltd., today's late-breaking report of an alleged massive fraud at a well known investment firm could be "the biggest story of the year." In his view,

    it is bigger than Enron, bigger than Boesky and bigger than Tyco.
    It attacks at the core of investor confidence -- because, if true, and this could happen ... investors might think that almost anything imaginable could happen to the money they have entrusted to their f
    iduciaries.

    Here are some excerpts from the Bloomberg report, entitled "Madoff Charged in $50 Billion Fraud at Advisory Firm":

    Bernard Madoff, founder and president of Bernard Madoff Investment Securities, a market-maker for hedge funds and banks, was charged by federal prosecutors in a $50 billion fraud at his advisory business.

    Madoff, 70, was arrested today at 8:30 a.m. by the FBI and appeared before U.S. Magistrate Judge Douglas Eaton in Manhattan federal court. Charged in a criminal complaint with a single count of securities fraud, he was granted release on a $10 million bond guaranteed by his wife and secured by his apartment. Madoff’s wife was present in the courtroom.

    "It’s all just one big lie," Madoff told his employees on Dec. 10, according to a statement by prosecutors. The firm, Madoff allegedly said, is "basically, a giant Ponzi scheme." He was also sued by the Securities and Exchange Commission.

    Madoff’s New York-based firm was the 23rd largest market maker on Nasdaq in October, handling a daily average of about 50 million shares a day, exchange data show. The firm specialized in handling orders from online brokers in some of the largest U.S. companies, including General Electric Co (GE). and Citigroup Inc. (C).

    ...

    SEC Complaint

    The SEC in its complaint, also filed today in Manhattan federal court, accused Madoff of a "multi-billion dollar Ponzi scheme that he perpetrated on advisory clients of his firm."

    The SEC said it’s seeking emergency relief for investors, including an asset freeze and the appointment of a receiver for the firm. Ira Sorkin, another defense lawyer for Madoff, couldn’t be immediately reached for comment.

    ...

    Madoff, who owned more than 75 percent of his firm, and his brother Peter are the only two individuals listed on regulatory records as "direct owners and executive officers."

    Peter Madoff was a board member of the St. Louis brokerage firm A.G. Edwards Inc. from 2001 through last year, when it was sold to Wachovia Corp (WB).

    $17.1 Billion

    The Madoff firm had about $17.1 billion in assets under management as of Nov. 17, according to NASD records. At least 50 percent of its clients were hedge funds, and others included banks and wealthy individuals, according to the records.

    ...

    Madoff’s Web site advertises the "high ethical standards" of the firm.

    "In an era of faceless organizations owned by other equally faceless organizations, Bernard L. Madoff Investment Securities LLC harks back to an earlier era in the financial world: The owner’s name is on the door," according to the Web site. "Clients know that Bernard Madoff has a personal interest in maintaining the unblemished record of value, fair-dealing, and high ethical standards that has always been the firm’s hallmark."

    ...

    "These guys were one of the original, if not the original, third market makers," said Joseph Saluzzi, the co-head of equity trading at Themis Trading LLC in Chatham, New Jersey. "They had a great business and they were good with their clients. They were around for a long time. He’s a well-respected guy in the industry."

    The case is U.S. v. Madoff, 08-MAG-02735, U.S. District Court for the Southern District of New York (Manhattan)

    Continued in article

    And here is the SEC press release:

    What was the auditing firm of Bernard Madoff Investment Securities, the auditor who gave a clean opinion, that's been insolvent for years?
    Apparently, Mr Madoff said the business had been insolvent for years and, from having $17 billion of assets under management at the beginning of 2008, the SEC said: “It appears that virtually all assets of the advisory business are gone”. It has now emerged that Friehling & Horowitz, the auditor that signed off the annual financial statement for the investment advisory business for 2006, is under investigation by the district attorney in New York’s Rockland County, a northern suburb of New York City.
    "The $50bn scam: How Bernard Madoff allegedly cheated investors," London Times, December 15, 2008 ---
    http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article5345751.ece

    It was at the Manhattan apartment that Mr Madoff apparently confessed that the business was in fact a “giant Ponzi scheme” and that the firm had been insolvent for years.

    To cap it all, Mr Madoff told his sons he was going to give himself up, but only after giving out the $200 - $300 million money he had left to “employees, family and friends”.

    All the company’s remaining assets have now been frozen in the hope of repaying some of the companies, individuals and charities that have been unfortunate enough to invest in the business.

    However, with the fraud believed to exceed $50 billion, whatever recompense investors could receive will be a drop in the ocean.

    "Bernie Madoff's Victims: The List (as known thus far) ," by Henry Blodget, Clusterstock, December 14, 2008 --- http://clusterstock.alleyinsider.com/2008/12/bernie-madoff-hosed-client-list
    Jensen Question
    How could such sophisticated investors be so naive? At a minimum, investors should consider whether the auditing firm has deep pockets. Bernie's auditors, Friehling & Horowitz, probably do not have any pockets at all in order to streamline for speed while fleeing the scene.

    "Madoff's auditor... doesn't audit? The three-person firm that apparently certified Madoff's books has been telling a key accounting industry group for years that it doesn't conduct audits," by Alyssa Abkowitz, CNN, December 18, 2008 --- http://money.cnn.com/2008/12/17/news/companies/madoff.auditor.fortune/index.htm?postversion=2008121808

    The three-person auditing firm that apparently certified the books of Bernard Madoff Investment Securities, the shuttered home of an alleged multibillion-dollar Ponzi scheme, is drawing new scrutiny.

    Already under investigation by local prosecutors for its potential role in the scandal, the firm, Friehling & Horowitz, is now also being investigated by the American Institute of Certified Public Accountants, the prestigious body that sets U.S. auditing standards for private companies.

    The problem: The auditing firm has been telling the AICPA for 15 years that it doesn't conduct audits.

    The AICPA, which has more than 350,000 individual members, monitors most firms that audit private companies. (Public-company auditors are overseen, as the name suggests, by the Public Company Accounting Oversight Board, which was created in 2003 in response to accounting scandals involving WorldCom and Enron.)

    Some 33,000 firms enroll in the AICPA's peer review program, in which experienced auditors assess each firm's audit quality every year. Forty-four states require accountants to undergo reviews to maintain their licenses to practice.

    Friehling & Horowitz is enrolled in the program but hasn't submitted to a review since 1993, says AICPA spokesman Bill Roberts. That's because the firm has been informing the AICPA -- every year, in writing -- for 15 years that it doesn't perform audits.

    Meanwhile, Friehling & Horowitz has reportedly done just that for Madoff. For example, the firm's name and signature appears on the "statement of financial condition" for Madoff Securities dated Oct. 31, 2006. "The plain fact is that this group hasn't submitted for peer review and appears to have done an audit," Roberts says. AICPA has now launched an "ethics investigation," he says.

    As it happens, New York is one of only six states that does not require accounting firms to be peer-reviewed. But on the heels of the Madoff revelations, on Tuesday, the New York State senate passed legislation that requires such a process. (The bill now awaits Gov. David Paterson's signature.) "We've not been regulated in the fashion we should've inside the state," says David Moynihan, president-elect of the New York State Society of Certified Public Accountants.

    David Friehling, the only active accountant at Friehling & Horowitz, according to the AICPA, might seem like an odd person to flout the institute's rules. He has been active in affiliated groups: Friehling is the immediate past president of the Rockland County chapter of the New York State Society of Certified Public Accountants and sits on the chapter's executive board.

    Friehling, who didn't return calls seeking comment, is rarely seen at his office, according to press reports. The 49-year-old, whose firm is based 30 miles north of Manhattan in New City, N.Y., operates out of a 13-by-18-foot office in a small plaza.

    A woman who works nearby told Bloomberg News that a man who dresses casually and drives a Lexus appears periodically at Friehling & Horowitz's office for about 10 to 15 minutes at a stretch and then leaves. (State automobile records indicate that Friehling owns a Lexus RX.) The Rockland County District Attorney's Office has opened an investigation to see if the firm committed any state crimes.

    People who know Friehling, through the state accounting chapter and through the Jewish Community Center in Rockland County (where he's a board member) were reluctant to discuss him. Most members of both boards wouldn't comment except to say they were surprised by Friehling's connection to Madoff.

    "He's nothing but the nicest guy in the world," says David Kirschtel, chief executive of JCC Rockland. "I've never had any negative dealings with him."

    From The Wall Street Journal Accounting Weekly Review on December 19, 2008

    SEC to Probe Its Ties to Madoffs
    by Aaron Lucchetti, Kara Scannell and Amir Efrati
    The Wall Street Journal

    Dec 17, 2008
    Click here to view the full article on WSJ.com
     

    TOPICS: Accounting, Auditing, SEC, Securities and Exchange Commission

    SUMMARY: "Bernard Madoff was trying to raise funds for his investment empire as recently as early this month, as redemptions were about to prompt an unraveling of an apparent $50 billion investment scam....According to a criminal complaint [filed] Dec. 11,...clients during the first week of December had requested about $7 billion of assets from their accounts...[and] Mr. Madoff...was struggling to meet those obligations....The sharp downturn in stocks this year may have sealed the firm's demise, since it hurt the ability for Mr. Madoff to keep recruiting new clients." Madoff's sons, Andrew and Mark Madoff, contacted the FBI through their attorney to after allegedly being told by their father that the family business "was a giant Ponzi scheme" totaling $50 billion. The SEC has made "an extraordinary admission that [it] was aware of numerous red flags raised about Bernard L. Madoff Investment Securities LLC but failed to take them seriously enough."

    CLASSROOM APPLICATION: Financial reporting and auditing classes may use this case for discussing ethics and audit procedures.

    QUESTIONS: 
    1. (Introductory) What is a Ponzi scheme? Why would recent market losses lead to the collapse of such a fraud?

    2. (Introductory) How did Bernard L. Madoff attract investors to his scheme?

    3. (Advanced) What "red flags" did the SEC and others miss that would have brought down the fraud earlier? You may use related articles to help answer this question.

    4. (Advanced) What should records of a legitimate investment advisory firm show? How would you envision "a phony set of records used to cover up [the] alleged $50 billion fraud" would appear?

    5. (Advanced) What audit steps are designed to identify frauds, such as the one Mr. Madoff has allegedly perpetrated? Why might such audit procedures fail to uncover fraud?

    6. (Introductory) What is the role of the U.S. SEC? How does this fraud reflect on the SEC's performance of its role in the U.S. financial system?
     

    Reviewed By: Judy Beckman, University of Rhode Island
     

    RELATED ARTICLES: 
    Fairfield Group forced to Confront Its Madoff Ties
    by Carrick Mollenkamp, Cassell Bryan-Low and Thomas Catan
    Dec 17, 2008
    Page: A10

    Impact on Jewish Charities is Catastrophic
    by Eleanor Laise and Dennis K. Berman
    Dec 16, 2008
    Online Exclusive
     

    "SEC to Probe Its Ties to Madoffs ," by Aaron Lucchetti, Kara Scannell and Amir Efrati, The Wall Street Journal, December 17, 2008 --- http://online.wsj.com/article/SB122947343148212337.html?mod=djem_jiewr_AC

    The Securities and Exchange Commission will examine the relationship between a former official at the agency and a niece of financier Bernard L. Madoff, after the SEC's chief admitted "apparent multiple failures" to oversee the firm at the center of an alleged $50 billion Ponzi scheme.

    In an extraordinary admission that the SEC was aware of numerous red flags raised about Bernard L. Madoff Investment Securities LLC, but failed to take them seriously enough, SEC Chairman Christopher Cox ordered a review of the agency's oversight of the New York securities-trading and investment-management firm. The review will include whether relationships between SEC officials and Mr. Madoff or his family members had any impact on the agency's oversight.

    "I am gravely concerned" by the agency's regulation of the firm, Mr. Cox said.

    Mr. Madoff's niece, Shana Madoff, married a former SEC attorney named Eric Swanson last year. Mr. Swanson worked at the SEC for 10 years, including as a senior inspections and examination official, before leaving in 2006. Ms. Madoff is a compliance lawyer at the securities firm.

    Among Mr. Swanson's duties was supervising the SEC's inspection program in charge of trading oversight at stock exchanges and electronic-trading platforms, according to a press release from Bats Trading Inc., an electronic stock exchange that hired Mr. Swanson as general counsel earlier this year.

    Neither person is named in the SEC statement as a target of the probe, which is being led by the agency's inspector general, David Kotz. But Mr. Kotz said in an interview that he intended to examine the relationship between Mr. Madoff's niece and Mr. Swanson.

    In a statement Tuesday night, a spokesman for Mr. Swanson acknowledged that "the compliance team he helped supervise made an inquiry about Bernard Madoff's securities operation," without being more specific. He said the couple began dating in 2006, and were married in 2007.

    A second representative of Mr. Swanson said the romantic relationship with Ms. Madoff began "years after" the regulatory scrutiny in which Mr. Swanson was involved. Mr. Swanson will "fully cooperate" with the SEC investigation, the representative said.

    Ms. Madoff couldn't be reached for comment.

    Mr. Cox's statements represent a strong rebuke of an agency already facing criticism of its response to the credit crisis. Mr. Cox said an initial review of SEC oversight of Mr. Madoff's firm found that "credible and specific allegations" made as far back as 1999 "were repeatedly brought to the attention of SEC staff, but were never recommended to the Commission for action."

    Mr. Cox wasn't specific about the past claims that were inadequately investigated. But around 2000, Harry Markopolos, at the time an executive at a rival firm to Mr. Madoff's, contacted the SEC with suspicions about Mr. Madoff's business. "Madoff Securities is the world's largest Ponzi scheme," Mr. Markopolos wrote in a letter to the agency. Mr. Markopolos pursued his accusations for years, dealing with the SEC's regional offices in New York and Boston, according to documents reviewed by The Wall Street Journal.

    In 2005, the SEC's inspections division in New York examined Mr. Madoff's business operations, concluding there was a violation of technical trading rules, according to the SEC. The agency's enforcement staff in New York completed an investigation in 2007 without recommending action.

    Late Tuesday, Lori Richards, director of the SEC's inspection and examinations division, detailed Mr. Swanson's role in oversight of Mr. Madoff's firm, saying he was a member of a team that looked at the securities-trading business in 1999 and 2004. "He did not participate in the 2005 exam," she said.

    Ms. Richards added that the SEC "has very strict rules prohibiting SEC staff from participating in matters involving firms where they have a personal interest. Subsequently, Mr. Swanson did not work on any other examination matters involving the Madoff firm before leaving the agency."

    Mr. Cox's criticisms of the agency came as investigators searching the offices of Mr. Madoff's firm in New York City discovered what they described as phony sets of records used to cover up its alleged $50 billion fraud, even as it became clear that Mr. Madoff was trying to attract new investors as recently as early December.

    Those potential investors included the Pritzkers, one of America's wealthiest families, people familiar with the matter say. Mr. Madoff's efforts didn't result in an investment from the family.

    Meantime, a financial firm with ties to Mr. Madoff is being drawn into the probe by regulators. The Massachusetts Secretary of State has subpoenaed Cohmad Securities Corp., which was closely affiliated with Mr. Madoff and advisers who helped bring investors to his business.

    No one answered calls placed to two phone numbers for Cohmad in New York on Tuesday.

    Investigators, hunkered down in the 17th-floor office where they believe Mr. Madoff carried out what he allegedly described to his sons as a $50 billion fraud, have found what appear to be "falsified records," according to Stephen Harbeck of Securities Investor Protection Corp., the securities-industry nonprofit group helping to oversee the firm's liquidation. These include a set of books that doesn't accurately reflect the assets held by the firm, he said.

    "Some customer statements do not reflect securities in the firm's possession," Mr. Harbeck said.

    The firm's records are in disarray, and the company has officially ceased operations, Mr. Harbeck said. According to Mr. Cox, Mr. Madoff "kept several sets of books and false documents, and provided false information involving his advisory activities to investors and to regulators."

    The alleged scam is widely expected to cause billions of dollars in losses for banks, hedge funds, well-known investors and charities around the world, some of whom have been wiped out. Investors and other affected parties have disclosed combined exposure of more than $25 billion.

    Continued in article

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

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

     


    Research Questions About the Corporate Ratings Game

    "How Good Are Commercial Corporate Governance Ratings?," by Bill Snyder, Stanford GSB News, June 2008 --- http://www.gsb.stanford.edu/news/research/larker_corpgov.html

    STANFORD GRADUATE SCHOOL OF BUSINESS—A study by Stanford law and business faculty members casts strong doubt upon the value and validity of the ratings of governance advisory firms that compile indexes to evaluate the effectiveness of a publicly held company’s governance practices.

    Enron, Worldcom, Global Crossing, Sunbeam. The list of major corporations that appeared rock solid—only to founder amid scandal and revelations of accounting manipulation—has grown, and with it so has shareholder concern. In response, a niche industry of corporate watchdog firms has arisen—and prospered.

    Governance advisory firms compile indexes that evaluate the effectiveness of a publicly held company’s governance practices. And they claim to be able to predict future performance by performing a detailed analysis encompassing many variables culled from public sources.

    Institutional Shareholder Services, or ISS, the best known of the advisory companies, was sold for a reported $45 million in 2001. Five years later, ISS was sold again; this time for $553 million to the RiskMetrics Group. The enormous appreciation in value underscores the importance placed by the investing public on ratings and advisories issued by ISS and its major competitors, including Audit Integrity, Governance Metrics International (GMI), and The Corporate Library (TCL).

    But a study by faculty at the Rock Center for Corporate Governance at Stanford questions the value of the ratings of all four firms. “Everyone would agree that corporate governance is a good thing. But can you measure it without even talking to the companies being rated?” asked David Larcker, codirector of the Rock Center and the Business School’s James Irvin Miller Professor of Accounting and one of the authors. “There’s an industry out there that claims you can. But for the most part, we found only a tenuous link between the ratings and future performance of the companies.”

    The study was extensive, examining more than 15,000 ratings of 6,827 separate firms from late 2005 to early 2007. (Many of the corporations are rated by more than one of the governance companies.) It looked for correlations among the ratings and five basic performance metrics: restatements of financial results, shareholder lawsuits, return on assets, a measure of stock valuation known as the Q Ratio, and Alpha—a measure of an investment’s stock price performance on a risk-adjusted basis.

    In the case of ISS, the results were particularly shocking. There was no significant correlation between its Corporate Governance Quotient (or CGQ) ratings and any of the five metrics. Audit Integrity fared better, showing “a significant, but generally substantively weak” correlation between its ratings and four of the five metrics (the Q ratio was the exception.) The other two governance firms fell in between, with GMI and TCL each showing correlation with two metrics. But in all three cases, the correlations were very small “and did not appear to be useful,” said Larcker.

    There have been many academic attempts to develop a rating that would reflect the overall quality of a firm’s governance, as well as numerous studies examining the relation between various corporate governance choices and corporate performance. But the Stanford study appears to be the first objective analysis of the predictive value of the work of the corporate governance firms.

    The Rock Center for Corporate Governance is a joint effort of the schools of business and law. The research was conducted jointly by Robert Daines, the Pritzker Professor of Law and Business, who holds a courtesy appointment at the Business School; Ian Gow, a doctoral student at the Business School; and Larcker. It is the first in a series of multidisciplinary studies to be conducted by the  Rock Center and the Corporate Governance Research Program 

    The current study also examined the proxy recommendations to shareholders issued by ISS, the most influential of the four firms. The recommendations delivered by ISS are intended to guide shareholders as they vote on corporate policy, equity compensation plans, and the makeup of their company’s board of directors. The researchers initially assumed that the ISS proxy recommendations to shareholders also reflect their ratings of the corporations.

    But the study found there was essentially no relation between its governance ratings and its recommendations. “This is a rather odd result given that [ISS’s ratings index] is claimed to be a measure of governance quality, but ISS does not seem to use their own measure when developing voting recommendations for shareholders,” the study says. Even so, the shareholder recommendations are influential; able to swing 20 to 30 percent of the vote on a contested matter, says Larcker.

    There’s another inconsistency in the work of the four rating firms. They each look at the same pool of publicly available data from the Securities and Exchange Commission and other sources, but use different criteria and methodology to compile their ratings.

    ISS says it formulates its ratings index by conducting “4,000-plus statistical tests to examine the links between governance variables and 16 measures of risk and performance.” GMI collects data on several hundred governance mechanisms ranging from compensation to takeover defenses and board membership. Audit Integrity’s AGR rating is based on 200 accounting and governance metrics and 3,500 variables while The Corporate Library does not rely on a quantitative analysis, instead reviewing a number of specific areas, such as takeover defenses and board-level accounting issues.

    Despite the differences in methodology, one would expect that the bottom line of all four ratings—a call on whether a given corporation is following good governance practices—should be similar. That’s not the case. The study found that there’s surprisingly little correlation among the indexes the rating firms compile. “These results suggest that either the ratings are measuring very different corporate governance constructs and/or there is a high degree of measurement error (i.e., the scores are not reliable) in the rating processes across firms,” the researchers wrote.

    The study is likely to be controversial. Ratings and proxy recommendations pertaining to major companies and controversial issues such as mergers are watched closely by the financial press and generally are seen as quite credible. Indeed, board members of rated firms spend significant amounts of time discussing the ratings and attempt to bring governance practices in line with the standards of the watchdogs, says Larcker.

    But given the results of the Stanford study, the time and money spent by public companies on improving governance ratings does not appear to result in significant value for shareholders.  


    "Default Swaps: One Boom in the Crunch; Volume Soared in '07 As Woes Worsened; Hedging and Betting," by Serena Ng, The Wall Street Journal, April 16, 2008; Page C2 --- http://online.wsj.com/article/SB120826572928916145.html?mod=todays_us_money_and_investing

    The bond market's love affair with credit derivatives continued during the market chaos of 2007, as volumes of instruments such as credit-default swaps surged to new highs.

    Credit-default swaps, which are private financial contracts that act as a form of insurance against bond and loan defaults, were written on $62.2 trillion of debt at the end of 2007, according to data from the International Swaps and Derivatives Association, an industry group.

    The latest numbers mark a 37% jump from the $45.5 trillion in so-called "notional" values of credit-default swaps in mid-2007, and compare with $34.5 trillion at the end of 2006. The gain indicates that the use of such swaps grew at a faster pace during the credit crunch in the second half of last year, possibly as banks and investors scrambled to protect themselves from possible defaults on mortgage debt and other bonds and loans.

    In a credit default swap, one firm makes regular payments to another firm, which agrees to compensate it if a specified bond or loan defaults. Some investors and financial institutions buy these swaps to hedge their debt investments, but many others trade them to make bets on whether default risk is rising or falling. As such, the notional volumes of the contracts far exceed the actual amount of debt on which they are written.

    ISDA's survey also found that the notional amount of interest-rate derivatives grew to $382.3 trillion at the end of 2007, up 10% from mid-2007 and 34% from a year earlier. These include interest-rate swaps, where firms exchange fixed interest payments on debt for floating-rate payments.

    The market for equity derivatives including options and forward contracts covered $10 trillion in notional volumes at the end of 2007, unchanged from the mid-year but up 39% from a year earlier.

    While notional amounts across all the asset classes add up to an eye-popping number of $454.5 trillion, ISDA says the numbers measure derivative activity rather than risk. It estimates that gross credit exposure of the firms that trade derivatives is around $9.8 trillion.

    Still, the large volumes have raised concerns about "counterparty risk," or the risk that one or more firms may not be able to make good on their trades and create problems for other firms .

    Continued in article

    Read about a Credit Default Swap (CDS) at http://en.wikipedia.org/wiki/Credit_default_swap

    IAS 39 Paragraph B18 (g) allows some leeway as to whether companies want to account for such contracts as insurance contracts or derivative financial instruments.

    FAS 133 Paragraph 59 is somewhat more explicit as to whether or not a credit derivative is scoped into FAS 133.

     




    Humor Between December 1 and December 31, 2008


    PJ O’Rourke’s Parliament of Whores --- http://snipurl.com/parliamentwhores   


    Forwarded by Professor Edwards (who ought to know)

    Perks of reaching 50 or being over 60 and heading towards 70 AND PLUS!

    01. Kidnappers are not very interested in you.

    02. In a hostage situation you are likely to be released first.

    03. No one expects you to run--anywhere.

    04. People call at 9 pm and ask, did I wake you?

    05. People no longer view you as a hypochondriac.

    06. There is nothing left to learn the hard way.

    07. Things you buy now won't wear out.

    08. You can eat supper at 4 pm.

    09. You can live without sex but not your glasses.

    10. You get into heated arguments about pension plans.

    11. You no longer think of speed limits as a challenge.

    12. You quit trying to hold your stomach in no matter who walks into the room.

    13. You sing along with elevator music.

    14. Your eyes won't get much worse.

    15 . Your investment in health insurance is finally beginning to pay off.

    16. Your joints are more accurate meteorologists than the national weather service.

    17. Your secrets are safe with your friends because they can't remember them either. 18. Your supply of brain cells is finally down to manageable size.

    19. You can't remember who sent you this list.

    And you notice these are all in Big Print for your convenience.

    Forward this to everyone you can remember right now!

    Never, under any circumstances, take a sleeping pill and a laxative on the same night.

     


    Forwarded by Maureen

    Pocket Taser Stun Gun, a great gift for the wife.

    From a guy who purchased his lovely wife a pocket Taser for their anniversary . . .

    Last weekend I saw something at Larry's Pistol & Pawn Shop that sparked my interest.

    The occasion was our 15th anniversary and I was looking for a little something extra for my wife Julie.

    What I came across was a 100,000-volt, pocket/purse-sized taser.

    The effects of the taser were supposed to be short lived, with no long-term adverse affect on your assailant, allowing her adequate time to retreat to safety....??

    WAY TOO COOL!

    Long story short, I bought the device and brought it home.

    I loaded two AAA batteries in the darn thing and pushed the button.

    Nothing!

    I was disappointed.

    I learned, however, that if I pushed the button AND pressed it against a metal surface at the same time; I'd get the blue arc of electricity darting back and forth between the prongs.

    AWESOME!!!

    Unfortunately, I have yet to explain to Julie what that burn spot is on the face of her microwave.

    Okay, so I was home alone with this new toy, thinking to myself that it couldn't be all that bad with only two triple-A batteries, right?

    There I sat in my recliner, my cat Gracie looking on intently (trusting little soul) while I was reading the directions and thinking that I really needed to try this thing out on a flesh & blood moving target.

    I must admit I thought about zapping Gracie (for a fraction of a second) and thought better of it. She is such a sweet cat.

    But, if I was going to give this thing to my wife to protect herself against a mugger, I did want some assurance that it would work as advertised.

    Am I wrong?

    So, there I sat in a pair of shorts and a tank top with my reading glasses perched delicately on the bridge of my nose, directions in one hand, and taser in another.

    The directions said that a one-second burst would shock and disorient your assailant; a two-second burst was supposed to cause muscle spasms and a major loss of bodily control; a three-second burst would purportedly make your assailant flop on the ground like a fish out of water.

    Any burst longer than three seconds would be wasting the batteries.

    All the while I'm looking at this little device measuring about 5 ' long, less than 3/4 inch in circumference; pretty cute really and (loaded with two itsy, bitsy triple-A batteries) thinking to myself, 'no possible way!'

    What happened next is almost beyond description, but I'll do my best...?

    I'm sitting there alone, Gracie looking on with her head cocked to one side as to say, 'don't do it dipshit,' reasoning that a one second burst from such a tiny little ole thing couldn't hurt all that bad.

    I decided to give myself a one second burst just for heck of it.

    I touched the prongs to my naked thigh, pushed the button, and . . . HOLY MOTHER OF GOD . . .WEAPONS OF MASS DESTRUCTION . . .

    WHAT THE HELL ! ? !

    I'm pretty sure Jessie Ventura ran in through the side door, picked me up in the recliner, then body slammed us both on the carpet, over and over and over again.

    I vaguely recall waking up on my side in the fetal position, with tears in my eyes, body soaking wet, both nipples on fire,testicles nowhere to be found, with my left arm tucked under my body in the oddest position, and tingling in my legs?

    The cat was making meowing sounds I had never heard before, clinging to a picture frame hanging above the fireplace, obviously in an attempt to avoid getting slammed by my body flopping all over the living room.

    Note: If you ever feel compelled to 'mug' yourself with a taser, one note of caution: there is no such thing as a one second burst when you zap yourself! You will not let go of that thing until it is dislodged from your hand by a violent thrashing about on the floor.

    A three second burst would be considered conservative?

    *(^%#@, THAT HURT LIKE HELL!!!

    A minute or so later (I can't be sure, as time was a relative thing at that point), I collected my wits (what little I had left), sat up and surveyed the landscape.

    My bent reading glasses were on the mantel of the fireplace.

    The recliner was upside down and about 8 feet or so from where it originally was.

    My triceps, right thigh and both nipples were still twitching.

    My face felt like it had been shot up with Novocain, and my bottom lip weighed 88 lbs. I had no control over the drooling.

    Apparently I shit myself, but was too numb to know for sure and my sense of smell was gone.

    I saw a faint smoke cloud above my head which I believe came from my hair.

    I'm still looking for my nuts and I'm offering a significant reward for their safe return!!

    P. S. My wife loved the gift, and now regularly threatens me with it!

     


    A man arrives at the gates of Heaven --- http://www.jumbojoke.com/arriving_in_heaven.html

    St. Peter asks, "Religion?"

    "Methodist," the man says.

    St. Peter looks down his list, and says, "Go to Room 24, but be very quiet as you pass Room 8."

    Another man arrives at the gates of Heaven.

    "Religion?"

    "Baptist."

    "Go to Room 18, but be very quiet as you pass Room 8."

    A third man arrives at the gates.

    "Religion?"

    "Jewish."

    "Go to Room 11, but be very quiet as you pass Room 8."

    The man says, "I can understand there being Different rooms for different religions, but why must we all be quiet when we pass Room 8?"

    "Well, the Catholics are in Room 8," St. Peter replies, "and they think they're the only ones here."

     


    Forwarded by Auntie Bev

    BATTER UP

    Two 90-year-old women, Rose and Barb, had been friends all of their lives.

    When it was clear that Rose was dying, Barb visited her every day.

    One day Barb said, 'Rose, we both loved playing women's softball all our lives, and we played all through High School. Please do me one favor: when you get to Heaven, somehow you must let me know if there's women's soft-ball there.'

    Rose looked up at Barb from her death bed and said, 'Barb, you've been my best friend for many years. If it's at all possible, I'll do this favor for you.'

    Shortly after that, Rose passed on.

    At midnight the following Friday, Barb was awakened from a sound sleep by a blinding flash of white light and a voice calling out to her, 'Barb, Barb.'

    'Who is it?' asked Barb, sitting up suddenly. 'Who is it?' 'Barb -- it's me, Rose.'

    'You're not Rose. Rose just died.' 'I'm telling you , it's me, Rose,' insisted the voice.

    'Rose! Where are you?' 'In Heaven,' replied Rose. 'I have some really good news and a little bad news.'

    'Tell me the good news first,' said Barb. The good news,' Rose said, 'is that there's Softball in Heaven. Better yet , all of our old buddies who died before us are here, too. Better than that, we're all young again.

    Better still, it's always springtime, and it never rains or snows. And best of all, we can play softball all we want, and we never get tired.'

    'That's fantastic,' said Barb. 'It's beyond my wildest dreams! So what's the bad news'

    'You're pitching Tuesday.'


    Forwarded by Maureen

    I just want to thank all of you for your educational emails over the past year..

    There's no way to save my grandchildren from being street beggars in Rio --- http://www.trinity.edu/rjensen/2008Bailout.htm#NationalDebt

    Thanks to you, I no longer open a public bathroom door without using a paper towel.

    I can't use the remote in a hotel room because I don't know what the last person was doing while flipping through the adult movie channels.

    I can't sit down on the hotel bedspread because I can only imagine what has happened on it since it was last washed.

    I can't enjoy lemon slices in my tea or on my seafood anymore because lemon peels have been found to contain all kinds of nasty germs including feces.

    I have trouble shaking hands with someone who has been driving because the number one pass-time while driving alone is picking your nose (although cell phone usage may be taking the number one spot)

    Eating a Little Debbie sends me on a guilt trip because I can only imagine how many gallons of trans fats I have consumed over the years.

    I can't touch any woman's purse for fear she has placed it on the floor of a public bathroom. Yuck!

    I must send my special thanks to whoever sent me the one about poop in the glue on envelopes because I now have to use a wet sponge with every envelope that needs sealing.

    Also, now I have to scrub the top of every can I open for the same reason.

    I no longer have any savings because I gave it to a sick girl (Penny Brown) who is about to die in the hospital for the 1,387,258th time.

    I no longer have any money at all, but that will change once I receive the $15,000 that Bill Gates/Microsoft and AOL are sending me for participating in their special e-mail program.

    I no longer worry about my soul because I have 363,214 angels looking out for me, and St. Theresa's novena has granted my every wish. ; I no longer eat KFC because their chickens are actually horrible mutant freaks with no eyes or feathers.

    I no longer use cancer-causing deodorants even though I smell like a water buffalo on a hot day.

    Thanks to you, I have learned that my prayers only get answered if I forward an email to seven of my friends and make a wish within five minutes.

    Because of your concern I no longer drink Coca Cola because it can remove toilet stains.

    I no longer can buy gasoline without taking someone along to watch the car so a serial killer won't crawl in my back seat when I'm pumping gas..

    I no longer drink Pepsi or Dr Pepper since the people who make these products are atheists who refuse to put 'Under God' on their cans.

    I no longer use Saran wrap in the microwave because it causes cancer.

    And thanks for letting me know I can't boil a cup of water in the microwave anymore because it will blow up in my face...disfiguring me for life. ; I no longer check the coin return on pay phones because I could be pricked with a needle infected with AIDS.

    I no longer go to shopping mall s because someone will drug me with a perfume sample and rob me.

    I no longer receive packages from UPS or FedEx since they are actually Al Qaeda in disguise.

    I no longer shop at Target since they are French and don't support our American troops or the Salvation Army.

    I no longer answer the phone because someone will ask me to dial a number for which I will get a phone bill with calls to Jamaica , Uganda & Singapore and Uzbekistan .

    I no longer buy expensive cookies from Neiman Marcus since I now have their recipe.

    Thanks to you, I can't use anyone's toilet but mine because a big brown African spider is lurking under the seat to cause me instant death when it bites my butt.

    And thanks to your great advice, I can't ever pick up $5.00 dropped in the parking lot because it probably was placed there by a sex molester waiting underneath my car to grab my leg.

    I can no longer drive my car because I can't buy gas from certain gas companies!

    If you don't send this e-mail to at least 144,000 people in the next 70 minutes, a large dove with diarrhea will land on your head at 5:00 PM this afternoon and the fleas from 12 camels will infest your back, causing you to grow a hairy hump. I know this will occur because it actually happened to a friend of my next door neighbor's ex-mother-in-law's second husband's cousin's beautician...

    Have a wonderful day...

    Oh, by the way..... A German scientist from Argentina , after a lengthy study, has discovered that people with insufficient brain activity read their e-mail with their hand on the mouse.

    Don't bother taking it off now, it's too late.


    Men versus Women Having Perfect Days --- http://www.amazingjokes.com/


    Funny metaphors used in high school essays --- http://help.com/post/124066-funny-metaphors-used-in-high-school
    A good sign they weren't plagiarized (except maybe from this site)

    Kissing Quotations ... http://www.citate-celebre.com/famous-quotes/kissing-quotes/


    Music Humor --- http://www.amiright.com/


    Forwarded by my good neighbors

    Here's a truly heartwarming story about the bond formed between a little 5-year-old girl and some construction workers that will make you believe that we all can make a difference when we give a child the gift of our time.

    A young family moved into a house, next to a vacant lot. One day, a construction crew began to build a house on the empty lot. The young family's 5-year-old daughter naturally took an interest in the goings-on and spent much of each day observing the workers.

    Eventually the construction crew, all of them 'gems-in-the-rough,' more or less, adopted her as a kind of project mascot. They chatted with her during coffee and lunch breaks and gave her little jobs to do here and there to make her feel important. At the end of the first week, they even presented her with a pay envelope containing ten dollars. The little girl took this home to her mother who suggested that she take her ten dollars 'pay' she'd received to the bank the next day to start a savings account.

    When the girl and her mom got to the bank, the teller was equally impressed and asked the little girl how she had come by her very own pay check at such a young age. The little girl proudly replied, 'I worked last week with a real construction crew building the new house next door to us.'

    'Oh my goodness gracious,' said the teller, 'and will you be working on the house again this week, too?' The little girl replied, 'I will, if those assholes at Home Depot ever deliver the FRICKEN' sheet rock.'

    Kind of brings a tear to the eye - doesn't it?

     


    Awful Puns forwarded by Auntie Bev

    1. The roundest knight at king Arthur's round table was Sir Cumference.

    He acquired his size from too much pi.

    2. I thought I saw an eye doctor on an Alaskan island,

    but it turned out to be an optical Aleutian .

    3. She was only a whisky maker,

    but he loved her still.

    4. A rubber band pistol was confiscated from algebra class because

    it was a weapon of math disruption.

    5. The butcher backed into the meat grinder

    and got a little behind in his work.

    6. Now matter how much you push the envelope,

    it'll still be stationery.

    7. A dog gave birth to puppies near the road

    and was cited for littering.

    8. A grenade thrown into a kitchen in France would result in

    Linoleum Blownapart.

    9. Two silk worms had a race.

    They ended up in a tie.

    10. Time flies like an arrow.

    Fruit flies like a banana.

    11. A hole has been found in the nudist camp wall.

    The police are looking into it.

    12. Atheism is a non-prophet organization.

    13. Two hats were hanging on a hat rack in the hallway.

    One hat said to the other, 'You stay here, I'll go on a head.'

    14. I wondered why the baseball kept getting bigger.

    Then it hit me.

    15. A sign on the lawn at a drug rehab center said: 'Keep off the Grass.'

    16. A small boy swallowed some coins and was taken to a hospital.

    When his grandmother telephoned to ask how he was,

    a nurse said, 'No change yet.'

    17. A chicken crossing the road is poultry in motion.

    18. The short fortune-teller who escaped from prison was

    a small medium at large.

    19. The man who survived mustard gas and pepper spray is now

    a seasoned veteran.

    20. A backward poet writes inverse.

    21. In democracy it's your vote that counts.

    In feudalism it's your count that votes.

    22. When cannibals ate a missionary,

    they got a taste of religion.

    23. Don't join dangerous cults:

    Practice safe sects!


    Old Ones Forwarded by Paula

    These quotes are from a book called Disorder in the American
    Courts, and are things people actually said in court, word for word, taken down
    and now published by court reporters who had the torment of staying calm while
    these exchanges were actually taking place.

     

    ATTORNEY: Are you sexually active?
    WITNESS: No, I just lie there.
    ________________________________

    ATTORNEY: What is your date of birth?
    WITNESS: July 18th.
    ATTORNEY: What year?
    WITNESS: Every year.
    _____________________________________

    ATTORNEY: What gear were you in at the moment of the impact?
    WITNESS: Gucci sweats and Reeboks.
     ______________________________________
    ATTORNEY: This myasthenia gravis, does it affect your memory at all?

    WITNESS: Yes.
    ATTORNEY: And in what ways does it affect your memory?
    WITNESS: I forget.
    ATTORNEY: You forget? Can you give us an example of something you
    forgot?
     ____________________________________
    ATTORNEY: How old is your son, the one living with you?
    WITNESS: Thirty-eight or thirty-five, I can't remember which.
    ATTORNEY: How long has he lived with you?
    WITNESS: Forty-five years.
    _____________________________________
    ATTORNEY: What was the first thing your husband said to you that
    morning?
    WITNESS: He said, "Where am I, Cathy ?"
    ATTORNEY: And why did that upset you?
    WITNESS: My name is Susan.
    ____________________________________
    ATTORNEY: Do you know if your daughter has ever been involved in
    voodoo?
    WITNESS: We both do.
    ATTORNEY: Voodoo?
    WITNESS: We do.
    ATTORNEY: You do?
    WITNESS: Yes, voodoo.
     ______________________________________
    ATTORNEY: Now doctor, isn't it true that when a person dies in his
    sleep, he doesn't know about it until the next morning?
    WITNESS: Did you actually pass the bar exam?
    ____________________________________
    ATTORNEY: The youngest son, the twenty-year old, how old is he?
    WITNESS: Uh, he's twenty
     ________________________________________
    ATTORNEY: Were you present when your picture was taken?
    WITNESS: Would you repeat the question?
     ______________________________________
    ATTORNEY: So the date of conception (of the baby) was August 8th?
    WITNESS: Yes.
    ATTORNEY: And what were you doing at that time?
    WITNESS: Uh....
    ___________________________________
    ATTORNEY: She had three children, right?
    WITNESS: Yes.
    ATTORNEY: How many were boys?
    WITNESS: None.
    ATTORNEY: Were there any girls?
     ______________ ________________________
    ATTORNEY: How was your first marriage terminated?
    WITNESS: By death.

    ATTORNEY: And by whose death was it terminated?
    ______________________________________
    ATTORNEY: Can you describe the individual?
    WITNESS: He was about medium height and had a beard.
    ATTORNEY: Was this a male or a female?
    ______________________________________
    ATTORNEY: Is your appearance here this morning pursuant to

    a deposition notice which I sent to your attorney?
    WITNESS: No, this is how I dress when I go to work.
    _____________________________________
    ATTORNEY: Doctor, how many of your autopsies have you performed on
    dead people?
    WITNESS: All my autopsies are performed on dead people.
    ______________________________________
    ATTORNEY: ALL your responses MUST be oral, OK? What school did you
    go to?

    WITNESS: Oral.
     ______________________________________
    ATTORNEY: Do you recall the time that you examined the body?
    WITNESS: The autopsy started around
    8:30 p.m.
    ATTORNEY: And Mr. Denton was dead at the time?
    WITNESS: No, he was sitting on the table wondering why I was doing
     an autopsy on him!
     ____________________________________________
    ATTORNEY: Are you qualified to give a urine sample?
    WITNESS: Huh?
     ____________________________________________
    And the best for last:

    ATTORNEY: Doctor, before you performed the autopsy, did you check
    for a pulse?
    WITNESS: No.
    ATTORNEY: Did you check for blood pressure?
    WITNESS: No.
    ATTORNEY: Did you check for breathing?
    WITNESS: No.
    ATTORNEY: So, then it is possible that the patient was alive when
    you  began the autopsy?
    WITNESS: No.
    ATTORNEY: How can you be so sure, Doctor?
    WITNESS: Because his brain was sitting on my desk in a jar.
    ATTORNEY: But could the patient have still been alive,
    nevertheless?
    WITNESS: Yes, it is possible that he could have been alive and
    practicing law


    Forwarded by Dick Haar

    WHY GOD MADE MOMS Answers given by 2nd grade school children to the following questions:

    Why did God make mothers? 1. She 's the only one who knows where the scotch tape is. 2. Mostly to clean the house. 3. To help us out of there when we were getting born.

    How did God make mothers? 1. He used dirt, just like for the rest of us. 2. Magic plus super powers and a lot of stirring. 3. God made my Mom just the same like he made me. He just used bigger parts.

    What ingredients are mothers made of ? 1. God makes mothers out of clouds and angel hair and everything nice in the world and one dab of mean. 2. They had to get their start from men's bones. Then they mostly use string, I think.

    Why did God give you your mother and not some other mom? 1. We're related. 2. God knew she likes me a lot more than other people's moms like me.

    What kind of little girl was your mom? 1. My Mom has always been my mom and none of that other stuff. 2. I don't know because I wasn't there, but my guess would be pretty bossy. 3. They say she used to be nice.

    What did Mom need to know about dad before she married him? 1. His last name. 2. She had to know his background. Like is he a crook? Does he get drunk on beer? 3. Does he make at least $800 a year? Did he say NO to drugs and YES to chores?

    Why did your mom marry your dad? 1. My dad makes the best spaghetti in the world. And my Mom eats a lot. 2 She got too old to do anything else with him. 3. My grandma says that Mom didn't have her thinking cap on.

    Who's the boss at your house? 1. Mom doesn't want to be boss, but she has to because dad's such a goof ball. 2. Mom. You can tell by room inspection. She sees the stuff under the bed. 3. I guess Mom is, but only because she has a lot more to do than dad.

    What's the difference between moms & dads? 1. Moms work at work and work at home and dads just go to work at work. 2. Moms know how to talk to teachers without scaring them. 3. Dads are taller & stronger, but moms have all the real power 'cause that's who you got to ask if you want to sleep over at your friend's. 4. Moms have magic, they make you feel better without medicine.

    What does your mom do in her spare time? 1. Mothers don't do spare time. 2. To hear her tell it, she pays bills all day long.

    What would it take to make your mom perfect? 1. On the inside she's already perfect. Outside, I think some kind of plastic surgery. 2. Diet. You know, her hair. I'd diet, maybe blue.

    If you could change one thing about your mom, what would it be? 1. She has this weird thing about me keeping my room clean. I'd get rid of that. 2. I'd make my mom smarter. Then she would know it was my sister who did it and not me. 3. I would like for her to get rid of those invisible eyes on the back of her head.


    Forwarded by Paula

    Age By Wal-Mart:

    You are in the middle of some kind of project around the house mowing the lawn, putting a new fence in, painting the living room, or whatever. You are hot and sweaty, covered in dirt or paint. You have your old work clothes on. You know the outfit - shorts with the hole in crotch, old T-shirt with a stain from who knows what, and an old pair of tennis shoes. Right in the middle of this great home improvement project you realize you need to run to Wal-Mart to get something to help complete the job. Depending on your age you might do the following:

    In your 20's: Stop what you are doing. Shave, take a shower, blow dry your hair, brush your teeth, floss, and put on clean clothes. Check yourself in the mirror and flex. Add a dab of your favorite cologne because you never know, you just might meet some hot chick while standing in the checkout lane. You went to school with the pretty girl running the register.

    In your 30's: Stop what you are doing, put on clean shorts and shirt. Change shoes. You married the hot chick so no need for much else. Wash your hands and comb your hair. Check yourself in the mirror. Still got it. Add a shot of your favorite cologne to cover the smell. The cute girl running the register is the kid sister to someone you went to school with.

    In your 40's: Stop what you are doing. Put a sweatshirt that is long enough to cover the hole in the crotch of your shorts. Put on different shoes and a hat. Wash your hands. Your bottle of Brute Cologne is almost empty so you don't want to waste any of it on a trip to Wal-Mart. Check yourself in the mirror and do more sucking in than flexing. The spicy young thing running the register is your daughter's age and you feel weird thinking she is spicy.

    In your 50's: Stop what you are doing. Put a hat on, wipe the dirt off your hands onto your shirt. Change shoes because you don't want to get dirt in your new sports car. Check yourself in the mirror and you swear not to wear that shirt anymore because it makes you look fat. The cutie running the register smiles when she sees you coming and you think you still have it. Then you remember the hat you have on is from Buddy's Bait & Beer Bar and it says, 'I Got Worms.'

    In your 60's: Stop what you are doing. No need for a hat anymore. Hose the dog shit off your shoes. The mirror was shattered when you were in your 50's. You hope you have underwear on so nothing hangs out the hole in your pants. The girl running the register may be cute, but you don't have your glasses on so you are not sure.

    In your 70's: Stop what you are doing. Wait to go to Wal-Mart until they have your prescriptions ready, too. Don't even notice the dog shit on your shoes. The young thing at the register smiles at you because you remind her of her grandfather.

    In your 80's: Stop what you are doing. Start again. Then stop again. Now you remember you needed to go to Wal-Mart. Go to Wal-Mart and wander around trying to think what it is you are looking for. Fart out loud and you think someone called out your name. You went to school with the old lady who greeted you at the front door.


    Humor Between December 1 and December 31, 2008 --- http://www.trinity.edu/rjensen/book08q4.htm#Humor123108 

    Humor Between November 1 and November 30, 2008 --- http://www.trinity.edu/rjensen/book08q4.htm#Humor113008

    Humor Between October 1 and October 31, 2008 --- http://www.trinity.edu/rjensen/book08q4.htm#Humor103108

    Humor Between September 1 and September 30, 2008 --- http://www.trinity.edu/rjensen/book08q4.htm#Humor093008 

    Humor Between July 1 and August 31, 2008 --- http://www.trinity.edu/rjensen/book08q3.htm#Humor083108

    Humor Between June 1 and June 30, 2008 --- http://www.trinity.edu/rjensen/book08q3.htm#Humor063008

    Humor Between May 1 and May 31, 2008 --- http://www.trinity.edu/rjensen/book08q2.htm#Humor053108

    Humor Between May 1 and May 31, 2008 --- http://www.trinity.edu/rjensen/book08q2.htm#Humor053108

    Humor Between April 1 and April 30, 2008 --- http://www.trinity.edu/rjensen/book08q2.htm#Humor043008

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

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

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

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




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

     

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

     

    International Accounting News (including the U.S.)

    AccountingEducation.com and Double Entries --- http://www.accountingeducation.com/
            Upcoming international accounting conferences --- http://www.accountingeducation.com/events/index.cfm
            Thousands of journal abstracts --- http://www.accountingeducation.com/journals/index.cfm
     

    Deloitte's International Accounting News --- http://www.iasplus.com/index.htm
     

    Association of International Accountants --- http://www.aia.org.uk/ 

    Wikipedia has a rather nice summary of accounting software at http://en.wikipedia.org/wiki/Accounting_software
    Bob Jensen’s accounting software bookmarks are at http://www.trinity.edu/rjensen/Bookbob1.htm#AccountingSoftware

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

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

     

    AccountingWeb --- http://www.accountingweb.com/
    AccountingWeb Student Zone --- http://www.accountingweb.com/news/student_zone.html

     

    Introducing the New journalofaccountancy.com  (free) --- http://www.journalofaccountancy.com/Issues/2008/Nov/NovSmartStops.htm

     

    SmartPros --- http://www.smartpros.com/

     

    I highly recommend TheFinanceProfessor (an absolutely fabulous and totally free newsletter from a very smart finance professor, Jim Mahar from St. Bonaventure University) --- http://www.financeprofessor.com/ 

     

    Financial Rounds (from the Unknown Professor) --- http://financialrounds.blogspot.com/

     

     

    Professor Robert E. Jensen (Bob) http://www.trinity.edu/rjensen
    190 Sunset Hill Road
    Sugar Hill, NH 03586
    Phone:  603-823-8482 
    Email:  rjensen@trinity.edu  

     

     

     

     

     

     

     

    November 30, 2008

     

     

    Bob Jensen's New Bookmarks on  November 30, 2008
    Bob Jensen at Trinity University 

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

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

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

    Many useful accounting sites (scroll down) --- http://www.iasplus.com/links/links.htm

    Bob Jensen's essay on the financial crisis bailout's aftermath and an alphabet soup of appendices can be found at
    http://www.trinity.edu/rjensen/2008Bailout.htm

    Essay

    • Introductory Quotations

    • The Bailout's Hidden, Albeit Noble, Agenda (for added details see Appendix Y)

    • A Step Back in History Barney's Rubble

    Appendix A: Impending Disaster in the U.S.

    Appendix B: The Trillion Dollar Bet in 1993

    Appendix C: Don't Blame Fair Value Accounting Standards This includes a bull crap case based on an article by the former head of the FDIC

    Appendix D: The End of Investment Banking as We Know It

    Appendix E: Your Money at Work, Fixing Others’ Mistakes (includes a great NPR public radio audio module)

    Appendix F: Christopher Cox Waits Until Now to Tell Us His Horse Was Lame All Along S.E.C. Concedes Oversight Flaws Fueled Collapse And This is the Man Who Wants Accounting Standards to Have Fewer Rules

    Appendix G: Why the $700 Billion Bailout Proposed by Paulson, Bush, and the Guilty-Feeling Leaders in Congress Won't Work

    Appendix H: Where were the auditors? The aftermath will leave the large auditing firms in a precarious state?

    Appendix I: 1999 Quote from The New York Times ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''

    Appendix J:  Will the large auditing firms survive the 2008 banking meltdown?

    Appendix K:  Why not bail out everybody and everything?

    Appendix L:  The trouble with crony capitalism isn't capitalism. It's the cronies.

    Appendix M:  Reinventing the American Dream

    Appendix N: Accounting Fraud at Fannie Mae

    Appendix O: If Greenspan Caused the Subprime Real Estate Bubble, Who Caused the Second Bubble That's About to Burst?

    Appendix P:  Meanwhile in the U.K., the Government Protects Reckless Bankers

    Appendix Q: Bob Jensen's Primer on Derivatives (with great videos from CBS)

    Appendix R:  Accounting Standard Setters Bending to Industry and Government Pressure to Hide the Value of Dogs

    Appendix S: Fooling Some People All the Time

    Appendix T:  Regulations Recommendations

    Appendix U: Subprime: Borne of Sleaze, Bribery, and Lies

    Appendix V: Implications for Educators, Colleges, and Students

    Appendix W: The End

    Appendix: X: How Scientists Help Cause Our Financial Crisis

    Appendix Y:  The Bailout's Hidden Agenda Details

    Appendix Z:  What's the rush to re-inflate the stock market?

    Personal Note from Bob Jensen




    Humor Between November 1 and November 30, 2008 --- http://www.trinity.edu/rjensen/book08q4.htm#Humor113008

    Humor Between October 1 and October 31, 2008 --- http://www.trinity.edu/rjensen/book08q4.htm#Humor103108

    Humor Between September 1 and September 30, 2008 --- http://www.trinity.edu/rjensen/book08q4.htm#Humor093008 

    Humor Between July 1 and August 31, 2008 --- http://www.trinity.edu/rjensen/book08q3.htm#Humor083108

    Humor Between June 1 and June 30, 2008 --- http://www.trinity.edu/rjensen/book08q3.htm#Humor063008

    Humor Between May 1 and May 31, 2008 --- http://www.trinity.edu/rjensen/book08q2.htm#Humor053108

    Humor Between May 1 and May 31, 2008 --- http://www.trinity.edu/rjensen/book08q2.htm#Humor053108

    Humor Between April 1 and April 30, 2008 --- http://www.trinity.edu/rjensen/book08q2.htm#Humor043008

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

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

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

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

     




    Accounting Learning and Study Games from the AICPA's StartHere --- http://www.startheregoplaces.com/games/default.aspx

    • The Turnaround Game
    • Catch Me If You Can
    • Money Means Business
    • BizzFun

    Bob Jensen's threads on edutainment --- http://www.trinity.edu/rjensen/000aaa/thetools.htm#Edutainment


    Interactive Mulitmedia Excel Files on the Web

    Richard Campbell's Interactive Invoice --- http://faculty.rio.edu/campbell/gp10_windows/engage.html

    I thank Richard for showing us how to add online interactive hotspots to a picture. This is part of the way toward interaction. A file may become more fully interactive if it is an Excel file rather than just a picture or a non-interactive video.

    Since your computer can be set to download Excel files into your Web browser for security purposes, it is possible to download Excel files with interactive hot spots. In addition, numbers can be changed such that there is calculation interaction as well. Such calculation interaction is not available in pictures.

    I illustrate an interactive multimedia Excel file at http://www.cs.trinity.edu/~rjensen/ExcelMediaIllustrations/Example01.xls

    The steps I follow when making interactive multimedia Excel files are as follows:

    1. Prepare an Excel spreadsheet
    2. Add Web links and make them active
    3. Decide where to place audio clips
    4. Record each audio clip as a wav file (I use the free Audacity software) --- http://audacity.sourceforge.net/
      I save these files in the same folder as the Excel spreadsheet
    5. In Excel click on (Insert, Object) and choose Media Clip
      Then choose (Insert Media File, Sound) and find the appropriate wav file
    6. You can also insert video clips (I record these in Camtasia)

    Note that you can compress wav audio files into mp3 files and avi video files into whatever format you choose such as wmv, mov, or mpg. Adding any media to an Excel spreadsheet makes downloading slower. Media file compression, however, speeds up the process greatly if you have long media clips in your spreadsheet.

    There are of course other files that you can add to Excel such as pictures.

    Any downloaded MS Office file loses macro functionality in a Web browser, so you might want to avoid using macros in your Excel file.

    It is also possible to add DHTML dynamic interactions to Exel files. This adds an immense amount of code to your file and the DHTML code cannot be read on all types of browsers. I have a video on how to do DHTML interaction in Excel at http://www.cs.trinity.edu/~rjensen/video/acct5342/ExcelDHTML.wmv
    However, I don't view this rather complex procedure important since it became possible to read downloaded Excel files directly into a Web browser and thereby avoid many of the security risks of running Excel files in Excel itself.

    Bob Jensen's threads on tricks and tools of the trade are at http://www.trinity.edu/rjensen/000aaa/thetools.htm


    Accounting for Intangibles is Arguably the Most Difficult Part of Accountancy Theory and Application
    It's doubly difficult since the uncertain amounts involved may be tenfold larger than the tangibles to be accounting for under accounting standards.
    Errors in identification and measurement alone may be larger than aggregated measures of tangibles.

    The white paper below does not address intangible and contingent liabilities, although one company’s l intangible liability may be another company's intangible asset such that scoping out intangible liabilities may not be possible.

    "Initial Accounting for Internally Generated Intangible Assets," Discussion Paper, Australian Accounting Standards Board, November 2008 --- http://www.aasb.gov.au/admin/file/content105/c9/ACCDP_IGIA_10-08.pdf

    (Chapter 2) Identification
    The manner by which an intangible item comes into existence is not relevant to the determination of whether the item can be identified as an asset. Therefore, intangible items of the same nature, irrespective of whether they are acquired in a business combination or internally generated (planned or unplanned), could be analysed in the same way for the purpose of determining whether they are assets. In particular, the principles and guidance for identifying the existence of and describing an intangible asset acquired in a business combination specified in IFRS 3 Business Combinations (and IAS 38 Intangible Assets) could be adopted for assessing whether internally generated intangible assets exist. Accordingly, a technique based on a hypothetical business combination is a possible technique for identifying internally generated intangible assets. (paragraph 66)

    (Chapter 3) Recognition
    If a cost-based model were adopted  
    Internally generated intangible assets that satisfy the definition of an intangible asset in IAS 38/IFRS 3 should be subject to the Framework’s recognition criteria. Accordingly, only planned internally generated intangible assets should be contemplated for recognition, on the basis that the plan identifies the unit of account and it is only those types of internally generated intangible assets that could satisfy the reliable measurement (of cost) recognition criterion. They do not warrant more specific recognition criteria, although guidance on the meaning of a ‘discrete plan that is being or has been implemented to create an internally generated intangible asset’ would be helpful. (paragraph 87)

    If a valuation-based model were adopted
    Internally generated intangible assets that satisfy the definition of an intangible asset in IAS 38/IFRS 3 should be subject to the same recognition requirements for intangible assets acquired in a business combination, using a technique based on a hypothetical business combination. Accordingly, all internally generated intangible assets that would be recognised if acquired in a business combination under IFRS 3 should be recognised. While less onerous identification techniques or recognition criteria could be adopted, they have significant conceptual shortcomings. (paragraph 113)

    (Chapter 4) Measurement
    If a cost-based model were adopted 
    It is reasonable to presume that historical cost can be reliably measured for planned internally generated intangible assets from the commencement of implementing the plan up until completion or abandonment of the plan, based on the principles in IASB standards for allocating costs to other types of assets. Therefore, the attributable costs of planned internally generated intangible assets should be required to be recognised (capitalised) as an asset. A transitional period may be warranted to allow entities time to develop adequate accounting systems. Cost is not a suitable basis for measuring unplanned internally generated intangible assets because there is no basis for reliably attributing costs. (paragraph 134)

    If a valuation-based model were adopted
    Internally generated intangible assets are capable of being reliably measured at fair value to the same degree that the IFRS 3 presumption (that the fair value of the same types of intangible assets acquired in a business combination is capable of reliable measurement) is valid. Subject to the outcome of the IASB/FASB Fair Value Measurement project, SFAS 157 Fair Value Measurements provides a possible basis for specifying the determination of fair value of internally generated intangible assets. Until then, IFRS 3 provides an adequate basis. (paragraph 171)

    From a technical conceptual perspective, internally generated intangible assets should be required to be initially measured at fair value to enhance the decision-usefulness of financial reports. An option to adopt cost as an alternative to fair value should not be allowed. On balance, we also think that this view can be justified on practical grounds. However, we acknowledge the views of some against our conclusion. Accordingly, before our conclusion is considered for implementation, we think that further investigation of the perceived practical impediments is warranted. (paragraph 190)

    (Chapter 5) Presentation/Disclosure
    The current reporting requirements in IAS 1 Presentation of Financial Statements can be applied to internally generated intangible assets, and are sufficient to facilitate the: (a) separate presentation of internally generated intangible assets that are recognised; and (b) disclosure of information in relation to the accounting policies adopted and judgements made by management in relation to internally generated intangible assets equivalent to the information that is required to be disclosed about other types of assets. (paragraph 203)

     If a cost-based model were adopted
    The amount of costs incurred in a reporting period and recognised in the carrying amounts of internally generated intangible assets presented in the financial statements should be disclosed together with the accounting policies adopted. In response to users’ comments, management’s rationale for capitalisation should also be disclosed. (paragraph 214)

    If a valuation-based model were adopted
    The methods and significant assumptions applied in determining an asset’s fair value, including the extent to which the asset’s fair value was determined directly by reference to observable prices or was estimated using other measurement techniques, should be disclosed. In addition, if changing one or more of the assumptions used to determine the fair value to reasonably possible alternative assumptions would change the fair value significantly, the entity should state this fact and disclose the effect of those changes. (paragraph 225) In response to users’ comments, the costs reliably attributable to an internally generated intangible asset should also be disclosed, either on an aggregate or a project-by-project basis. (paragraph 232) If an internally generated intangible asset does not meet the relevant recognition criteria, in the interests of providing useful information to users, entities should be required to disclose a description of the asset and the reason why the asset fails to meet the relevant recognition criteria. (paragraph 240) Consistent with the recognition and disclosure principles in the Framework and IASB standards, disclosure is not an adequate substitute for recognition and internally generated intangible items that meet the relevant asset definition and recognition criteria should be recognised in the financial statements. While a disclosure-only approach may have some merit as a pragmatic interim step towards the adoption of a recognition-based accounting approach for internally generated intangible assets, in the interests of maximising the information content of financial statements on a timely basis, a recognition-based approach is preferred. (paragraph 258)

    Bob Jensen's threads on accounting for intangibles (the part under the icebergs) are at
    http://www.trinity.edu/rjensen/Theory01.htm#TheoryDisputes


    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 --- http://business.timesonline.co.uk/tol/business/columnists/article3080766.ece

    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]

    Bob,

    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!

    Denny

    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
    UConn

    Jensen Comment
    You can download FAS 141(R) from http://www.fasb.org/st/index.shtml#fas160 

    Bob Jensen's threads on accounting for intangibles (the part under the icebergs) are at
    http://www.trinity.edu/rjensen/Theory01.htm#TheoryDisputes


    David Albrecht asks:  Why not a day for accountants? http://profalbrecht.wordpress.com/2008/10/06/accounting-day/



    Question
    Why might you want to become a CPA?

     

    A great reference summarizing reasons is cited below. CPAs and non-CPAs frequently track into industry and how accounting knowledge greatly enhances career advancement in most instances:

     

    STEPHEN R. MOEHRLE, GARY JOHN PREVITS, AND JENNIFER A. REYNOLDSMOEHRLE, The CPA Profession: Opportunities, Responsibilities, and Services (New York, NY: American Institute of Certified Public Accountants, 2006, pp. xxii, 254).
    This monograph provides a comprehensive overview of the scope of services provided by CPA firms.

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


    "FASB and IASB Issue Discussion Paper on Financial Statement Presentation,"  by Mark Crowley and Stephen McKinney, Deloitte & Touche LLP, Heads Up, November 10, 2008 Vol. 15, Issue 40 --- http://www.iasplus.com/usa/headsup/headsup0811presentationdp.pdf

    Radical Changes in Financial Reporting --- http://www.trinity.edu/rjensen/Theory01.htm#ChangesOnTheWay
    Yipes! Net earnings and eps will no longer be derived and presented. It's like getting your kids report card with summaries of his/her weekly activities and no final grade.

    Five General Categories of Aggregation
    "The Sums of All Parts: Redesigning Financials:  As part of radical changes to the income statement, balance sheet, and cash flow statement, FASB signs off on a series of new subtotals to be contained in each," by Marie Leone, CFO Magazine, November 14, 2007 --- http://www.cfo.com/article.cfm/10131571?f=rsspage

    In another large step towards the most dramatic overhaul of financial statements in decades, the Financial Accounting Standards Board Wednesday laid out a series of subtotal figures that companies would be required to include on their balance sheets, income statements and cash flow statements.

    The new look for financials will break all three statements into five general categories: business, discontinued operations, financing, income taxes, and equity (if needed). Each of those groupings will carry its own total. In addition, the business, financing, and income tax categories will be segmented into even more narrow sections, each of which will include a subtotal. For example, the business category will be broken down into operating assets, operating liabilities and a subtotal; and investing assets, investing liabilities, and a second subtotal.

    (Although FASB will not officially release its proposal until the second quarter of 2008, it has made public some initial peeks at the proposed format.)

    The addition of totals and subtotals is an extension of FASB's broader principle on disaggregating financial statement line items. It is the board's belief that separating line items into their components gives investors, creditors, analysts and other financial statement users a better view of a company's financial health. For example, the new format should make it easier for an investor to see how much cash a company generates by selling its products versus how much it generates by selling-off a business unit or through financial investments made by the corporate treasurer.

    FASB staffers say buy- and sell-side analysts typically scrutinize financial statements by breaking them down into categories similar to the ones the board is proposing.

    In keeping with its promise to strip accounting standards of complexity, the board also agreed to issue two overarching principles in its draft document on financial statement presentation. One principle instructs preparers to keep the category order consistent in each of the three financial statements. For example, if income tax is the last category shown in on the balance sheet, then it should also be the final category on the cash flow and income statement. "We're not going to tell you what order [to use], just that you should use the same order in all three statements," noted FASB Chairman Robert Herz during the meeting.

    In addition, the board wants companies to "clearly distinguish" between operating assets and operating liabilities, as well as short-term assets and liabilities and their long-term counterparts. But the board is not going to prescribe how that should be done. Regarding the issue of common sums, "the only requirement will be that totals and subtotals are segmented by activities," noted board member George Batavick, "the rest will be principles."

    Updating the look and functionality of financial statements is one of the joint projects that FASB is working on with the International Accounting Standards Board as the two organizations work to converge U.S. and global accounting rules. On Thursday, IASB will discuss the common totals issue and is expected to release its recommendations.

    FASB expects the draft proposal to spark a healthy debate among users and preparers, and staffers are planning for a four- to six-month comment period to follow its release. One issue that will have to be thrashed out, for example, is whether discontinued operations should be relegated to its own category, or run through the income statement or financing activities.

    To avoid any last-minute confusion with the Securities and Exchange Commission, Herz asked the FASB accountants working on the project to "touch base with the SEC staff just to get their input." Herz noted that last time the two groups discussed disaggregation principles, Scott Taub, not James Kroeker, was the SEC's deputy chief accountant.

    Jensen Comment
    Now is especially the time for accounting researchers to look into leading edge alternatives for visualizing data. My threads on that topic are at http://www.trinity.edu/rjensen/352wpVisual/000DataVisualization.htm

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


    Credit Default Swap (CDS)
    This is an insurance policy that essentially "guarantees" that if a CDO goes bad due to having turds mixed in with the chocolates, the "counterparty" who purchased the CDO will recover the value fraudulently invested in turds. On September 30, 2008 Gretchen Morgenson of The New York Times aptly explained that the huge CDO underwriter of CDOs was the insurance firm called AIG. She also explained that the first $85 billion given in bailout money by Hank Paulson to AIG was to pay the counterparties to CDS swaps. She also explained that, unlike its casualty insurance operations, AIG had no capital reserves for paying the counterparties for the the toxic mortgage-backed investments they purchased from Wall Street investment banks.

    "Testimony Concerning Credit Default Swaps," by Erik Sirri Director, Division of Trading and Markets U.S. Securities and Exchange Commission, SEC, November 20, 2008 --- http://www.sec.gov/news/testimony/2008/ts112008ers.htm

    I am pleased to have the opportunity today to again testify regarding the credit default swaps (CDS) market. My testimony today summarizes the key points from my testimony before this committee five weeks ago and updates it to reflect the Commission's activities since then.

    CDS can serve important purposes. They can be employed to closely calibrate risk exposure to a credit or a sector. CDS can be especially useful for the business model of some financial institutions that results in the institution making heavily directional bets, and others — such as dealer banks — that take both long and short positions through their market-making and proprietary trading activities. Through CDS, market participants can shift credit risk from one party to another, and thus the CDS market may be an important element to a particular firm's willingness to participate in an issuer's securities offering.

    The current CDS market operates solely on a bilateral, over-the-counter basis and has grown to many times the size of the market for the underlying credit instruments. In light of the problems involving AIG, Lehman, Fannie, Freddie, and others, attention has focused on the systemic risks posed by CDS. The ability of protection sellers (such as AIG and Lehman) to meet their CDS obligations has raised questions about the potentially destabilizing effects of the CDS market on other markets. Also, the deterioration of credit markets generally has increased the likelihood of CDS payouts, thus prompting protection buyers to seek additional margin from protection sellers. These margin calls have strained protection sellers' balance sheets and may be forcing asset sales that contribute to downward pressure on the cash securities markets.

    In addition to the risks that CDS pose systemically to financial stability, CDS also present the risk of manipulation. Like all financial instruments, there is the risk that CDS are used for manipulative purposes, and there is a risk of fraud in the CDS market.

    The SEC has a great interest in the CDS market because of its impact on the securities markets and the Commission's responsibility to maintain fair, orderly, and efficient securities markets. These markets are directly affected by CDS due to the interrelationship between the CDS market and the securities that compose the capital structure of the underlying issuers on which the protection is written. In addition, we have seen CDS spreads move in tandem with falling stock prices, a correlation that suggests that activities in the OTC CDS market may in fact be spilling over into the cash securities markets.

    OTC market participants generally structure their acivities in CDS to comply with the CFMA's swap exclusion from the Securities Act and the Exchange Act. These CDS are "security-based swap agreements" under the CFMA, which means that the SEC currently has limited authority to enforce anti-fraud prohibitions under the federal securities laws, including prohibitions against insider trading. If CDS were standardized as a result of centralized clearing or exchange trading or other changes in the market, and no longer subject to individual negotiation, the "swap exclusion" from the securities laws under the CFMA would be unavailable.

    Progress on Establishing a Central Counterparty for CDS

    As announced on November 14th, a top priority for The President's Working Group on Financial Markets, in which the SEC Chairman is a member, is to oversee the implementation of central counterparty services for CDS. A central counterparty ("CCP") for CDS could be an important step in reducing the counterparty risks inherent in the CDS market, and thereby help mitigate potential systemic impacts.

    By clearing and settling CDS contracts submitted by participants in the CCP, the CCP could substitute itself as the purchaser to the CDS seller and the seller to the CDS buyer. This novation process by a CCP would mean that the two counterparties to a CDS would no longer be exposed to each others' credit risk. A single, well-managed, regulated CCP could vastly simplify the containment of the failure of a major market participant. In addition, the CCP could net positions in similar instruments, thereby reducing the risk of collateral flows.

    Moreover, a CCP could further reduce risk through carefully regulated uniform margining and other robust risk controls over its exposures to its participants, including specific controls on market-wide concentrations that cannot be implemented effectively when counterparty risk management is uncoordinated. A CCP also could aid in preventing the failure of a single market participant from destabilizing other market participants and, ultimately, the broader financial system.

    A CCP also could help ensure that eligible trades are cleared and settled in a timely manner, thereby reducing the operational risks associated with significant volumes of unconfirmed and failed trades. It may also help to reduce the negative effects of misinformation and rumors that can occur during high volume periods, for example when one market participant is rumored to "not be taking the name" or not trading with another market participant because of concerns about its financial condition and taking on incremental credit risk exposure to the counterparty. Finally, a CCP could be a source of records regarding CDS transactions, including the identity of each party that engaged in one or more CDS transactions. Of course, to the extent that participation in a CCP is voluntary, its value as a device to prevent and detect manipulation and other fraud and abuse in the CDS market may be limited.

    The Commission staff, together with Federal Reserve and CFTC staff, has been evaluating proposals to establish CCPs for CDS. SEC staff has participated in on-site assessments of these CCP proposals, including review of their risk management systems. The SEC brings to this exercise its experience over more than 30 years of regulating the clearance and settlement of securities, including derivatives on securities. The Commission will use this expertise, and its regulatory and supervisory authorities over any CCPs for CDS that may be established, to strengthen the market infrastructure and protect investors.

    To facilitate the speedy establishment of one or more CCPs for CDS and to encourage market participants to voluntarily submit their CDS trades to the CCP, Commission staff are preparing conditional exemptions from the requirements of the securities laws for Commission consideration. SEC staff have been discussing the potential scope and conditions of these draft exemptions with each prospective CCP and have been coordinating with relevant U.S. and foreign regulators.

    In addition, last Friday, Chairman Cox, on behalf of the SEC, signed a Memorandum of Understanding (MOU) with the Federal Reserve Board and the Commodity Futures Trading Commission. This MOU establishes a framework for consultation and information sharing on issues related to CCPs for CDS. Cooperation and coordination under the MOU will enhance each agency's ability to effectively carry out its respective regulatory responsibilities, minimize the burden on CCPs, and reduce duplicative efforts.

    Other Potential Improvements to OTC Derivatives Market

    As explained above, the SEC has limited authority over the current OTC CDS market. The SEC, however, is statutorily prohibited under current law from promulgating any rules regarding CDS trading in the over-the-counter market. Thus, the tools necessary to oversee this market effectively and efficiently do not exist. Chairman Cox has urged Congress to repeal this swap exclusion, which specifically prohibits the SEC from regulating the OTC swaps market.

    Recordkeeping and Reporting to the SEC

    The repeal of this swap exclusion would allow the SEC to promulgate recordkeeping requirements and require reporting of CDS trades to the SEC. As I discussed in my earlier testimony, a mandatory system of recordkeeping and reporting of all CDS trades to the SEC, is essential to guarding against misinformation and fraud. The information that would result from such a system would not only reduce the potential for abuse of the market, but would aid the SEC in detection of fraud in the market quickly and efficiently.

    Investigations of over-the-counter CDS transactions have been far more difficult and time-consuming than those involving cash equities and options. Because these markets lack a central clearing house and are not exchange traded, audit trail data is not readily available and must be reconstructed manually. The SEC has used its anti-fraud authority over security-based swaps, including the CDS market, to expand its investigation of possible market manipulation involving certain financial institutions. The expanded investigation required hedge fund managers and other persons with positions in CDS and other derivative instruments to disclose those positions to the Commission and provide certain other information under oath. This expanded investigation is ongoing and should help to reveal the extent to which the risks I have identified played a role in recent events. Depending on its results, this investigation may lead to more specific policy recommendations.

    However, because of the lack of uniform recordkeeping and reporting to the SEC, the information on security-based CDS transactions gathered from market participants has been incomplete and inconsistent. Given the interdependency of financial institutions and financial products, it is crucial for our enforcement efforts that we have a mechanism for promptly obtaining CDS trading information — who traded, how much and when — that is complete and accurate.

    Recent private sector efforts may help to alleviate some of these concerns. For example, Deriv/SERV, an unregulated subsidiary of DTCC, provides automated matching and confirmation services for over-the-counter derivatives trades, including CDS. Deriv/SERV's customers include dealers and buy-side firms from more than 30 countries. According to Deriv/SERV, more than 80% of credit derivatives traded globally are now confirmed through Deriv/SERV, up from 15% in 2004. Its customer base includes 25 global dealers and more than 1,100 buy-side firms in 31 countries. While programs like Deriv/SERV may aid the Commission's efforts, from an enforcement perspective, such voluntary programs would not be expected to take the place of mandatory recordkeeping and reporting requirements to the SEC.

    In the future, Deriv/SERV and similar services may be a source of reliable information about most CDS transactions. However, participation in Deriv/SERV is elective at present, and the platform does not support some of the most complex credit derivatives products. Consequently, not all persons that engage in CDS transactions are members of Deriv/SERV or similar platforms. Greater information on CDS trades, maintained in consistent form, would be useful to financial supervisors. In addition to better recordkeeping by market participants, ready information on trades and positions of dealers also would aid the SEC in its enforcement of anti-fraud and anti-manipulation rules. Finally, because Deriv/SERV is unregulated, the SEC has no authority to obtain the information stored in this facility for supervision of risk associated with the OTC CDS market and can only obtain it if given voluntarily or by subpoena.

    Market Transparency

    Market transparency is another improvement to the CDS market that the Commission supports. The development of a CCP could facilitate greater market transparency, including the reporting of prices for CDS, trading volumes, and aggregate open interest. The availability of pricing information can improve the fairness, efficiency, and competitiveness of markets — all of which enhance investor protection and facilitate capital formation. The degree of transparency, of course, depends on participation in the CCP, which currently is not mandatory.

    Exchange Trading

    A CCP also could facilitate the exchange trading of CDS because the CDS would be in standardized form. Exchange trading of credit derivatives could add both pre- and post-trade transparency to the market that would enhance efficient pricing of credit derivatives. Exchange trading also could reduce liquidity risk by providing a centralized market that allows participants to efficiently initiate and close out positions at the best available prices.

    Continued in article

    You can read how CDS contracts are the main reason over $100 billion is being given in the bailout to keep AIG alive --- http://www.trinity.edu/rjensen/2008Bailout.htm#Bailout

    Bob Jensen's threads on accounting for credit default swaps can be found under the C-terms at http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm#C-Terms


    Question
    Could the classic historical cost standards for financial reporting have prevented the subprime scandal?

    November 25, 2008 message from Zane Swanson

    Accounting could have a role in addressing crisis situations but the current historical character of the financial statements precludes explicit warnings about market failures. For the most part (balance sheet fair value accounting notwithstanding), statements present after-the-fact information. Only the auditors’ identification of a going concern problem gives an accounting advance warning. But, how many of the 2008 failed financial institutions had going concern opinions? None that I heard of this year … wait till next year. The MD&A is the communication that management is supposed to use to discuss trends. Once again, these reports come out once a year with the financial statements. Even so, how many financial institution 2007 MD&As identified the value at risk commensurate with the consequent 2008 disasters? Answer that one yourself.

    With the switch from US GAAP to the European style IFRS, perhaps firms will also be coerced into preparing European style sustainability reports. Sustainability reports may not be perfect (what is?) as currently constituted, but they could be an avenue to more accurately focus attention on future events / trends about impending crises.

    Zane Swanson

    November 25, 2008 reply from Bob Jensen

    Hi Zane,

    There are almost always warnings under most any accounting system. The Paton and Littleton 1940 model required estimation of bad debts. Certainly if bad debts had been properly estimated, we would’ve had ample warning with virtually no fair value accounting other than bad debt estimation. It cannot be argued that historical cost accounting as implemented in the 1940s and 1950s would’ve failed us if bad debts were properly estimated and auditors were truly independent of their largest Wall Street clients. If bad debts had been properly estimated for banks over the past two decades there would’ve never been a crisis of this magnitude. Auditors simply caved in to bullying clients who pressured for enormous underestimation of bad debts.

    Under later GAAP with FAS 105, 115, and 133 in place there were even more accounting warnings that a bubble was building and would one day burst. The problem with accounting information is that it combines with other signals in the economy that add noise and make it very difficult to predict just when the bubble will burst. If investors and lawmakers paid close attention, there were ample warnings.

    Warren Buffett has been studying financial statements for the past two decades and has been loudly warning about the dangers of a gigantic derivatives bubble, and in many ways the present crisis is merely a fulfillment of his prophecy.

    Frank Partnoy (in Infectious Greed) and many other analysts and academicians warned over and over again about the dangers of not regulating the derivative markets, especially the credit derivatives market --- http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds  A lot of the blame falls at the feet of Alan Greenspan who, after the big bang, finally admits he made a “terrible mistake” by not requiring greater regulation --- http://www.trinity.edu/rjensen/2008Bailout.htm 

    The problem is that people in power just did not want to heed the warnings. Rep. Barney Frank kept pressuring Fannie Mae and the other mortgage lenders to make loans to poor people who really had no chance of making their mortgage payments. The investment bankers and traditional bankers were making such high commissions and bonuses that they were more than willing to keep blowing up the bubble even when it became obvious that their shareholders were going to take a beating. All along the line hogs feeding on the trough from Wall Street to Main Street knew what they were doing was wrong, but succumbed to their own greed. Accounting should not be blamed completely, although the actions of the auditors, credit rating agencies, and banks estimating bad debts were complicit in creating this mess --- http://www.trinity.edu/rjensen/2008Bailout.htm

    Bob Jensen

     


    Greed has no limits!
    I wish the government would simply buy a tombstone with the inscription AIG RIP.
    What's interesting about this is the argument AIG dreamed up to fight this tax assessment?

    From The Wall Street Journal Accounting Weekly Review on November 21, 2008

    AIG's Tax Dispute with U.S. Has Twist of Irony
    by Jesse Drucker
    The Wall Street Journal

    Nov 14, 2008
    Click here to view the full article on WSJ.com ---
    http://online.wsj.com/article/SB122662579362126965.html?mod=djem_jiewr_AC
     

    TOPICS: Disclosure, Disclosure Requirements, Financial Accounting, Income Taxes

    SUMMARY: AIG "...is in a battle with the Internal Revenue Service over $329 million in back taxes and penalties....a portion of which relates to the 'disallowance of foreign tax credits associated with cross-border financing transactions.'....Since AIG first disclosed its dispute with the IRS over these deals last spring, the government has lent nearly $123 billion to the company in exchange for a 79.9% stake in the company." AIG's pursuit of these claims for back taxes means that the U.S. government is effectively funding these activities against its own agency.

    CLASSROOM APPLICATION: Questions relate to understanding the tax issues and related required financial statement disclosures under APB Opinion 28, Statement of Financial Accounting Standards No. 5, Financial Accounting Interpretation No. 48

    QUESTIONS: 
    1. (Advanced) Access the AIG 10-Q filing at http://www.sec.gov/Archives/edgar/data/5272/000095012308014821/y72212e10vq.htm Review footnote 9 on Federal Income Taxes. As explained in the first paragraph of this note, how does the company determine its estimated income tax rate? What accounting standard requires this treatment?

    2. (Introductory) When did AIG receive an IRS notice regarding the matter described in this article?

    3. (Introductory) Summarize the international transactions undertaken by AIG, and other entities, which the IRS calls "abusive".

    4. (Advanced) The $329 million in back taxes and penalties discussed in the article, is not identified separately in footnote 9. How did the author of this article learn of this specific amount? Where has it been recorded in the financial statements, according to the description in the article?

    5. (Advanced) As noted in the article, AIG said in a securities filing that it expects the IRS to challenge transactions similar to those described in answer to question 4 above for years after 1997-1999 for which the IRS has already made notice to AIG. What accounting standard requires a disclosure of this type? Where in the footnotes to AIG's quarterly filing is this information found?

    6. (Advanced) Also noted in the article is the fact that AIG has settled a leasing dispute. When, and for how much, will the impact of this settlement show in the AIG financial statements? Why was this settlement not reflected in the 10-Q filing examined above? Why do you think that AIG disclosed specific amounts related to this settlement but did not disclose amounts related to the international transactions discussed in answer to question 4 above?
     

    Reviewed By: Judy Beckman, University of Rhode Island


    "AIG's Tax Dispute With U.S. Has Twist of Irony In Battle Dating Before Big Bailout, Company Seeks IRS Refund for $329 Million in Back Payments, Penalties

    American International Group Inc. is in a battle with the Internal Revenue Service over $329 million in back taxes and penalties in part stemming from the company's use of a type of transaction the IRS has called "abusive," securities filings show.

    The tax dispute puts AIG -- recipient of a $150 billion federal bailout -- in the peculiar position of effectively using government funding to fight the U.S. government.

    The clash dates from before the bailout: The company disclosed in a securities filing this week that it filed a "claim for refund" with the IRS. The dispute was first disclosed in May.

    In the past, the insurance and financial-services giant hasn't been shy about fighting for itself. AIG has long been known for its lobbying clout. But after it got the federal rescue money, it came under fire for lobbying state mortgage regulators. AIG then pledged to stop all lobbying.

    The company says the IRS is asserting $329 million in back taxes and penalties, a portion of which related to "the disallowance of foreign tax credits associated with cross-border financing transactions." The company has paid a portion of the money sought by the IRS and is seeking a refund. Any cash recouped by AIG from the government would likely add to its value if it is eventually sold.

    Transactions like the ones used by AIG, long popular on Wall Street, take many forms. But in their simplest version they allow companies with overseas subsidiaries to pay foreign taxes, receive a U.S. credit for paying those taxes and then effectively split the credit with foreign lenders who in turn lower their interest costs.

    The IRS concern: Such transactions mean the U.S. is effectively subsidizing the lending of foreign banks through the tax break that gets shared by the U.S. company and the foreign bank.

    These maneuvers were the subject of congressional testimony by former IRS commissioner Mark Everson in 2006, who called them "abusive." He didn't specifically name AIG's role in such deals, but asserted that they "often result in the duplication of tax benefits through the use of certain structures designed to exploit inconsistencies between U.S. and foreign laws."

    Proposed regulations issued by the IRS last year have effectively shut down new versions of the deals, say people who worked on such transactions.

    Since AIG first disclosed its dispute with the IRS over these deals last spring, the government has lent nearly $123 billion to the company in exchange for a 79.9% stake in the company. On Sunday, the government agreed to scrap its original loans and replace them with a new, $150 billion aid package for AIG.

    Nevertheless, the company is still pursuing the claim against the IRS, according to AIG spokesman Joe Norton.

    "AIG's global tax organization will continue to maximize value for our shareholders, whoever they are, while fully complying with all applicable tax rules and requirements around the world," he said. "We're going to pursue the claim."

    The tax dispute between the IRS and AIG covers 1997 to 1999, but AIG said in a securities filing that it expects the IRS to challenge similar transactions from later years. It didn't indicate the potential size of those additional disputes.

    Separately, AIG said it had settled a tax dispute related to so-called "lease-in lease-out" tax shelters and anticipated recording an after-tax charge of between $34 million and $100 million in the fourth quarter of this year.

    Were AIG losses hidden early on by creative accounting?
    PwC is the external auditor of AIG

    "A Question for A.I.G.: Where Did the Cash Go?" by Mary Williams Walsh, The New York Times, October 29, 2008 --- http://www.nytimes.com/2008/10/30/business/30aig.html?dlbk

    The American International Group is rapidly running through $123 billion in emergency lending provided by the Federal Reserve, raising questions about how a company claiming to be solvent in September could have developed such a big hole by October. Some analysts say at least part of the shortfall must have been there all along, hidden by irregular accounting.

    “You don’t just suddenly lose $120 billion overnight,” said Donn Vickrey of Gradient Analytics, an independent securities research firm in Scottsdale, Ariz.

    Mr. Vickrey says he believes A.I.G. must have already accumulated tens of billions of dollars worth of losses by mid-September, when it came close to collapse and received an $85 billion emergency line of credit by the Fed. That loan was later supplemented by a $38 billion lending facility.

    But losses on that scale do not show up in the company’s financial filings. Instead, A.I.G. replenished its capital by issuing $20 billion in stock and debt in May and reassured investors that it had an ample cushion. It also said that it was making its accounting more precise.

    Mr. Vickrey and other analysts are examining the company’s disclosures for clues that the cushion was threadbare and that company officials knew they had major losses months before the bailout.

    Tantalizing support for this argument comes from what appears to have been a behind-the-scenes clash at the company over how to value some of its derivatives contracts. An accountant brought in by the company because of an earlier scandal was pushed to the sidelines on this issue, and the company’s outside auditor, PricewaterhouseCoopers, warned of a material weakness months before the government bailout.

    The internal auditor resigned and is now in seclusion, according to a former colleague. His account, from a prepared text, was read by Representative Henry A. Waxman, Democrat of California and chairman of the House Committee on Oversight and Government Reform, in a hearing this month.

    These accounting questions are of interest not only because taxpayers are footing the bill at A.I.G. but also because the post-mortems may point to a fundamental flaw in the Fed bailout: the money is buoying an insurer — and its trading partners — whose cash needs could easily exceed the existing government backstop if the housing sector continues to deteriorate.

    Edward M. Liddy, the insurance executive brought in by the government to restructure A.I.G., has already said that although he does not want to seek more money from the Fed, he may have to do so.

    Continuing Risk

    Fear that the losses are bigger and that more surprises are in store is one of the factors beneath the turmoil in the credit markets, market participants say.

    “When investors don’t have full and honest information, they tend to sell everything, both the good and bad assets,” said Janet Tavakoli, president of Tavakoli Structured Finance, a consulting firm in Chicago. “It’s really bad for the markets. Things don’t heal until you take care of that.”

    A.I.G. has declined to provide a detailed account of how it has used the Fed’s money. The company said it could not provide more information ahead of its quarterly report, expected next week, the first under new management. The Fed releases a weekly figure, most recently showing that $90 billion of the $123 billion available has been drawn down.

    A.I.G. has outlined only broad categories: some is being used to shore up its securities-lending program, some to make good on its guaranteed investment contracts, some to pay for day-to-day operations and — of perhaps greatest interest to watchdogs — tens of billions of dollars to post collateral with other financial institutions, as required by A.I.G.’s many derivatives contracts.

    No information has been supplied yet about who these counterparties are, how much collateral they have received or what additional tripwires may require even more collateral if the housing market continues to slide.

    Ms. Tavakoli said she thought that instead of pouring in more and more money, the Fed should bring A.I.G. together with all its derivatives counterparties and put a moratorium on the collateral calls. “We did that with ACA,” she said, referring to ACA Capital Holdings, a bond insurance company that was restructured in 2007.

    Of the two big Fed loans, the smaller one, the $38 billion supplementary lending facility, was extended solely to prevent further losses in the securities-lending business. So far, $18 billion has been drawn down for that purpose.

    Continued in Article

    From Jim Mahar's blog on October 31, 2008 --- http://financeprofessorblog.blogspot.com/

    First and foremost it gets to a serious question. Were the initial infusions (into AIG) by the government just a stop gap measure and will even more be needed. (The idea of throwing good money after bad comes to mind). Secondly in class yesterday we talked about information asymmetries and how accounting can only partially lessen the problem and that firms can have billions of dollars of losses that investors may not be aware of even after reading the financial statements. And finally a student in class is doing a paper on this and what the executives must have known (or at least should have known) before hand.

    Bob Jensen's threads on where the bailout money paid to AIG went are at http://www.trinity.edu/rjensen/2008Bailout.htm#Bailout
    Hint:  Think credit derivatives not backed with capital reserves

    If AIG executives knew about these problems early on, what did the auditor not insist on disclosing?
    Sounds like a massive class action lawsuit here for AIG shareholders who lost their investments.
     

    You can read more about accounting scandals in the sorry history of AIG at http://www.trinity.edu/rjensen/FraudRotten.htm#MutualFunds


    Accounting for Adjustable Mortgage Rate (ARM) Options

    November 20, 2008 message from Amy Dunbar [Amy.Dunbar@BUSINESS.UCONN.EDU]

    Can someone give me a reference for the “existing GAAP” rules referred to below?

    From http://www.revenuerecognition.com/industry/banking/ 

    Phantom Revenues

    Some commercial banks have created a mortgage for homeowners and investors that has raised concerns in the banking industry and the investment community. It is the option adjustable rate mortgage or “ARM.” In an option ARM, the mortgagor has four monthly payment options; for example:

    · minimum payment, which doesn’t cover interest changes (resulting in the principal growing each period and creating negative amortization);

    · interest only, with no interest added to the principal balance;

    · regular (interest plus principal) payments on a fully amortizable 30-year loan; and

    · regular (interest plus principal) payments on a fully amortizable 15-year loan.

    Because the option ARM is attractive to cash-strapped home buyers and investment-return buyers, most mortgagors chose the minimum payment option. Under that option, the interest rate (which is growing each month) adjusts the loan balance. At some point, the loan principal is reset and a new amortizable balance is set over the 30-year term, resulting in a revised mandatory repayment amount that can readily be three or four times the original monthly payment.

    Of concern to bank regulators and those investing in commercial bank stocks is the treatment of such loans by the mortgagees. Under existing GAAP, the mortgagee may book revenue on the option ARM at the fully amortized amount, despite the fact that the mortgagor is only paying the minimum amount (the negative amortization case). This booking of “phantom” future revenues is the disturbing result of option ARMs.

    EXAMPLE

    Mr. and Mrs. Smith enter into a $500,000 mortgage on a $550,000 Florida condominium. It is an option ARM and permits the Smiths, as mortgagors, to pay a minimum monthly amount of approximately $1,600. This does not result in the payment of any principal or the full amount of monthly interest on the 30-year term loan.

    The fully amortizable monthly payment for the mortgagors is closer to $4,600, or about an additional $3,000 per month. The Florida bank books the interest portion of the $3,000 that it doesn’t receive as deferred interest revenue (many would say “phantom” revenue). At some point in the negative amortization process, the loan balance resets and the mortgagors must pay the new monthly amount of $4,600. However, in the Smiths’ case, the loan is “upside-down”; that is, the value of the investment condominium (because of a rapidly changing real estate market) is less than $500,000, so foreclosure is their only option.

    If the commercial bank has a significant portion of its loan portfolio in such option ARMs, with a rising money market interest rate and declining real estate values, it is a prescription for trading losses. Such affected banks will follow GAAP and book the phantom revenues, increase earnings, and then move the non-performing option ARM mortgages to the held-for-sale marketable classification and, eventually, to collection agencies.

    Amy Dunbar
    Department of Accounting #431
    School of Business
    University of Connecticut
    2100 Hillside Road, Unit 1041 Storrs, CT 06269-104
    land line: 860-742-0672 cell: 860-208-2737

    November 20, 2008 reply from Bob Jensen

    Hi Amy,

    One place to look if FAS 91 --- http://www.revenuerecognition.com/industry/banking/

    Sale of convertible, adjustable-rate mortgages with contingent repayment agreements are discussed in EITF 08-1. Also see EITF 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios, and EITF 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments, for consideration of any beneficial conversion feature.

     Here are some SEC Rules --- http://www.sec.gov/divisions/corpfin/cfacctdisclosureissues.pdf  

    One such product is an option adjustable-rate mortgage (option ARM), which is being sold to home buyers who desire smaller monthly mortgage payments. This mortgage product gives borrowers the option to make monthly payments that are less than the interest actually owed on the loan. The result is that the deferred interest is added to the principal amount of the mortgage loan creating a rising loan balance, often referred to as a negative amortization loan. If the loan balance grows to the extent that the loan-to-value ratio exceeds an established threshold, the lender may restructure the loan, requiring the borrower to immediately begin making larger payments

    The types of residential mortgage loans held and the underwriting standards used to originate these loans are important to an understanding of a registrant’s financial condition and results of operations. While the information required by Industry Guide 3 includes basic categorical statistics about a registrant’s loan portfolio, more detailed information about certain loan products may be needed in order to provide a complete picture of the portfolio’s credit risk. Some disclosure examples follow for use in Description of Business or MD&A, as appropriate.

    Provide disaggregated information about residential mortgage loans with features that may result in higher credit risk

    • Describe the significant terms of each type of residential mortgage loan product offered, including underwriting standards used for each product, maximum loan-to-value ratios and how credit management monitors and analyzes key features, such as loan-to-value ratios and negative amortization, and changes from period to period.

    • Disclose the approximate amount (or percentage) of loans originated during the period and loans as of the end of the reporting period that relate to each type of residential mortgage loan product.

     

    • Disclose the approximate amount (or percentage) of off-balance sheet loans with retained credit risk which relate to each type of residential mortgage loan product.

     

    • Disclose the amount of loans that experienced negative amortization during the period and the amount of increase in the loan balance during the period that resulted from negative amortization.

     

    • Describe your policy for placing loans on non-accrual status when the loan’s terms allow for a minimum monthly payment less than interest accrued on the loan, and the impact of this policy on the nonperforming loan statistics disclosed.

     

    • Disclose the approximate amount (or percentage) of residential mortgage loans as of the end of the reporting period with loan-to-value ratios above 100%.

    • Disclose any geographic concentrations that exist as of period end in your portfolio of residential mortgage loans with high loan-to-value ratios.

    Describe risk mitigation activities used to reduce exposure to credit risk related to residential mortgage loans

     

    • Describe risk mitigation transactions used to reduce credit risk exposure, such as insurance arrangements, credit default agreements or credit derivatives.

    • Explain any limitations of your credit risk mitigation strategies.

    • Disclose the impact that credit risk mitigation transactions have had on your financial statements.

     

    Disclose trends related to residential mortgage loans with features that may result in higher credit risk that are reasonably likely to have a material favorable or unfavorable impact on net interest income after the provision for loan loss

    • Disclose any changes in the percentage of borrowers who have chosen a minimum payment option during the period instead of choosing a payment option that includes full payment of interest expense or payment of interest and principal.

    • Describe any significant weakening in local housing markets in which you have a concentration of residential mortgage loans with high loan-to-value ratios.

    • Disclose changes in credit losses and interest income recognized for higher risk loans.

    As far as I can tell the IASB has not yet taken option ARMs up in the loose international standards on revenue recognition. Under IAS 18 – Revenue, sales with a buyback commitment cannot always be recognized as revenue because the significant risks and rewards of ownership of the goods are not necessarily transferred to the buyer. This, however, is principles-based without bright line rules.

    Bob Jensen

    Bob Jensen's threads on revenue realization are at http://www.trinity.edu/rjensen/ecommerce/eitf01.htm


    Auditors in Ancient Egypt

    Below is a portion of a message received from Blan McBride. Blan loves ancient accounting history.

    Blan speculates about auditors in Egypt. It reminds me of an audit engagement I had in my early experience at E&E in Denver. For days on end I had to sit on a pile of boxed-up Gold Bond Stamp books after they had been turned into Gold Bond dealers for merchandise. My job was to verify that each box was destroyed as the stamp boxes were rather slowly fed into chemical (dissolving) tank at a factory that turned paper mush into cardboard boxes.

    The redeemed stamps, being hole punched, were only of value to Gold Bond dealers since dealers were the only ones that could turn in punched stamps into the Gold Bond company for credit. But Gold Bond worried that unscrupulous dealers might work out an arrangement with the paper box company for recycling of the unintended variety.

    My E&E friend Dennis and I sat very bored watching gold bond stamp books dissolved much like Blan’s Egyptian auditors must’ve been bored watching grain pour into domed warehouses. In fact Dennis and I became so bored that we started opening boxes and counting the books. We discovered than many of the boxes only had 29 books and not the required 30 books. We informed the Gold Bond company that, in turn, commenced an investigation. Sure enough several dealers were subsequently arrested.

    Gold Bond had an internal control before shipping the boxes off to the paper box factory. Each box was weighed. But it turns out that the scales could not accurately detect a shortage of one redemption book which is where some unscrupulous dealers were taking advantage of a weakness in the internal control system.

    I wonder how Egyptian auditors measured a cart load of grain? Certainly the piles are not perfect cones or pyramids in shape such that volume can be neatly measured by formula.

    Bob Jensen

     

     November 16, 2008 message from Blan McBride [blan@comcast.net]

    Good Morning, Bob,

    We had a cold front pass through here last night and with the temperature down in the low 60’s, I decided to work inside this morning.  The sun’s out now and I think it’ll be warm enough to work in the shop this afternoon.  Meanwhile –

    With my brain temporarily unfrozen and upon reading your daily missive, thoughts of accounting history surfaced.  (I should probably seek treatment for that condition.)  I once wrote a paper concerning the larger changes in auditing practice in the USA and how they usually follow large, well-publicized situations in which large auditing firms have had ethical problems exposed. Part of the paper related how auditors consistently attempt to separate “ethics” from the “mechanics” of their practice, also known as “It’s not my fault. I carefully followed the letter of the law”.  Price Waterhouse brought in seven other large auditing firms to testify that “We don’t observe the taking of inventory.  It’s dirty out there in the factory.”  Remember how that didn’t work?

    I only dealt with the relatively short period (about four decades) between Mckesson/Robbins and National Student Marketing.  It now occurs to me that the more recent debacles concerning Enron and AA and the present unpleasantness related to valuation of mortgages (and other instruments of debt) both doubles the period and adds reinforcement to my original conclusion.  One might also conclude that the penalties laid on auditors for either ignorance, laziness, lack of ethics and combinations thereof are becoming more severe.

    Now, having laid the groundwork, I attempt to make an assignment.  Obviously, (most accounting educators today) would have nothing to do with such a subject.  It deals with an increasingly lengthy period of time, whereas their interest was in increasingly shorter periods. I’m so out of touch that you and Gary Previts are the only living accounting historians I know.  I’m in awe of your output on the net and the old rule was to get something done, give it to a busy man.  Please – add your brainpower to this and run with it.

    As payment, I offer the following historical question :  What proof do we have that auditors were in use in ancient Egypt?

    Answer: On a wall of a burial chamber in Egypt dated around 2,000 BCE, there is a picture of a grain warehouse.  These were dome shaped with a hole for filling at the top.  When full, that hole was sealed.  When it was necessary to remove grain, a hole was made at ground level.  This was the type probably used in the Biblical story of Joseph.  The picture on the interior wall of the tomb shows a person sitting at a table at ground level and another sitting beside the hole in the top. The picture depicts each as writing as the grain is delivered.  I expect that these guys are not permitted to talk to one another.  Presumably, the records are checked by a third party to see if they match.  Hey, anyone with enough smarts to design and build a pyramid is not going to get shortchanged by a farmer if he can help it.

    Remember to keep your feet dry and wear your hat outdoors. (envisioning Bob Jensen in deep snow)

    Blan


    A Distance Learning Course on Introductory Accounting from the Harvard Business School --- Click Here
    This course dates back to 2005 and I'm not certain how often it is updated.
    It appears that students cannot get credit from Harvard for taking this course, although other colleges could give credit for taking the course.
    It features narrated animations. Fees for this course can be found by phoning

    A Preview is available at
    http://harvardbusinessonline.hbsp.harvard.edu/b01/en/common/viewFileNavBean.jhtml?_requestid=21163
    The course features narrated animations and assessment materials.

    Financial Accounting: An Introductory Online Course
    Publication Date: Nov 4, 2005
    Availability: Available
    Author(s):  David F. Hawkins, Paul M. Healy, Michael Sartor
        Type: Online Courses
    Product Number: 105708
    Language: English
    Source: HBS
    Length: Information Not Available
     

    To preview (Authorized Faculty) or purchase this online course, call (800) 545-7685 (outside the U.S. and Canada, 617-783-7600).
    A Teaching Note is available for Authorized Faculty. Online course product #105708

    Bob Jensen's threads on online training and education alternatives available worldwide are at http://www.trinity.edu/rjensen/crossborder.htm

     


    Nine Years is Surprisingly Steep for Accounting Fraud:  This is almost as bad as for stealing beer at a convenience store

    "Tech billionaire gets 9 years in prison for fraud," MIT's Technology Review, November 14, 2008 ---
    http://www.technologyreview.com/wire/21680/?nlid=1513&a=f

    A one time dot-com billionaire from Las Vegas has been sentenced to nine years in prison for defrauding investors in his software company in 2001.

    Prosecutors had sought a much longer sentence for Charles "Junior" Johnson, founder and CEO of the now-defunct PurchasePro.

    Johnson was the ringleader of a scheme to falsely inflate PurchasePro's revenue in the first three months of 2001, as the high-tech economy was in freefall.

    Seven people were convicted in the long-running investigation, which also exposed improper accounting practices at America Online, which had been PurchasePro's business partner.

    Bob Jensen's rants about how white collar crime pays even if you get caught are at http://www.trinity.edu/rjensen/FraudConclusion.htm#CrimePays

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


    Yet another reason for joining the American Accounting Association as it tries to bring state-of-the-art services to its members --- http://aaahq.org/index.cfm

     Greetings to All,

    The American Accounting Association is proud to announce the AAA Digital Library, our NEW electronic journal platform website hosted by Scitation and the American Institute of Physics (AIP). You will receive an email from the Scitation Help Desk at AIP soon, with instructions on how to activate your account. You will have access to all of the AAA journals you subscribe to.

    You will need to complete a brief, one-time, registration process the first time you access the new platform. If you have trouble getting access to the site, the email you receive from the Scitation Help Desk will contain information about contacting the Help Desk at Scitation.

    The Digital Library has been designed to coordinate with AAACommons and we are very excited about the new features we are able to offer including article-by-article publishing; new tools and links on the abstract pages; downloadable citations; and much more.

    When you receive the email from the Scitation Help Desk at AIP, please take a few minutes to register, explore the site, and gain electronic access to your AAA journals. Please send feedback and suggestions to Diane Hazard, Publications Project Director, at diane@aaahq.org.

    Sincerely,

    Beverly J. Harrelson
    Director, Communications
    American Accounting Association
    Phone: 941.556.4109
    Fax: 941.923.4093
    AAA website: http://aaahq.org
    Email: beverly@aaahq.org

     


    November 11, 2008 message from Jagdish Gangolly [gangolly@CSC.ALBANY.EDU]

    You may like to read --- http://www.journalofaccountancy.com/Issues/1998/May/inaicpa.htm

    Institute Receives Papers From First CPA MAY 1998

    First CPA Comes Home

    On February 23, 1893, New York City accountant Frank Broaker sued one of his clients. Broaker had charged the company $3 an hour to straighten out its books; the company thought the work was worth only $1 an hour. Two other accountants testified on Broaker's behalf, and, although the defendants argued this was a case of price fixing, the jury quickly found for Broaker.

    Nevertheless, Broaker believed such problems would continue until the state formally recognized accountants as professionals. He proved to be a shrewd political operative and, by 1896, had circumvented opposition to a licensing bill for CPAs in the New York state senate.

    The so-called Wray bill, which Broaker helped draft, made New York the first state to create CPAs. Broaker received CPA certificate no. 1 and served both on the nations first state board of examiners and as president of the American Association of Public Accountants, a predecessor to the AICPA.

    On February 19, 1998, Broaker had a homecoming of sorts. His granddaughter, Marjorie Ferrigno, presented to the Institute his CPA certificate and the document appointing him to the New York state board.

    November 13, 2008 reply from

    Broaker was not actually the first CPA - he only received the first certificate. The first CPAs were grandfathered in and the certificates presented in alphabetical order. The manual below actually got him kicked off the board due to a perceived conflict of interest. Broaker was a person in charge of the exam and yet he published a CPA review book. Broaker unsuccessful fought his departure.

    The manual --- Click Here

    Jim McKinney, Ph.D., C.P.A.
    Tyser Teaching Fellow Accounting and Information Assurance
    Robert H. Smith School of Business
    4333G Van Munching Hall
    University of Maryland College Park, MD 20742-1815

     http://www.rhsmith.umd.edu 

    Jensen Comment
    Since the CPI was 9.9 in 1913 and 207.3 in 2008 thus far, we can only speculate what Broaker was charging in today's dollars. It appears, however, that in 1893 Broaker was probably charging over $75 per hour in 2008 dollars. This is certainly cheap by Big Four standards today, but the Big Four no longer handles many of these small clients seeking bookkeeping services. Billings by small accounting firms vary greatly, but my guess is that bookkeeping consulting could probably be obtained for less than $75 per hour today. Of course we don't know all that was entailed in the term "straighten out the books" in 1893. Were there even adding machines in 1893?

    In 1960 dollars, Broaker was charging slightly over $21 per hour. Years ago, while I was an undergraduate student, I worked for part-time for Ernst & Ernst in Denver. A tax job was passed down to me for a restaurant client that only had shoe boxes full of expenditure receipts and cash register tapes for an entire year. I've no idea what my time was being billed out for on this job by E&E, but I think I was making $5 per hour in 1960. I was very fast on a ten-key adding machine, but I could never be as fast as David Fordham who now types something like 160 wpm with relatively few errors.

    There was no Excel, no computers, and obviously no tax software in 1960. That goes back when men were men, and women were not CPAs --- at least not many women were CPAs in the United States. We kept one woman hidden in the back room at E&E to review our tax returns when we got them worked up. She reviewed our work because she was smarter than any of us even though she had no CPA license.

    October 12, 2008 reply from Dennis Beresford [dberesfo@TERRY.UGA.EDU]

    Bob,

    I note that you were making "about $5 per hour" with E&E in Denver in 1960. I started working part-time with E&E in Los Angeles in the fall of 1960 and then full time in June 1961. My starting salary (no extra amount for overtime) was $525 a month. Based on 160 hours a month (we actually worked more, especially in the busy season) that works out to a whopping $3.28 an hour. So your pay of $5 an hour means that you were making about 50% more than me - an entirely justifiable premium for your ten-key adding machine and other skills.

    Denny

    October 12, 2008 reply from Bob Jensen

    But you, Denny, went on to become a highly-paid executive partner in E&E.

    I later worked full time for a very short while for E&E and then went on to Stanford for a PhD before entering the academy (at Michigan State) in 1966 for a whopping $11,000 per year (not including summer pay) which at the time I considered quite generous. Of course, I bought three acres with a lovely home and carriage house on the edge of the MSU campus for $30,000.

    This just proves that you started at E&E for less and rose very fast. I started for E&E for more and went straight downhill in terms of pay.

    Bob Jensen

    October 12, 2008 reply from David Fordham, James Madison University [fordhadr@JMU.EDU]

    I remember at Jones Business College in the early 1970's, the business curriculum required that all students take a 1-credit course titled, "Business Technology". It covered touch-typing, the 10-key (both of which required a speed test proficiency exam), and a machine called a "Telex". The Telex used a punched paper tape that you prepared before making a connection, to save transmission time.

    I was intrigued by the Telex technology, which could multiplex several connections over a single telephone line. It used pulse circuit switching, with six-digit "phone" numbers. We actually used the Telex daily to communicate with customers, vendors, the railroads, and our other company facilities at the paper company. I vividly remember the conversion from 45 baud to 110 baud, and later the conversion from the original F1F2 punched paper tape to the TWX Bell 101 system.

    In the mid-1980's I was development manager of a computer project whose scope include the replacement of the TWX system with something called "X.12 EDI", using the completely-electronic Bell 103 modems! Computer to computer communications, who'da thunk it? The Seaboard Coast Line Railroad was the only company that could provide us training on implementing the X.12 data exchange... no one else knew anything about it, including the Phone Company. (Back then, there was only 1 phone company, so everyone just referred to it as "The Phone Company", or Ma Bell. Thank Harold Green for the mess we have today...)

    Today, old TWX equipment is easily adapted to higher-baud radio applications by amateur radio operators. In fact, through the use of sound card D/A A/D converters, this ancient Baudot transmission mode is still being played with by hobbyists, albeit supplemented with the more modern modes (for which it serves as their direct ancestral basis) such as PACTOR, G-TOR, CLOVER, AX.25 Packet, and my favorite, PSK31.

    Most people don't know it, but these digital radio modes and their Enq-Ack CSMA-CD protocols were the inspiration behind the name of Metcalf and Bogg's "Ethernet". In the U.S., a radio transmitter is said to be "on the air". Brits are smarter and know that air does not carry radiowaves. They believe that radiowaves are carried by something invisible called "the Ether". Since these digital modes pioneered the CSMA-CD techniques, Metcalf borrowed the protocol design and CSMA-CD ideas, and named the resulting wired network (which back then used a wire bus topology similar to a single radio channel) the "ETHER-net".

    BTW, thanks for the compliments Bob, but my speed used to be 180wpm *before* subtraction of mistakes, and with the subtraction came in around 160. This was years ago, however. I took a speed test in our CIT lab a couple months ago, and apparently since turning 50 a few years ago, I'm losing my touch, literally. My unadjusted speed was only 171, and adjusted for errors it dropped all the way down to 114. I wish I could blame it on their keyboard which felt different than mine, but that probably wouldn't be completely truthful. I tell you, it's terrible what aging does to you. I still go fast, but I have to rely on the spell-checker and backspace keys. Watt a grate inn vent shone they R.

    David Fordham


    "Users Grade Tax Software," by Stanley Zarowin, Journal of Accountancy, October 2007 --- http://www.aicpa.org/pubs/jofa/oct2007/tax_software.htm

    2008 Professional Tax Software as Listed in a November 7, 2008 Accounting Web Newsletter

    Featured Tax Software

    2008 Update from WebCPA --- http://www.webcpa.com/article.cfm?articleid=29425

    From the Journal of Accountancy Smart Stops on the Web in 2008

    A TAX TOOLBOX
    www.irs.gov/taxpros/article/0,,id=118004,00.html
    This Smart Stop from the IRS provides a host of basic tools for tax professionals, handily compiled onto one page for easy access. The information ranges from recent tax law changes to standards of practice and Circular 230 information to the contact info for the Taxpayer Advocacy Panel (see “The Taxpayer Advocacy Panel: An Opportunity to Collaborate With the IRS,” JofA, Sept. 08, page 68). The page contains a host of publications on representing clients before the IRS, as well as requesting client transcripts and copies of their tax returns. Also look under “IRS Collection Tools and Your Clients Rights” for rules on representation and disclosure and Offer in Compromise guidelines.

    HOMEBUYERS TAKE NOTE
    www.federalhousingtaxcredit.com
    Visit this new site from the National Association of Home Builders for an overview of the Housing and Economic Recovery Act of 2008, which authorizes a tax credit for qualified first-time buyers purchasing homes before July 1, 2009. The “Frequently Asked Questions” page answers both general and technical questions regarding the credit, or click on “The Law’s Other Provisions” to go beyond the act’s tax credit provisions and learn about its implications for property taxes, mortgage revenue bonds and Federal Housing Administration modernization. If you’re still looking for information, the “Home Buyer Resources” page hosts a list of links to helpful government Web sites, including state and local homebuyer assistance programs.

    From Smart Stops on the Web, Journal of Accountancy, October 2007 --- http://www.aicpa.org/pubs/jofa/oct2007/smart_stops.htm

    TAX

    BIG RESOURCES FOR SMALL BUSINESSES
    www.irs.gov/businesses/small

    Whether you own a small business or work for one, this IRS site sorts out tax-related information so you don’t have to. There’s an A–Z index that lets you search by business type or by subject. It lists the necessary forms for each and links to information on starting up, closing down and everything in between. You also can sign up for the “e-News for Small Businesses” electronic newsletter or download complimentary tax products, including tax calendars and videos. And, of course, there’s plenty of guidance on e-filing and forms for both small businesses with employees and the self-employed.

    CONSTRUCTIVE CRITICISM
    www.improveirs.org

    Got a beef with the IRS? The Taxpayer Advisory Panel, a federal advisory committee established under the authority of the Treasury Department, is a group of volunteers working to improve the Service. Its Web site features a comment box and phone number where citizens can make suggestions. You can also view taxpayer suggestions that have become proposals, which range from the general (improving the quality of customer service), to the picky (adding lines to forms) to the technical (expanding the third-party authorization On The Web time frame). Want to join the panel? There’s information on becoming a member in the FAQ section.

    KNOW THE LAW
    http://tax.cchgroup.com/legislation

    Turn to this site for coverage of new tax legislation and analysis of its impact on taxpayers and tax professionals, plus comments on proposed tax law reform. Click on the “Full CCH Coverage Here” links for access to “Tax Briefing” PDFs, which include in-depth analyses of the legislations’ tax credits, deductions and effective dates. The site also offers “Quick Tax Facts” PDFs for several pieces of legislation, including the Small Business and Work Opportunity Act of 2007; Tax Relief and Health Care Act of 2006; and the Pension Protection Act of 2006.

     

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

    Bob Jensen's accounting software helpers are at http://www.trinity.edu/rjensen/Bookbob1.htm#AccountingSoftware


    Virtual Learning for Accounting Students

    Second Life (Membership is Free) --- http://secondlife.com/
    Also see --- http://en.wikipedia.org/wiki/Second_Life
    A Second Life Blog --- http://blog.secondlife.com/

    Videos --- Click Here

    "Accounting for Second Life," by Richard A. Johnson and Joyce M. Middleton, Journal of Accountancy, June 2008 --- http://www.journalofaccountancy.com/Issues/2008/Jun/AccountingforSecondLife 

    EXECUTIVE SUMMARY

    Second Life is a virtual world with education, public relations, and economic implications. CPA Island is the center of the public accounting profession in Second Life.

    At a minimum, CPA Island presents a creative communication medium to appeal to a new generation. This generation has grown up with high-speed Internet connectivity, instant messaging, and multiplayer online gaming.

    The spirit behind CPA Island goes beyond clearly demonstrating an awareness of the different skill set of this new generation. It embraces and celebrates these skills as important to the future of the accounting profession.

    The economic implications of Second Life are just now unfolding. Suspend disbelief, log on, and experience CPA Island and the other aspects of Second Life for yourself.

    Richard A. Johnson, CPA, Ph.D., and Joyce M. Middleton, CPA, Ph.D., are professors of accounting at Frostburg State University’s College of Business. Their e-mail addresses, respectively, are rjohnson@frostburg.edu and jmiddleton@frostburg.edu .

    Thanks to the pioneering efforts

    Instructors can create their own Second Life virtual learning worlds.
    Another great pioneer expert in Second Life is Steven Hornik at the University of Central Florida.

    Bob Jensen's threads on virtual learning and Second Life are at http://www.trinity.edu/rjensen/000aaa/thetools.htm#SecondLife


    The Bea Sanders/AICPA Innovation in Teaching Award  --- Click Here  http://ceae.aicpa.org/Resources/Scholarships+and+Awards/The+Bea+Sanders+AICPA+Innovation+in+Teaching+Award.htm

    American Accounting Association Awards --- http://aaahq.org/awards/InventoryofAwards08.pdf

    Introducing the New journalofaccountancy.com  (free) --- http://www.journalofaccountancy.com/Issues/2008/Nov/NovSmartStops.htm


    Peter, Paul, and Barney: An Essay on 2008 U.S. Government Bailouts of Private Companies ---
    http://www.trinity.edu/rjensen/2008Bailout.htm

     The Technology Industry in a Troubled Economy, 50 Slides from Mary Meeker, as served up by The Washington Post, November 6, 2008 --- Click Here
    These would be greatly improved if they were also narrated. But the graphs and tables are useful.


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

    AutoNation's Big Loss Traces Back to Detroit
    by Neal E. Boudette and Sharon Terlep
    The Wall Street Journal

    Nov 07, 2008
    Click here to view the full article on WSJ.com
     

    TOPICS: Advanced Financial Accounting, Business Segments, Goodwill, Impairment

    SUMMARY: The article reports on a business segment analysis undertaken by AutoNation which revealed profitability issues tied directly to automotive dealerships selling the Big Three U.S. auto makers' products. The segment analysis led to a write down of $1.46 billion "to cover a sharp decline in the value of dealerships selling vehicles made by General Motors Corp., Ford Motor Co. and Chrysler LLC. Without the charge, the auto retailer would have earned $44 million." Questions ask students to verify their determination of the analysis leading to this write-down (a goodwill impairment test) in the company's 10-Q filing for the quarter ended September 30, 2008, made on November 7, 2008. The filing also reveals that the company initiated segment reporting along these three product lines in this quarterly report.

    CLASSROOM APPLICATION: Goodwill impairment testing and segment reporting are covered in this article.

    QUESTIONS: 
    1. (Introductory) Describe AutoNation Inc.'s business, using some of the information about the three different business segments discussed in the article.

    2. (Introductory) How do each of AutoNation's three business segments differ in profitability?

    3. (Advanced) AutoNation's CEO Jackson states, "There has to be a justifiable return on capital." What is the problem with AutoNation's return on capital invested in the franchises selling automobiles from the Big Three U.S. manufacturers? In your answer, define the ratio "return on capital".

    4. (Advanced) What is a "noncash charge...to cover a sharp decline in the value of dealerships selling vehicles made by General Motors Corp., Ford Motor Co. and Chrysler LLC"? From what analysis do you think this charge stems?

    5. (Advanced) Why do you think that AutoNation analyzed this breakdown of sales and profitability into three categories for the first time in the third quarter of this year?

    6. (Advanced) Examine the AutoNation 10-Q filing for the quarter ended September 30, 2007, and filed on November 7, 2008, available at http://www.sec.gov/Archives/edgar/data/350698/000095014408008262/g16446e10vq.htm#104. Alternatively, click on the live link to AutoNation in the on-line WSJ article, click on SEC Filings in the left-hand column, and click on the html link to the 10-Q filing. Confirm your answers to questions 4 and 5 above with evidence from the financial statements. Describe and explain the significance of the evidence you find.

    7. (Advanced) "The large write-down means the company has very little value tied up in its Big Three stores." What might happen to reported income if these automobile dealership locations are sold?
     

    Reviewed By: Judy Beckman, University of Rhode Island
     

    "AutoNation's Big Loss Traces Back to Detroit," by Neal E. Boudette and Sharon Terlep, The Wall Street Journal, November 7, 2008 --- http://online.wsj.com/article/SB122598503324005039.html?mod=djem_jiewr_AC

    AutoNation Inc., the country's largest car-dealership chain, reported a $1.4 billion loss in the third quarter and left little doubt it sees Detroit as its problem.

    It also suggested that in the future it's likely to put more resources into stores selling foreign-made cars at the expense of those carrying Big Three vehicles.

    The loss, AutoNation's first quarterly setback since 1999, was the result of a noncash charge of $1.46 billion to cover a sharp decline in the value of dealerships selling vehicles made by General Motors Corp., Ford Motor Co. and Chrysler LLC. Without the charge, the auto retailer would have earned $44 million.

    This is the first time AutoNation has broken out earnings generated by its Big Three, import-brand and luxury-car dealerships, and they showed what a drag GM, Ford and Chrysler were on its business.

    In a telephone interview, Chairman and Chief Executive Michael J. Jackson said the earnings breakdown reveals "where the greatest weakness is and where the greatest strength is" in AutoNation's operations.

    He also said the breakdown will drive future decision-making and could result in allocating more capital to the franchises of import manufacturers like Toyota Motor Corp. and Honda Motor Co. and luxury nameplates like Mercedes-Benz and BMW AG.

    "There has to be a justifiable return on capital, and we are on a very different track with the domestic manufacturers than we are with the imports or premium-luxury" brands, he said.

    Big Three franchises account for almost half of AutoNation's 238 stores but generated just $23 million in pretax profit, only a fifth of the total and a decline of 57% from a year earlier. Import stores, which mainly include Toyota and Honda vehicles, produced pretax profit of $53 million, down 19%. Pretax profit from luxury franchises, which include Mercedes-Benz, BMW and Lexus, was $43 million, down 24%.

    AutoNation's loss was a reversal from its $72 million profit a year ago. It amounted to a per-share loss of $7.95, compared with a profit of 39 cents a share the year before. Revenue declined to $3.5 billion from $4.5 billion.

    Michael Maroone, AutoNation's chief operating officer, said the company is likely to join other large dealership chains in selling some of its Detroit-brand dealerships in the next few years. "As the industry moves forward, the auto retail landscape will include fewer domestic stores," he said.

    The large write-down means the company has very little value tied up in its Big Three stores. Most are located on real estate that AutoNation owns and could sell if it decided to close the stores, Mr. Jackson said.

    U.S. auto sales have been falling since the spring because of high gasoline prices and the sluggish economy. But the decline worsened in September and October as credit dried up for both consumers and dealers.

    In October, new-car sales fell 30% to a 25-year low, with the Big Three suffering the most. GM's sales fell 45%. Together the Detroit auto makers had 47% of the market, down from 51% a year ago.

    Bob Jensen's threads on Goodwill Impairment Issues are at http://www.trinity.edu/rjensen/Theory01.htm#Impairment

     


    We should not blame fair value accounting for the 2008 bank failures when, in point of fact, there were conflicts of interest among rating agencies that would've led to investment failures under any accounting system that did not disclose the conflicts of interest in the rating agencies themselves.

    From the Financial Clippings Blog on October 22, 2008 --- http://financeclippings.blogspot.com/

    I wrote earlier that credit rating agencies seem to be run like protection rackets..

    from CNBC
    In a hearing today before the House Oversight Committee, the credit rating agencies are being portrayed as profit-hungry institutions that would give any deal their blessing for the right price.

    Case in point: this instant message exchange between two unidentified Standard & Poor's officials about a mortgage-backed security deal on 4/5/2007:

    Official #1: Btw (by the way) that deal is ridiculous.

    Official #2: I know right...model def (definitely) does not capture half the risk.

    Official #1: We should not be rating it.

    Official #2: We rate every deal. It could be structured by cows and we would rate it.

    A former executive of Moody's says conflicts of interest got in the way of rating agencies properly valuing mortgage backed securities.

    Former Managing Director Jerome Fons, who worked at Moody's until August of 2007, says Moody's was focused on "maxmizing revenues," leading it to make the firm more "issuer friendly."

    November 6 reply fromn Paul Polinski [paulp_is@YAHOO.COM]

    Hi Bob.
    I'm not sure if this has been brought to the listserv yet, but the SEC's web cast for its roundtable on FAS no. 157
    (accessible at http://www.connectlive.com/events/secroundtable102908/ ) makes for interesting listening, as the different stakeholder groups, including banks, investors, accountants, and one academic (Ray Ball; o.k., two, if you count Tom Linsmeier as an FASB observer) discuss the role of mark-to-market on the financial markets.

    Paul

    From IAS Plus on November 1, 2008 --- http://www.iasplus.com/index.htm

    1 November 2008: IASB publishes fair value guidance
    The IASB has published educational guidance on the application of fair value measurement when markets become inactive. The guidance consists of a summary document prepared by IASB staff and the final report of the expert advisory panel established to consider the issue:
    • The summary document sets out the context of the expert advisory panel report and highlights important issues associated with measuring the fair value of financial instruments when markets become inactive. It takes into consideration and is consistent with recent documents issued by the US FASB and the US SEC.
    • The report of the expert advisory panel identifies practices that experts use for measuring the fair value of financial instruments when markets become inactive and practices for fair value disclosures in such situations. The report provides useful information and educational guidance about the processes used and judgements made when measuring and disclosing fair value.
    Here are links to:

    You may also want to take a look at the following working paper:
    Some Fair Values are Fairer than Others and Few if Any are True Values,” by G. Peter Wilson, Boston College ---
    http://commons.aaahq.org/files/1b268f3cc0/Some_Fair_Values_are_Fairer_than_Others.pdf

    Bob Jensen's threads on credit rating industry frauds are at http://www.trinity.edu/rjensen/FraudRotten.htm#CreditRatingAgencies  

    Accounting for CDOs (including journal entries) under U.S. and Foreign GAAP --- http://www.trinity.edu/rjensen/TheoryOnFirmCommitments.htm

    Bob Jensen's threads on fair value accounting --- http://www.trinity.edu/rjensen/theory01.htm#FairValue


    Question
    How do you account for and bail out a company with over $1 trillion in assets that has ownership contracting that the best experts cannot untangle?
    Did you ever think Osama Bin Laden may be in for some of these bailout billions from our taxpayers?
    Corporate contracting is becoming incomprehensible!

    Denny Beresford forwarded this link to me.
    "The Professor’s Pop Quiz: Who Controls A.I.G.?" by Steven M. Davidoff, Dealbook.com, November 18, 2018 --- http://dealbook.blogs.nytimes.com/2008/11/18/the-professors-pop-quiz-who-controls-aig/?ei=5070&emc=eta1

    The terms of the government’s investment in the American International Group were released last week. After reading these terms, I have a multiple-choice question.

    Who controls A.I.G.? Is it:

    1) The Federal Reserve
    2) The Department of the Treasury
    3) The current shareholders of A.I.G. (but not the government)
    4) All of the above collectively
    5) No one knows

    The best answer I can discern right now is number 5. The deal has become much more complicated than it was before, but the control rights over A.I.G. appear to be as follows:

    1. In exchange for its $40 billion preferred share injection under the Emergency Economic Stabilization Act, the government is getting a 10 percent dividend on these shares (plus A.I.G.’s agreement to restrictions on lobbying), the same limitations on executive compensation as in other preferred equity injections, a further limitation on annual bonus pools for senior partners not to exceed 2007 and 2006 levels, and compliance with an expense policy. As for control rights — the $40 billion preferred is nonvoting except on certain major issues affecting the preferred. If A.I.G. misses dividend payments for four consecutive quarters, the Treasury has the right under the terms of this preferred stock to elect two directors and a number of directors (rounded upward) equal to 20 percent of the total number of directors after giving effect to such election.

    2. In exchange for the new $60 billion Federal Credit Facility (down from $85 billion), the Federal Reserve obtains the general rights of a creditor including senior security over A.I.G.’s unregulated subsidiaries, but no real governance rights except for some negative covenants limiting A.I.G.’s operations and expenditures.

    3. Finally, the government is receiving 100,000 Series C preferred shares convertible into 77.9 percent of A.I.G.’s outstanding common stock. This second preferred stock has a vote equal to 77.9 percent of A.I.G.’s share capital and is entitled to 77.9 percent of any dividends paid by A.I.G. on its common stock.

    Thus, whoever controls these Series C preferred shares controls A.I.G. These Series C shares, the stock that will vote and control A.I.G., will be owned by is a trust for the benefit of the Treasury Department. The trust is called the A.I.G. Credit Facility Trust. And who are the trustees of this trust and the controllers of A.I.G.? I have no idea nor have I seen any public disclosure on the issue except for news reports in October that these trustees would be appointed by the Fed and that there would be three of them. Moreover, under Section 5.11 of the original credit agreement, a provision that appears to be unamended in the new deal, A.I.G. “shall use all reasonable efforts to cause the composition of the board of directors of [A.I.G.] to be … satisfactory to the Trust in its sole discretion.”

    So, why this oddity? I must admit, I am puzzled. Perhaps it is related to accounting or some other legal requirement? But I also suspect it may be political — the government does not want to control A.I.G. directly. Rather, it is preserving some separation of ownership and control to bar future administrations from political meddling (read the Obama administration). This is probably a worthy goal — allowing A.I.G. to operate on an economic basis protected from political meddling.

    However, there should be adequate oversight of the trust and some mechanisms to prevent the trustees from obtaining their own private benefits from controlling A.I.G. and its $1 trillion in assets. In addition, the trustees themselves should be chosen for their acumen and ability to right the sinking A.I.G. ship. Here, the government could begin by disclosing the terms of this trust once they are drafted.

    Jensen Comment
    What's even more comical is that accounting standards for various purposes, such as when implementing securitization accounting under FAS 140, are heavily dependent upon the "degree of control" irrespective of actual number of equity shares owned. How do such standards get implemented when top experts have no idea who controls what and for how long? Real life just is not as simple as what we teach in Accounting 101.

    What do you want to bet that lucrative consulting contracts are being given to Andy Fastow to draft these ownership and control contracts? Here's an example of one that Andy cut his teeth on --- http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm

    Bob Jensen's essay on the bailout mess is at http://www.trinity.edu/rjensen/2008Bailout.htm

     


    Selling New Equity to Pay Dividends:  Reminds Me About the South Sea Bubble of 1720 ---
    http://en.wikipedia.org/wiki/South_Sea_bubble

    "Fooling Some People All the Time"

    "Melting into Air:  Before the financial system went bust, it went postmodern," by John Lanchester, The New Yorker, November 10, 2008 --- http://www.newyorker.com/arts/critics/atlarge/2008/11/10/081110crat_atlarge_lanchester

    This is also why the financial masters of the universe tend not to write books. If you have been proved—proved—right, why bother? If you need to tell it, you can’t truly know it. The story of David Einhorn and Allied Capital is an example of a moneyman who believed, with absolute certainty, that he was in the right, who said so, and who then watched the world fail to react to his irrefutable demonstration of his own rightness. This drove him so crazy that he did what was, for a hedge-fund manager, a bizarre thing: he wrote a book about it.

    The story began on May 15, 2002, when Einhorn, who runs a hedge fund called Greenlight Capital, made a speech for a children’s-cancer charity in Hackensack, New Jersey. The charity holds an annual fund-raiser at which investment luminaries give advice on specific shares. Einhorn was one of eleven speakers that day, but his speech had a twist: he recommended shorting—betting against—a firm called Allied Capital. Allied is a “business development company,” which invests in companies in their early stages. Einhorn found things not to like in Allied’s accounting practices—in particular, its way of assessing the value of its investments. The mark-to-market accounting that Einhorn favored is based on the price an asset would fetch if it were sold today, but many of Allied’s investments were in small startups that had, in effect, no market to which they could be marked. In Einhorn’s view, Allied’s way of pricing its holdings amounted to “the you-have-got-to-be-kidding-me method of accounting.” At the same time, Allied was issuing new equity, and, according to Einhorn, the revenue from this could be used to fund the dividend payments that were keeping Allied’s investors happy. To Einhorn, this looked like a potential Ponzi scheme.

    The next day, Allied’s stock dipped more than twenty per cent, and a storm of controversy and counter-accusations began to rage. “Those engaging in the current misinformation campaign against Allied Capital are cynically trying to take advantage of the current post-Enron environment by tarring a great and honest company like Allied Capital with the broad brush of a Big Lie,” Allied’s C.E.O. said. Einhorn would be the first to admit that he wanted Allied’s stock to drop, which might make his motives seem impure to the general reader, but not to him. The function of hedge funds is, by his account, to expose faulty companies and make money in the process. Joseph Schumpeter described capitalism as “creative destruction”: hedge funds are destructive agents, predators targeting the weak and infirm. As Einhorn might see it, people like him are especially necessary because so many others have been asleep at the wheel. His book about his five-year battle with Allied, “Fooling Some of the People All of the Time” (Wiley; $29.95), depicts analysts, financial journalists, and the S.E.C. as being culpably complacent. The S.E.C. spent three years investigating Allied. It found that Allied violated accounting guidelines, but noted that the company had since made improvements. There were no penalties. Einhorn calls the S.E.C. judgment “the lightest of taps on the wrist with the softest of feathers.” He deeply minds this, not least because the complacency of the watchdogs prevents him from being proved right on a reasonable schedule: if they had seen things his way, Allied’s stock price would have promptly collapsed and his short selling would be hugely profitable. As it was, Greenlight shorted Allied at $26.25, only to spend the next years watching the stock drift sideways and upward; eventually, in January of 2007, it hit thirty-three dollars.

    All this has a great deal of resonance now, because, on May 21st of this year, at the same charity event, Einhorn announced that Greenlight had shorted another stock, on the ground of the company’s exposure to financial derivatives based on dangerous subprime loans. The company was Lehman Brothers. There was little delay in Einhorn’s being proved right about that one: the toppling company shook the entire financial system. A global cascade of bank implosions ensued—Wachovia, Washington Mutual, and the Icelandic banking system being merely some of the highlights to date—and a global bailout of the entire system had to be put in train. The short sellers were proved right, and also came to be seen as culprits; so was mark-to-market accounting, since it caused sudden, cataclysmic drops in the book value of companies whose holdings had become illiquid. It is therefore the perfect moment for a short-selling advocate of marking to market to publish his account. One can only speculate whether Einhorn would have written his book if he had known what was going to happen next. (One of the things that have happened is that, on September 30th, Ciena Capital, an Allied portfolio company to whose fraudulent lending Einhorn dedicates many pages, went into bankruptcy; this coincided with a collapse in the value of Allied stock—finally!—to a price of around six dollars a share.) Given the esteem with which Einhorn’s profession is regarded these days, it’s a little as if the assassin of Archduke Franz Ferdinand had taken the outbreak of the First World War as the timely moment to publish a book advocating bomb-throwing—and the book had turned out to be unexpectedly persuasive.

    In the case of Business Loan Express, Allied evidently was forced to pump another $12 million of equity into it to keep it going, and the subsidiary stopped paying dividends to the parent. But Allied still reported $19.7 milllion in interest income and fees from its subsidiary. And it chooses not to tell us how much money any of its subsidiaries really earned. In normal accounting, that would never be allowed. It should not be allowed here.
    Floyd Norris, "Allied Capital Barely Knows Its Subsidiary," The New York Times, March 1, 2007 --- http://norris.blogs.nytimes.com/tag/allied-capital/

    Heavy Insider Trading --- http://investing.businessweek.com/research/stocks/ownership/ownership.asp?symbol=ALD

    Allied's independent auditor is KPMG
    KPMG has a lot of problems with litigation --- http://www.trinity.edu/rjensen/fraud001.htm

    Bob Jensen's threads on the collapse of the Banking System are at http://www.trinity.edu/rjensen/2008Bailout.htm

    Bob Jensen's threads on fraud are at http://www.trinity.edu/rjensen/Fraud.htm
    Also see Fraud Rotten at http://www.trinity.edu/rjensen/FraudRotten.htm

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

    History of Fraud in America ---  http://www.trinity.edu/rjensen/415wp/AmericanHistoryOfFraud.htm


    Accounting Quizzes You Can Use --- http://www.accountingweb.com/quiz/

    Our ACEM friend Barbara Scofield added some quiz items on October 13 and again on October 6 and many earlier weeks.
    Thanks for sharing Barbara

    Funny metaphors used in high school essays --- http://help.com/post/124066-funny-metaphors-used-in-high-school
     A good sign they weren't plagiarized (except maybe from this site)

     


    Question
    What is the meaning of  Grenzplankostenrechnung?

    Answer
    Look it up in Wikipedia --- http://en.wikipedia.org/wiki/Grenzplankostenrechnung_(GPK)   


    Jury Nullification

    Before reading David's message below, readers may want to read about jury nullification at - http://en.wikipedia.org/wiki/Jury_Nullification 

    November 14, 2008 message from David Fordham, James Madison University [fordhadr@JMU.EDU]

    I'm surprised at how few Americans know of a concept called Jury Nullification.

    I received a summons to jury duty this week.  I was Candidate Number Four in the jury screening process.  Everything was going smoothly until the judge asked me, "Mr. Fordham, are you aware of any reason why you might not be able to apply the law of the Commonwealth to the facts in this case to arrive at a verdict in accordance with my instructions?"

    I was under oath.  I had promised to tell the truth. I knew of a reason.  So I decided to tell the truth.

    "Well, your Honor," I began, "I know about the concept of Jury Nullification and I --"

    "Stop!  Stop!" cried the judge, as the defense attorney knocked over his water glass and the prosecutor choked and had a coughing fit.  "Don't say anything more.  Bailiff, escort Mr. Fordham out this side door."

    "Can I get my coat?" I asked, since I'd left it on my chair in the gallery.

    "No, we'll bring it to you," snapped the judge.  "Just go, go."

    In the anteroom, the bailiff gave me back my cellphone, validated my parking pass, and delivered the usual "thank you for serving the citizens of your community, you're free to go now" speech.  "Oh, and use this back door here.  Don't go back into the courtroom or talk to anyone on your way out," he added.

    I understand full well why judges and lawyers don't want juries to know about Jury Nullification.  (And in spite of my cynical opinion of the courts, I realize there's more to it than just their attempt to maintain their complete control over the trial outcome.  I realize that given the nature of juries today, if everyone knew about Jury Nullification, we'd soon degenerate into a lawless anarchy and civilized society would soon disappear.)

    But at the same time, I also realize why Jury Nullification is so important as being the heart of theconcept of a "trial by your peers".  At the time the constitution was written, the founding fathers expected the juries to be made up of voters: educated men, men who had proven their abilities by owning land and managing operations, vestrymen, scholars, men who knew the need to look out for the common good and would work towards the welfare of the people at large.  It was felt that by and large, these men could be trusted to seek true justice, and could be trusted with the power to overrule unjust laws, whether an unjust legislative law, an unjust executive law or enforcement, or an unjust judicial or case law. The risk of abuse by a jury chosen from the people was seen as a small price to pay for the benefit of having a workable checks & balances against all three branches of government.

     Jury nullification is the embodiment of the trial by a jury of your peers.  Operating at the case level, it is a sharp and precise tool, -- in contrast to the only other check/balance on the judiciary: constitutional change, which the founding fathers deliberately made difficult since it has such a broad and universal application.

    It is my passionate belief that all Americans owe it to their fellow citizens to learn a little something of this concept and what it means.  I won't presume to name sources, anyone who wishes should be able to find multiple sources, whether encyclopedic, law texts, online references, etc.  Rest assured, you will get a diversity of opinion:  Jury Nullification is as controversial in the jurisprudence community as gay marriage, abortion, gun control, and the Patriot Act are among the general population!

    The concept has been consistently upheld and never overturned (and isn't likely to be) and thus it is a fact of our present-day life.  Of course, even merely admitting you know about this obligation of juries (to ensure justice is done regardless of the law, facts, or instruction) is apparently a good way to get dismissed from jury duty.   (It's funny that knowing your duty and admitting you know your duty results in your being prevented from doing your duty. Maybe we need to adopt a "don't ask don't tell" policy, eh?)

    Anyway, my students got their tests graded and returned on time.  Otherwise, I might still be in deliberations.

    Jury Nullification.  If you have some free time, look it up.  It might come in handy some day, you never know.

    David Fordham

     

    November 15, 2008 reply from Bob Jensen

    Hi David,

    In fairness David, the judge may have let you off the hook because he suspected that you might be a rabble rouser rather than because you knew about the laws of jury nullification. Unlike your friends like me, he might be suspect of your good intentions.

    I found your off-topic message extremely interesting, although it does extrapolate somewhat to the implementation of accounting standards where, in the judgment of auditors, a particular rule is terribly misleading if enforced. The auditors and their clients have the power in the standards to override the rule in a particular instance of financial reporting, but reasons must be documented. Of course this seldom works in tax accounting, but tax courts on occasion agree with a taxpayer's line of reasoning. 

    However, unlike juries in courts of law, the auditors and their financial reporting clients can be sued for millions of dollars such that auditors rarely invoke a nullification override. I can't recall a single example other than in tax court cases. Often auditor reports in financial statements refer to “other means” when a particular auditing rule could not be followed (such as in the case of property destroyed by fire) but this does not constitute auditor nullification of an accounting rule.

    I guess juries similarly do not invoke their nullification override. Most juries probably are ignorant of their nullification powers.

    I’m nearly always amazed at Wikipedia (except in the case of accountancy where Wikipedia is nearly always a disappointment). The Wikipedia module for "jury nullification" appears to be quite good as a short module --- http://en.wikipedia.org/wiki/Jury_Nullification

    What's interesting is how an argument might be made that IFRS judgmental standards that will replace US GAAP rules. In many instances IFRS international accounting standards are extensions of the jury nullification concept. Auditor judgment will soon override many US GAAP rules on a more frequent basis because of latitude granted by the IASB relative to the FASB.

    What we will soon need are accounting courts to resolve disputes between auditors and their clients regarding implementation of accounting standards and rules. The reason for that is that increasingly gigantic clients are bullying their auditors.

    By the way, you say that jury nullification has been “consistently upheld and never overturned.” Be careful of such language when you’re dealing with lawyers having millions of international cases at their fingertips in legal research. There’s probably some case somewhere in history that decided 1 lb is not 0.453592 kg in a particular instance.

     

    Bob Jensen

    Bob Jensen's threads on the transitioning of domestic accounting standards to international accounting standards can be found at http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting

     


    Question
    What did the PCAOB find, in its inspection reports, to be the biggest problem encountered in the area of auditor independence?

    Answer --- Prohibited Non-auditor Services

    The most common deficiency noted in the independence area involves preparation of an issuer's financial statements and related footnotes. Under the SEC's rules, an auditor is not independent of its audit client if the auditor maintains or prepares the audit client's accounting records, prepares source data underlying the audit client's financial statements, or prepares the audit client's financial statements that are filed with the SEC.28/ Even when dealing with inexperienced accounting personnel in small public companies, auditors cannot provide these prohibited non-audit services to these issuer audit clients. In some cases, the deficiency consisted of the preparation of a portion of the issuer's financial statements (such as the statement of cash flows) or of the statements or disclosures in a single, specialized area (such as the income tax provision and the related deferred tax asset and liability balances). Even these more limited preparation services impair the firm's independence. Other identified deficiencies include instances in which firms provided bookkeeping services by, for example, maintaining the trial balance or the fixed asset subledger, classifying expenditures in the general ledger, preparing the consolidating schedules, or preparing and posting journal entries to record transactions or the results of calculations. In other instances, firms prepared source data underlying their issuer audit client's financial statements by, for example, determining the fair values assigned to intangible assets acquired in a business combination or to stock options and warrants, or calculating depreciation expense and accumulated depreciation.
    PCAOB Release No. 2007-010 October 22, 2007 --- http://www.pcaobus.org/Inspections/Other/2007/10-22_4010_Report.pdf
     

    Jensen Comment
    I mention this because as we move under the joint IASB-FASB era of fair value accounting, auditors will be under increased pressures to assist clients struggling with how to measure fair value. I'm not opposed to requiring fair value accounting for financial assets and to footnote disclosures of fair values of many non-financial items.

    I am avoiding at this point any discussion of booking fair values of non-financial items for which there is no practical means of estimating value in use --- http://www.trinity.edu/rjensen/theory01.htm#FairValue

    There are of course many other audit deficiencies other than independence that are mentioned in this PCAOB Release, particularly problems in revenue recognition. Students of accounting should definitely be assigned to study this report at http://www.pcaobus.org/Inspections/Other/2007/10-22_4010_Report.pdf 

    Bob Jensen's threads on audit professionalism and independence are at http://www.trinity.edu/rjensen/Fraud001.htm#Professionalism

    Bob Jensen's threads on valuation, intangibles, and other accounting theory issues are at http://www.trinity.edu/rjensen/theory01.htm

    November 3, 2008 reply from hnouri [hnouri@TCNJ.EDU]

    I am not sure I understand this lack of independence issue. Suppose I, as the auditor, go to a client and the client gives me a set of financial statements. I perform the audit and see that provision of taxes is materially misstated. To come to that conclusion, I have to recalculate everything myself. After I find that my calculation and client calculations are not the same, I have to tell the client how I arrived at my estimation of provision for taxes . If the client agrees, then the client has two choices. Either do nothing and get a qualified or adverse opinion or adjust the books and get an unqualified report. So, Is this now considered helping clients which impairs independence? Does this mean that whatever material misstatements in an account the auditor finds s/he, for example, just should tell the client "there is a material difference between my calculation and your calculation of provision for taxes (without giving any further information), so get another accounting firm to help you find how I calculated provision for taxes?"

    Hossein Nouri, Ph.D., CPA, CFE, DABFA, CFSA
    Department of Accounting School of Business
    The College of New Jersey
    PO Box 7718 Ewing, NJ 08628-0718 Tel. (609) 771-2176 Fax (609) 637-5129

    Email: hnouri@tcnj.edu

     

    November 3, 2008 reply from Bob Jensen

    With all those certifications after your name, Hossein, I should be asking you for the answers.

    A somewhat similar problem is encountered by small companies that have interest rate swaps. Company C has no Bloomberg Terminal for deriving yield curves needed to value a swap. Audit Firm A has such a terminal and a lot of expertise in valuing swaps.

    Company C could ask Auditor A for help in valuing the swaps. But this would violate auditor independence rules. Instead, Company C must go to Bank B to get a value for the swap assuming Bank B has a Bloomberg Terminal. Suppose that current value is $1.4 million according to Bank B.

    Auditor A now verifies "independently" that the swap value is $1.4 million. This supposedly solves the independence problem because Auditor A is really verifying Company C's (outsourced) valuation of the swap.

    The kicker, however, is that both Bank B and Auditor A are using a Bloomberg Terminal that taps into identical yield curve database information. The fair value audit here is really form over substance. It has the appearance of independent verification when in fact it's really Bloomberg that provided the $1.4 million number to both Bank B and Auditor A.

    And for another kick, nobody audits Bloomberg's database for errors and bias aside from, maybe, Bloomberg. Who knows? He's pretty busy running for his third term as Mayor of NYC.

    In answer to your question Hossein, you must advise the client to go to some outsource expert to recalculate the "provision for taxes." But for the appearance of independence you as the auditor must never, never communicate with that outside expert who may, of course, end up being a dunderhead. Then you, of course, are left with two bad estimates for the tax provision that you must attest to in the audit. Next you must suggest that the client go find another dunderhead and another dunderhead and another . . . .

    The problem here Hossein is that you probably know too much about tax law. If you slept through those tax courses you would be a much more efficient auditor. Then you could believe in Dunderhead Number 1 and happily sign off on the audit.

    Of course if this was an interest rate swap instead or a tax provision, everybody would get the same happy number from the Bloomberg database.

    Now you've had your lesson in auditor independence. By the way, here's how to value interest rate swaps --- http://www.trinity.edu/rjensen/acct5341/speakers/133swapvalue.htm 
    The video tutorial is the 133ex05a.xls file is at http://www.cs.trinity.edu/~rjensen/video/acct5341/ 

    Bob Jensen


    November 3, 2008 reply from Jim Fuehrmeyer [mailto:jfuehrme@nd.edu]

    Let’s keep in mind that this PCAOB report relates to inspections from 2004 to 2006 of the small accounting firms – those auditing fewer than 100 issuers and most of these quite a bit fewer than 100. You’re not going to see this with larger firms.

    The actions described below are consistent with the historical relationship very small firms have had with their clients. The advent of the PCAOB will likely change that. Unfortunately, the PCAOB inspection reports don’t disclose exceptions of this nature in the public portions but it is worthwhile noting that many, if not most, of the small firm inspection reports issued thus far in 2008 contain no exceptions for violations of GAAP or PCAOB audit standards. It may be that the relationships described below have also gone by the wayside and those clients will be seeking valuation and reporting help from firms other than their auditors.

    Jim Fuehrmeyer
    Assoc. Professional Specialist
    384 Mendoza College of Business
    University of Notre Dame
    Notre Dame, IN 46556-5646
    574-631-1752 (office)
    574-631-5255 (fax)

     

     


    "Coming Soon ... Securitization with a New, Improved (and Perhaps Safer) Face,   Knowledge@Wharton, April 2, 2008 ---
    http://knowledge.wharton.upenn.edu/article.cfm;jsessionid=a83051431af9532a7261?articleid=1933

    Also note the following empirical study of whether securitizations are sales or loans.
    "Are Asset Securitizations Sales or Loans," by Wayne R. Landsman, Kenneth Peasnell, and Catherine Shakespeare, The Accounting Review, Vo. 83, No. 5, September 2008, pp. 1251-1272.

    "FASB Issues FSP Requiring Enhanced Disclosure for Credit Derivative and Financial Guarantee Contracts,"  by Mark Bolton and Shahid Shah, Deloitte Heads Up, September 18, 2008 Vol. 15, Issue 35 --- http://www.iasplus.com/usa/headsup/headsup0809derivativesfsp.pdf

    September 18, 2008

    Vol. 15, Issue 35

    The FASB recently issued FSP FAS 133-1 and FIN 45-4,1 which amends and enhances the disclosure requirements for sellers of credit derivatives (including hybrid instruments that have embedded credit derivatives) and financial guarantees. The new disclosures must be provided for reporting periods (annual or interim) ending after November 15, 2008, although earlier application is encouraged. The FSP also clarifies the effective date of Statement 161.2

    The FSP defines a credit derivative as a "derivative instrument (a) in which one or more of its underlyings are related to the credit risk of a specified entity (or a group of entities) or an index based on the credit risk of a group of entities and (b) that exposes the seller to potential loss from credit-risk-related events specified in the contract." In a typical credit derivative contract, one party makes payments to the seller of the derivative and receives a promise from the seller of a payoff if a specified third party or parties default on a specific obligation. Examples of credit derivatives include credit default swaps, credit index products, and credit spread options.

    The popularity of these products, coupled with the recent market downturn and the potential liabilities that could arise from these conditions, prompted the FASB to issue this FSP to improve the transparency of disclosures provided by sellers of credit derivatives. Also, because credit derivative contracts are similar to financial guarantee contracts, the FASB decided to make certain conforming amendments to the disclosure requirements for financial guarantees within the scope of Interpretation 45.3

    Credit Derivative Disclosures

    The FSP amends Statement 1334 to require a seller of credit derivatives, including credit derivatives embedded in hybrid instruments, to provide certain disclosures for each credit derivative (or group of similar credit derivatives) for each statement of financial position presented. These disclosures must be provided even if the likelihood of having to make payments is remote. Required disclosures include:

    In This Issue:

    • Credit Derivative Disclosures

    • Financial Guarantee Disclosures

    • Effective Date and Transition

    • Effective Date of Statement 161

    1 FASB Staff Position No. FAS 133-1 and FIN 45-4, "Disclosures About Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161."

    2 FASB Statement No. 161, Disclosures About Derivative Instruments and Hedging Activities.

    3 FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.

    4 FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.

    • The nature of the credit derivative, including:

    o The approximate term of the derivative.

    o The reason(s) for entering into the derivative.

    o The events or circumstances that would require the seller to perform under the derivative.

    o The status of the payment/performance risk of the derivative as of the reporting date. This can be based on a recently issued external credit rating or an internal grouping used by the entity to manage risk. (If an internal grouping is used, the entity also must disclose the basis for the grouping and how it is used to manage risk.)

    • The maximum potential amount of future payments (undiscounted) the seller could be required to make under the credit derivative contract (or the fact that there is no limit to the maximum potential future payments). If a seller is unable to estimate the maximum potential amount of future payments, it also must disclose the reasons why.

    • The fair value of the derivative.

    • The nature of any recourse provisions and assets held as collateral or by third parties that the seller can obtain and liquidate to recover all or a portion of the amounts paid under the credit derivative contract.

    For hybrid instruments that have embedded credit derivatives, the required disclosures should be provided for the entire hybrid instrument, not just the embedded credit derivative.

    Financial Guarantee Disclosures

    As noted previously, the FASB did not perceive substantive differences between the risks and rewards of sellers of credit derivatives and those of financial guarantors. With one exception, the disclosures in Interpretation 45 were consistent with the disclosures that will now be required for credit derivatives. To make the disclosures consistent, the FSP amends Interpretation 45 to require guarantors to disclose "the current status of the payment/performance risk of the guarantee."

    Effective Date and Transition

    Although it is effective for reporting periods ending after November 15, 2008, the FSP requires comparative disclosures only for periods presented that ended after the effective date. Nevertheless, it encourages entities to provide comparative disclosures for earlier periods presented.

    Effective Date of Statement 161

    After the issuance of Statement 161, some questioned whether its disclosures are required in the annual financial statements for entities with noncalendar year-ends (e.g., March 31, 2009). To address this confusion, the FSP clarifies that the disclosure requirements of Statement 161 are effective for quarterly periods beginning after November 15, 2008, and fiscal years that include those periods. However, in the first fiscal year of adoption, an entity may omit disclosures related to quarterly periods that began on or before November 15, 2008. Early application is encouraged.

     

    From The Wall Street Journal Accounting Weekly Review on June 13, 2008

     
    SEC, Justice Scrutinize AIG on Swaps Accounting
    by Amir Efrati and Liam Pleven
    The Wall Street Journal

    Jun 06, 2008
    Page: C1
    Click here to view the full article on WSJ.com ---
    http://online.wsj.com/article/SB121271786552550939.html?mod=djem_jiewr_AC
     

    TOPICS: Advanced Financial Accounting, Auditing, Derivatives, Fair Value Accounting, Internal Controls, Mark-to-Market Accounting

    SUMMARY: The SEC "...is investigating whether insure American International Group Inc. overstated the value of contracts linked to subprime mortgages....At issue is the way the company valued credit default swaps, which are contracts that insure against default of securities, including those backed by subprime mortgages. In February, AIG said its auditor had found a 'material weakness' in its accounting. Largely on swap-related write-downs...AIG has recorded the two largest quarterly losses in its history."

    CLASSROOM APPLICATION: Financial reporting for derivatives is at issue in the article; related auditing issues of material weakness in accounting for these contracts also is covered in the main article and the related one.

    QUESTIONS: 
    1. (Introductory) What are collateralized debt obligations (CDOs)?

    2. (Advanced) What are credit default swaps? How are these contracts related to CDOs?

    3. (Advanced) Summarize steps in establishing fair values of CDOs and credit default swaps.

    4. (Introductory) What is a material weakness in internal control? Does reporting write-downs of such losses as AIG has shown necessarily indicate that a material weakness in internal control over financial reporting has occurred? Support your answer.
     

    Reviewed By: Judy Beckman, University of Rhode Island
     

    RELATED ARTICLES: 
    AIG Posts Record Loss, As Crisis Continues Taking Toll
    by Liam Pleven
    May 09, 2008
    Page: A1
     



    Were AIG losses hidden early on by creative accounting?
    PwC is the external auditor of AIG

    "A Question for A.I.G.: Where Did the Cash Go?" by Mary Williams Walsh, The New York Times, October 29, 2008 --- http://www.nytimes.com/2008/10/30/business/30aig.html?dlbk

    The American International Group is rapidly running through $123 billion in emergency lending provided by the Federal Reserve, raising questions about how a company claiming to be solvent in September could have developed such a big hole by October. Some analysts say at least part of the shortfall must have been there all along, hidden by irregular accounting.

    “You don’t just suddenly lose $120 billion overnight,” said Donn Vickrey of Gradient Analytics, an independent securities research firm in Scottsdale, Ariz.

    Mr. Vickrey says he believes A.I.G. must have already accumulated tens of billions of dollars worth of losses by mid-September, when it came close to collapse and received an $85 billion emergency line of credit by the Fed. That loan was later supplemented by a $38 billion lending facility.

    But losses on that scale do not show up in the company’s financial filings. Instead, A.I.G. replenished its capital by issuing $20 billion in stock and debt in May and reassured investors that it had an ample cushion. It also said that it was making its accounting more precise.

    Mr. Vickrey and other analysts are examining the company’s disclosures for clues that the cushion was threadbare and that company officials knew they had major losses months before the bailout.

    Tantalizing support for this argument comes from what appears to have been a behind-the-scenes clash at the company over how to value some of its derivatives contracts. An accountant brought in by the company because of an earlier scandal was pushed to the sidelines on this issue, and the company’s outside auditor, PricewaterhouseCoopers, warned of a material weakness months before the government bailout.

    The internal auditor resigned and is now in seclusion, according to a former colleague. His account, from a prepared text, was read by Representative Henry A. Waxman, Democrat of California and chairman of the House Committee on Oversight and Government Reform, in a hearing this month.

    These accounting questions are of interest not only because taxpayers are footing the bill at A.I.G. but also because the post-mortems may point to a fundamental flaw in the Fed bailout: the money is buoying an insurer — and its trading partners — whose cash needs could easily exceed the existing government backstop if the housing sector continues to deteriorate.

    Edward M. Liddy, the insurance executive brought in by the government to restructure A.I.G., has already said that although he does not want to seek more money from the Fed, he may have to do so.

    Continuing Risk

    Fear that the losses are bigger and that more surprises are in store is one of the factors beneath the turmoil in the credit markets, market participants say.

    “When investors don’t have full and honest information, they tend to sell everything, both the good and bad assets,” said Janet Tavakoli, president of Tavakoli Structured Finance, a consulting firm in Chicago. “It’s really bad for the markets. Things don’t heal until you take care of that.”

    A.I.G. has declined to provide a detailed account of how it has used the Fed’s money. The company said it could not provide more information ahead of its quarterly report, expected next week, the first under new management. The Fed releases a weekly figure, most recently showing that $90 billion of the $123 billion available has been drawn down.

    A.I.G. has outlined only broad categories: some is being used to shore up its securities-lending program, some to make good on its guaranteed investment contracts, some to pay for day-to-day operations and — of perhaps greatest interest to watchdogs — tens of billions of dollars to post collateral with other financial institutions, as required by A.I.G.’s many derivatives contracts.

    No information has been supplied yet about who these counterparties are, how much collateral they have received or what additional tripwires may require even more collateral if the housing market continues to slide.

    Ms. Tavakoli said she thought that instead of pouring in more and more money, the Fed should bring A.I.G. together with all its derivatives counterparties and put a moratorium on the collateral calls. “We did that with ACA,” she said, referring to ACA Capital Holdings, a bond insurance company that was restructured in 2007.

    Of the two big Fed loans, the smaller one, the $38 billion supplementary lending facility, was extended solely to prevent further losses in the securities-lending business. So far, $18 billion has been drawn down for that purpose.

    Continued in Article

    From Jim Mahar's blog on October 31, 2008 --- http://financeprofessorblog.blogspot.com/

    First and foremost it gets to a serious question. Were the initial infusions (into AIG) by the government just a stop gap measure and will even more be needed. (The idea of throwing good money after bad comes to mind). Secondly in class yesterday we talked about information asymmetries and how accounting can only partially lessen the problem and that firms can have billions of dollars of losses that investors may not be aware of even after reading the financial statements. And finally a student in class is doing a paper on this and what the executives must have known (or at least should have known) before hand.

    Bob Jensen's threads on where the bailout money paid to AIG went are at http://www.trinity.edu/rjensen/2008Bailout.htm#Bailout
    Hint:  Think credit derivatives not backed with capital reserves

    If AIG executives knew about these problems early on, what did the auditor not insist on disclosing?
    Sounds like a massive class action lawsuit here for AIG shareholders who lost their investments.
    Bob Jensen's threads on PwC auditors are at http://www.trinity.edu/rjensen/Fraud001.htm

    Will the all Big Four auditing firms survive the forthcoming class action lawsuits? --- http://www.trinity.edu/rjensen/2008Bailout.htm#Auditors


    Although PwC is the newly designated auditor of the Bailout Program, appearances of conflict of interest just keep increasing since a huge and controversial recipient of Bailout funds is not only a PwC client, the recipient has now been convicted of accounting fraud dating back to Year 2000.

    Will government bailout money be used to pay AIG's court settlements?

    "A federal judge has ruled that shareholders of American International Group Inc. lost more than $500 million as a result of a scheme to manipulate the financial statements of the world's largest insurance company," AccountingWeb, November 3, 2008 --- http://accounting.smartpros.com/x63720.xml

    A federal judge has ruled that shareholders of American International Group Inc. lost more than $500 million as a result of a scheme to manipulate the financial statements of the world's largest insurance company.

    The ruling Friday by Judge Christopher Droney means five former insurance executives convicted of the scheme could face up to life in prison under advisory sentencing guidelines.

    Four former executives of General Re Corp. and a former executive of AIG were convicted in February of conspiracy, securities fraud, mail fraud and making false statements to the Securities and Exchange Commission.

    Prosecutors filed court papers citing a study by its expert, concluding the fraud-related losses to AIG shareholders totaled $1.2 billion to $1.4 billion.

    They cited another methodology by the expert that put the losses at $544 million to $597 million, but said either method is reasonable.

    Droney rejected the higher estimate, but said the lower range was reasonable. That finding and a determination that the fraud affected more than 250 victims will increase the advisory guideline sentence range.

    The guideline range and a sentencing date have not been set yet.

    The defendants challenged the estimate, saying there was no loss to investors. The defendants are Christopher Garand, Ronald Ferguson, Elizabeth Monrad, Robert Graham and Christian Milton.

    Ferguson has said in court papers that he anticipated the government will advocate a loss amount that leads to a recommendation for life in prison. But prosecutors made no such recommendation, simply concluding that the defendants should receive a "substantial" prison sentence.

    A report by the probation department recommended sentences of 14 years to more than 17 years for each defendant.

    Prosecutors said the defendants participated in a scheme in which AIG paid Gen Re as part of a secret side agreement to take out reinsurance policies with AIG in 2000 and 2001, propping up its stock price and inflating reserves by $500 million.

    Reinsurance policies are backups purchased by insurance companies to completely or partly insure the risk they have assumed for their customers.

    General Re is part of Berkshire Hathaway Inc., which is led by billionaire investor Warren Buffett of Omaha, Neb.

    Jensen Comment
    Just for the record --- I’m not the only one raising concerns about independence of the Bailout consultant and auditor, I provide reference to the following published in CFO.com:

    Carolina Selby wrote the following in CFO.com --- http://www.cfo.com/article.cfm/l_comments/12454494?context_id=2984378#4270

     

    PWC&EY contract for bailout

    I am very troubled that the government has chosen PwC as one of the firms to help with the internal controls on the $700b bail out which included AIG. PWC just recently agreed to one of the largest settlements in the public accounting history over a class-action law suit because of their carelessness in auditing AIG. What happened to the Sarbanes-Oxley requirements? Where were the auditors, controllers and CFO?s of these companies requiring the bailout? Something is fundamentally wrong. I fully agree with Lynn Turner, former CFO and former chief accountant of the SEC on the recent quote:


    When you look at the past and see where auditors didn't get the job done right, there were indicators that they didn't pay attention to,". "Auditors are going to need to take off the blinders."

    I was a former PwC employee and always thought highly of the caliber of training and values they taught me. In the last decade or so, however, public accounting firms are more worried about the bottom line than the significant value the profession can bring to troubled companies
    .

     David Newman wrote the following in CFO.com --- http://www.cfo.com/article.cfm/l_comments/12454494?context_id=2984378#4270

    Auditor Conflicts

    I hope there are no conflicts of interest, such as independence issues, of PwC, and Ernst and Young auditing the USA Federal Treasury while also consulting on accounting and internal control areas. The latter is indicated in the article. The auditing is not.

    Though some research indicates that the Government Accountability Office (GA) audits the Federal Treasury. Now the million dollar question: who audits the GAO?

    It appears it is Internal Audit and KPMG.
    http://www.gao.gov/press/peerreview_cleanopinion.pdf

     Jensen Comment

    All of the comments published may be dysfunctional at this point to our profession at this moment. I will not deliberately continue my search for evidence that other people in the world are raising the same concerns about independence of the Bailout auditor and consultant.

    Auditing has a huge image problem since all of the failed and failing banks (with Washington Mutual perhaps being the worst-case illustration) had clean audit reports prior to failing and wiping out shareholder equity. Even if the CPA Profession finds reasons and excuses for those clean opinions, the image of independence and value added by an audit is badly tarnished at this point. Paying those same auditing firms giving those clean opinions for failed banks millions of dollars in the government’s subsequent bailing out of PwC and E&Y banking clients seemingly adds to the tarnish at this point in time.

    Although AIG, that is now dependent upon billions in the government's Bailout Program in order to survive, AIG will have to come up with another $500 million from somewhere following the judge's October 31, 2008 ruling establishing the amount owing for its accounting fraud dating back to Year 2000.

    AIG admitted that it misled its PwC auditor.
    For its part in the AIG scandal, however, PwC settled separately when it paid $97.5 million to settle a class-action securities fraud lawsuit instigated by the Ohio State Attorney General's Office --- http://gist.whistlehog.com/items/show/188970
    This is considerably less that the initial $1.6 billion sought by AIG shareholders ---
    http://www.accountancyage.com/accountancyage/news/2200128/pwc-sued-shareholders
     

    Under censure from the SEC for compromising its independence AIG accounting fraud, Ernst & Young agreed to pay up $1.5 million to clients of AIG in 2007.

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

    Ernst Censure Over Independence, Agrees to $1.5 Million Settlement
    by Judith Burns
    Mar 27, 2007
    Page: C2
    Click here to view the full article on WSJ.com ---
    http://online.wsj.com/article/SB117495897778849860.html?mod=djem_jiewr_ac
     

    TOPICS: Accounting, Advanced Financial Accounting, Auditing, Auditing Services, Auditor Independence, Financial Accounting, Sarbanes-Oxley Act, Securities and Exchange Commission

    SUMMARY: Ernst & Young (E&Y) "was censured by the Securities and Exchange Commission (SEC) and will pay $1.5 million to settle charges that it compromised its independence through work it did in 2001 for clients American International Group Inc. and PNC Financial Services Group. "Regulators claimed AIG hired E&Y to develop and promote an accounting-driven financial product to help public companies shift troubled or volatile assets off their books using special-purpose entities created by AIG." PNC accounted incorrectly for its special purpose entities according to the SEC, who also said that "PNC's accounting errors weren't detected because E&Y auditors didn't scrutinize important corporate transactions, relying on advice given by other E&Y partners.

    QUESTIONS: 
    1.) What are "special purpose entities" or "variable interest entities"? For what business purposes may they be developed?

    2.) What new interpretation addresses issues in accounting for variable interest entities?

    3.) What issues led to the development of the new accounting requirements in this area? What business failure is associated with improper accounting for and disclosures about variable interest entities?

    4.) For what invalid business purposes do regulators claim that AIG used special purpose entities (now called variable interest entities)? Why would Ernst & Young be asked to develop these entities?

    5.) What audit services issue arose because of the combination of consulting work and auditing work done by one public accounting firm (E&Y)? What laws are now in place to prohibit the relationships giving rise to this conflict of interest?
     

     

     

    It appears that, when they were appointed by the 2008 Bailout Program as consultants and auditors, both PwC and E&W had already settled the AIG lawsuits. This is not the case for AIG itself that must come up with more cash.

    Jim Mahar writes as follows in his Finance Professor Blog on October 30, 2008

    From the NY Times Article A Question for A.I.G. - Where Did the Cash Go? - NYTimes.com:

     

    The American International Group is rapidly running through $123 billion in emergency lending provided by the Federal Reserve, raising questions about how a company claiming to be solvent in September could have developed such a big hole by October.....Mr. Vickrey says he believes A.I.G. must have already accumulated tens of billions of dollars worth of losses by mid-September, when it came close to collapse and received an $85 billion emergency line of credit by the Fed. That loan was later supplemented by a $38 billion lending facility.

    But losses on that scale do not show up in the company’s financial filings. Instead, A.I.G. replenished its capital by issuing $20 billion in stock and debt in May and reassured investors that it had an ample cushion....Mr. Vickery and other analysts are examining the company’s disclosures for clues that the cushion was threadbare and that company officials knew they had major losses months before....


    Professor Mahar Comment
    Several reasons for including this one. First and foremost it gets to a serious question. Were the initial infusions by the government just a stop gap measure and will even more be needed. (The idea of throwing good money after bad comes to mind). Secondly in class yesterday we talked about information asymmetries and how accounting can only partially lessen the problem and that firms can have billions of dollars of losses that investors may not be aware of even after reading the financial statements. And finally a student in class is doing a paper on this and what the executives must have known (or at least should have known) before hand.

    PwC'a auditors either ignored or missed the warning signs of accounting fraud at AIG
    For years, PricewaterhouseCoopers LLP gave a clean bill of financial health to American International Group Inc., only to watch the insurance giant disclose a long list of accounting problems this spring. But in checking for trouble, PwC might have asked the audit committee of AIG's board of directors, which is supposed to supervise the outside accountant's work. For two years, the committee said that it couldn't vouch for AIG's accounting. In 2001 and 2002, the five-member directors committee, which included such figures as former U.S. trade representative Carla A. Hills and, in 2002, former National Association of Securities Dealers chairman and chief executive Frank G. Zarb, reported in an annual corporate filing that the committee's oversight did "not provide an independent basis to determine that management has maintained appropriate accounting and financial reporting principles." Further, the committee said, it couldn't assure that the audit had been carried out according to normal standards or even that PwC was in fact "independent." While the distancing statement by the audit committee is not unprecedented, the AIG committee's statement is one of the strongest he has seen, said Itzhak Sharav, an accounting professor at Columbia University. "Their statement, the phrasing, all of it seems to be to get the reader to understand that they're going out of their way to emphasize the possibility of problems that are undisclosed and undiscovered, and they want no part of it." Language in audit committee reports ran the gamut . . .
    "Accountants Missed AIG Group's Red Flags," SmartPros, May 31, 2005 --- http://accounting.smartpros.com/x48436.xml

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

    Will the all Big Four auditing firms survive the forthcoming class action lawsuits? --- http://www.trinity.edu/rjensen/2008Bailout.htm#Auditors


    Anyone who lives within their means suffers from a lack of imagination.
    Oscar Wilde

    Guess who is now trying to promote  a new form of "sustainable capitalism?"
    Why it's Blood and Gore!

    Question
    If the liberal media, new market regulations, new taxes on higher wage earners and corporations, the raft of bank failures, unmanageable national debt, crippling entitlements, resurgent protectionism and militant unions, a plunging stock market, tort lawyers with class action lawsuits, costly national health care, fraud that's growing exponentially, newer mushy accounting standards, rising corruption in politics, gangland, Hollywood, and fundamentalist Islamic terrorists do not destroy capitalism in the United States, what's left to drive the final nail in the coffin of U.S. capitalism?

    Answer
    Environmental protection legislation and enforcement that send energy prices soaring and force entire industries to shut down because of cost barriers that make profitability and cost of capital unbearable for sustaining capitalism itself. But rising up like a phoenix from the smoldering cinders will be the Blood and Gore new form of sustainable capitalism.

     

    We Need Sustainable Capitalism
    by Al Gore and David Blood
    The Wall Street Journal
    Nov 05, 2008
    Click here to view the full article on WSJ.com
     

    TOPICS: Accounting, Capital Budgeting, Capital Spending, Entrepreneurship, Environmental Cleanup Costs

    SUMMARY: "The challenges of the climate crisis, water scarcity, income disparity, extreme poverty and disease must command our urgent attention." So argue former Vice President Al Gore and his managing partner in Generation Investment Management, an organization founded in 2004 "...to develop a new philosophy of investment management and business more broadly." They argued that "the causes of the current financial crisis include: short-termism (including but not limited to increased leverage), poor governance and regulation, misaligned compensation and incentive systems, lack of transparency, and in some firms, poor leadership and a dysfunctional business culture."

    CLASSROOM APPLICATION: The article is the second to allow students to discuss the implications of this week's presidential election on business topics in financial reporting, entrepreneurship and business decision-making.

    QUESTIONS: 
    1. (Introductory) From what political viewpoint do the authors of this opinion page piece hail? How does that influence the proposals they make regarding the state of both the economy and our environment?

    2. (Introductory) With regard to environmental issues, the authors quote Jonathan Lash, president of the World Resources Institute, who said, "Nature does not do bailouts." What are the implications of this statement for business?

    3. (Advanced) What do the authors mean by "short-termism"? How is leverage related to a short-term viewpoint? How is financial reporting of quarterly income for publicly-traded companies to our financial markets also related to this viewpoint?

    4. (Introductory) What is transparency? When is it evident that financial reporting achieves this notion of transparency?

    5. (Introductory) Messrs. Gore and Blood argue that "we need to internalize externalities-starting with a price on carbon" and that not placing such a price delays "...internalization of this obviously material cost." Though not all U.S. citizens agree with the argument that carbon emissions are a material cost, assume that it is the case. Why is this cost not visible in current reports of U.S. business performance? How would these authors propose to internalize this cost?

    6. (Introductory) Refer again to the statements in the question above by Messrs. Gore and Blood. What do they mean by stating that this is an "obviously material cost"? Are they using the term "material" in the same sense as it is used for accounting purposes? In your answer, provide this definition of materiality.

    7. (Advanced) The authors argue that the longer businesses delay internalizing costs of carbon emissions, "the greater risk the economy faces from investing in high carbon content, 'sub-prime' assets." What are these risks? What implications do they hold for business decisions on capital investments in projects to generate future revenues?

    8. (Introductory) Refer to the related article. What business investment decisions are being made in anticipation of political change in the areas of the environmental cleanliness and reduction of carbon emissions? List at least two responses and explain the factors influencing those decisions.

    9. (Advanced) Refer to you answer to the question above. What accounting information about environmental aspects of operations are needed to make those business decisions?
     

    Reviewed By: Judy Beckman, University of Rhode Island
     

    RELATED ARTICLES: 
    Business Braces for Cooler Climate
    by Elizabeth Williamson
    Nov 05, 2008
    Online Exclusive

    Boosting Clean Energy: Research is Nice, Cap-and-Trade is Nicer
    by Keith Johnson (blog posting)
    Oct 30, 2008
    Online Exclusive
     

    "We Need Sustainable Capitalism Nature does not do bailouts," by Al Gore and David Blood, The Wall Street Journal, November 5, 2008 --- http://online.wsj.com/article/SB122584367114799137.html?mod=djem_jiewr_AC

    When greeting old friends after a period of absence, Ralph Waldo Emerson used to ask: "What has become clear to you since we last met?"

    What is clear to us and many others is that market capitalism has arrived at a critical juncture. Even beyond the bailouts and recent volatility, the challenges of the climate crisis, water scarcity, income disparity, extreme poverty and disease must command our urgent attention.

    The financial crisis has reinforced our view that sustainable development will be the primary driver of economic and industrial change over the next 25 years. As a result, old patterns and assumptions are now being re-examined in an effort to find new ways to use the strengths of capitalism to address this reality. Indeed, at the Harvard Business School Centennial Global Business Summit held earlier this month, the future of market capitalism was one of the principal themes discussed.

    We founded Generation Investment Management in 2004 to develop a new philosophy of investment management and business more broadly. Our approach is based on the long-term, and on the explicit recognition that sustainability issues are central to business and should be incorporated in the analysis of business and management quality.

    Nearly five years on, our conviction on the importance of sustainability in delivering long-term performance has increased. Indeed, the past year, and certainly the past two months, has reinforced our view on sustainability. While certainly not a complete list, the causes of the current financial crisis include: short-termism (including but not limited to increased leverage), poor governance and regulation, misaligned compensation and incentive systems, lack of transparency, and in some firms, poor leadership and a dysfunctional business culture.

    Forty years ago, Robert F. Kennedy reminded Americans that the Dow Jones Industrial Average and Gross National Product measure neither our national spirit nor our national achievement. Both metrics fail to consider the integrity of our environment, the health of our families and the quality of our education. As he put it, "the Gross National Product measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to country. It measures everything, in short, except that which makes life worthwhile."

    The Keynesian system of "national accounts," which still serves as the backbone for determining today's gross domestic product, is incomplete in its assessment of value. Principally established in the 1930s, this system is precise in its ability to account for capital goods, but dangerously imprecise in its ability to account for natural and human resources.

    Business -- and by extension the capital markets -- need to change. We are too focused on the short term: quarterly earnings, instant opinion polls, rampant consumerism and living beyond our means. As we have often said, the market is long on short and short on long. Short-termism results in poor investment and asset allocation decisions, with disastrous effects on our economy. As Abraham Lincoln said at the time of America's greatest danger, "We must disenthrall ourselves, and then we will save our country."

    At this moment, we are faced with the convergence of three interrelated crises: economic recession, energy insecurity and the overarching climate crisis. Solving any one of these challenges requires addressing all three.

    For example, by challenging America to generate 100% carbon-free electricity within 10 years -- with the building of a 21st century Unified National Smart Grid, and the electrification of our automobile fleet -- we can encourage investment in our economy, secure domestic energy supplies, and create millions of jobs across the country.

    We also need to internalize externalities -- starting with a price on carbon. The longer we delay the internalization of this obviously material cost, the greater risk the economy faces from investing in high carbon content, "sub-prime" assets. Such investments ignore the reality of the climate crisis and its consequences for business. And as Jonathan Lash, president of the World Resources Institute recently said: "Nature does not do bailouts."

    Sustainability and long-term value creation are closely linked. Business and markets cannot operate in isolation from society or the environment.

    Today, the sustainability challenges the planet faces are extraordinary and completely unprecedented. Business and the capital markets are best positioned to address these issues. And there are clearly higher expectations for businesses, and more serious consequences for running afoul of the boundaries of corporate responsibility. We need to return to first principles. We need a more long-term and responsible form of capitalism. We must develop sustainable capitalism.

    Mr. Gore, chairman of Generation Investment Management, is a former vice president of the United States. Mr. Blood is managing partner of Generation Investment Management.

    Jensen Comment
    What the authors fail to answer is how capitalism or even the United States of America itself can be sustained while adding nearly $4 billion per day at the moment to the national debt. New forms of energy (synthetics, wind, geothermal, hydro, and nuclear) will take a massive infusion of capital. Where will it come from without destroying the U.S. dollar? How do we compete with nations who have no intention of producing cheaper energy with continued use of hydrocarbons such as China and India?

    Is Gore's envisioned new form of capitalism really sustainable or will the wheels of industry grind to a halt due to the high cost of energy under a 10-year mandate to eliminate carbon pollution? What happens if we start borrowing $10 billion per day over the next 10 years?

    Maybe Blood and Gore Visible Hand Capitalism is the answer to sustainability of capitalism, but I do not see it in the above article. If our cows are burping and farting half the carbon pollution, I guess we can kill all the cows over the next 10 years. It might even be healthier to live without milk and meat! Put unemployed coal miners to work making candles. Oops! Candles emit carbon monoxide.

    Blood and Gore Capitalism will truly cause soaring inflation  --- I guess it's appropriate that Gore and Blood proposed "sustainable capitalism" for the survivors. Perhaps the television networks will capture it all in reality shows as we're sustaining ourselves.

    At least Obama is proposing a more realistic deadline of 2050.

    "Green Herring:  Obama tries to hide the costs of his global warming solution," by Jacob Sullum, Reason Magazine, November 5, 2008 --- http://www.reason.com/news/show/129866.html

    The Apollo Alliance, a coalition of environmentalists and labor unions, wants the federal government to spend $500 billion over 10 years to "build America's 21st century clean energy economy" and thereby "create more than five million high quality green-collar jobs." Barack Obama says he can accomplish the same goal for only $150 billion, which gives you a sense of how reliable these projections are.

    More fundamentally, both the Apollo Alliance and Obama, who has liberally borrowed from its ideas, mistakenly treat the manpower required to reduce greenhouse gas emissions as a measure of success, when it should be viewed as a cost to be minimized. Obama's "green jobs" rhetoric is part of his strategy to conceal the enormous expense associated with his plan to "transform our entire economy" and "build a new economy that is powered by clean and secure energy."

    Obama wants to "implement an economy-wide cap-and-trade program to reduce greenhouse gas emissions 80 percent by 2050." That is even more ambitious than the goal of a cap-and-trade bill that the Department of Energy estimates would cost between $444 billion and $1.3 trillion in reduced economic growth over two decades.

    Depending on how bad the effects of global warming are expected to be and how effective Obama's plan is at ameliorating them, such a sacrifice could be justified. But Obama has not made that case. Instead he has said, in essence: Sacrifice? What sacrifice?

    The basic problem addressed by a cap-and-trade system, which uses tradable permits to charge companies for the greenhouse gases they generate, is that people contribute to climate change without bearing the cost of their behavior. Like a carbon tax, which achieves the same result more explicitly, a cap-and-trade system works only if it makes energy use (and the emissions associated with it) more expensive.

    What are we to make, then, of Obama's promise to cushion the blow of rising gasoline prices and home heating bills by providing "emergency energy rebates"? That is exactly the opposite of what the government should do if it wants to encourage energy conservation and make alternative energy sources more competitive. "Under my plan of a cap-and-trade system," Obama admitted during an unusually candid interview with the San Francisco Chronicle in January, "electricity rates would necessarily skyrocket."

    If Obama's cap-and-trade plan works as advertised, it will create incentives for businesses to achieve greenhouse gas reductions as efficiently as possible. He nevertheless cannot resist centrally planning the response—for example, by arbitrarily requiring that 25 percent of the nation's electricity come from renewable resources by 2025, instead of letting the market decide what mix of conservation and alternative energy makes the most sense.

    A recent RAND Corporation study concludes that, without "dramatic progress in renewable energy technology," reaching this "25X'25" goal will mean "significantly increasing consumer costs." And the study did not consider "the transition and adjustment costs associated with initiating such a significant shift from fossil fuels to renewable energy technologies."

    Those costs involve not just the loss of jobs in carbon-intense parts of the economy but the loss of jobs that would be created if the resources used to mitigate global warming were available for other purposes. Obama and other "clean energy" boosters do not take those losses into account, acting as if every "green job" is a net gain to the economy.

    The Apollo Alliance goes so far as to brag that "renewable energy creates more jobs than coal," as if this were a selling point, as opposed to a sign of lower efficiency. It enthusiastically likens the creation of a "clean energy economy" to "the World War II industrial mobilization."

    The analogy is more telling than the alliance realizes: Like a war, the effort to dramatically reduce greenhouse gas emissions may be justified to prevent a more costly outcome. But the economic activity it generates has to be weighed against the destruction it causes, something the president-elect so far has shown no inclination to do.

    The National Debt has continued to increase an average of $3.93 billion per day since September 28, 2007!
    The National Debt Amount This Instant (Refresh your browser for updates by the second) --- http://www.brillig.com/debt_clock/
    History of the National Debt --- http://en.wikipedia.org/wiki/National_Debt 
    The crisis --- http://www.trinity.edu/rjensen/2008Bailout.htm#NationalDebt
    Entitlements --- http://www.trinity.edu/rjensen/entitlements.htm

    What do you project a carbon-free energy will do to the above graph over the next ten years of Blood and Gore Capitalism?

    Anyone who lives within their means suffers from a lack of imagination.
    Oscar Wilde

    A Sobering Paper from the University of Pennsylvania
    "Think the Credit Crisis Is Bad? Coalition Sees Bigger Problems Down the Road
    ,"  Knowledge@Wharton, October 29, 2008 ---
    http://knowledge.wharton.upenn.edu/article.cfm;jsessionid=9a30144044b07a406280?articleid=2077

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

    Bob,
    We have to stop this because we are getting to be like an old married couple finishing each other sentences. I believe sustainable capitalism is an oxymoron. As an old forestry major my notion of sustainability is a natural one, not a social or economic one. Margaret Mead gave a speech at UNC 25 years ago where she stated the major issue of the day: it is now a question of whether humans can survive. If one spends any time in the fields and woods, one observes that the detritus of one thing living there is the nurturance of something else.

    Thus, in the absence of us, there is little that could be identified as garbage. My old plant pathology teacher gave us a remarkable demonstration of the activity that is all around us that nobody pays any attention to but is essential for our survival. He swept aside a few leaves on the ground in the woods and there was a mycellium mat of a fungus, doing its bit to turn the detritus of the trees (leaves) into soil (along with the assistance of various ants, beetles, and centipedes). Soil in which the trees fruit would sprout and grow to take the tree's place when it died.

    I am sure some of the folks on this net have wondered on a cold winter day how do birds and other little forest creatures survive. They obviously do. And the energy source all of them rely upon exclusively is merely the sun. They don't need oil, gas, coal, nuclear, wind, biofuels -- none of that stuff. They survive on only what God (or whatever) provided them. There is also the law of the preservation of life (the peacekeeper law), which is why lions don't kill all of the wildebeest in an effort to establish who is the "wealthiest" lion. Wolves mark their territory only for the information of other wolves; we mark our territory to keep out everything we don't want there.

    When one understands sustainability in those terms, the task ahead of us is far more daunting, and a far greater moral challenge, than the happy talk about green capitalism. Having your cake and eating it to seems to be the Blood and Gore idea. All wealth is ultimately extracted from nature. As far as I know, no human being has been able to master the complexities of photosynthesis and produce food for himself. Food prices are rising; we may have reached the limits of the first green revolution, which depended on oil to a great extent.

    Many scientists are concerned that there is no next green revolution waiting in the wings. I love E.O. Wilson's observations that if the Aborigines lost electricity, they wouldn't even notice, but if Californians lost electricity, millions would die. The fragility of our life support system is far greater than any of us want to believe. Those little warm-blooded marsupials and rodents hiding in the shrubs to avoid being stepped on by dinosaurs got the last laugh. Who knows what little creatures are lurking in the underbrush to take our place. In geologic time, the meek maybe do inherit the earth.

    Paul

     


    Research Questions About the Corporate Ratings Game

    "How Good Are Commercial Corporate Governance Ratings?," by Bill Snyder, Stanford GSB News, June 2008 --- http://www.gsb.stanford.edu/news/research/larker_corpgov.html

    STANFORD GRADUATE SCHOOL OF BUSINESS—A study by Stanford law and business faculty members casts strong doubt upon the value and validity of the ratings of governance advisory firms that compile indexes to evaluate the effectiveness of a publicly held company’s governance practices.

    Enron, Worldcom, Global Crossing, Sunbeam. The list of major corporations that appeared rock solid—only to founder amid scandal and revelations of accounting manipulation—has grown, and with it so has shareholder concern. In response, a niche industry of corporate watchdog firms has arisen—and prospered.

    Governance advisory firms compile indexes that evaluate the effectiveness of a publicly held company’s governance practices. And they claim to be able to predict future performance by performing a detailed analysis encompassing many variables culled from public sources.

    Institutional Shareholder Services, or ISS, the best known of the advisory companies, was sold for a reported $45 million in 2001. Five years later, ISS was sold again; this time for $553 million to the RiskMetrics Group. The enormous appreciation in value underscores the importance placed by the investing public on ratings and advisories issued by ISS and its major competitors, including Audit Integrity, Governance Metrics International (GMI), and The Corporate Library (TCL).

    But a study by faculty at the Rock Center for Corporate Governance at Stanford questions the value of the ratings of all four firms. “Everyone would agree that corporate governance is a good thing. But can you measure it without even talking to the companies being rated?” asked David Larcker, codirector of the Rock Center and the Business School’s James Irvin Miller Professor of Accounting and one of the authors. “There’s an industry out there that claims you can. But for the most part, we found only a tenuous link between the ratings and future performance of the companies.”

    The study was extensive, examining more than 15,000 ratings of 6,827 separate firms from late 2005 to early 2007. (Many of the corporations are rated by more than one of the governance companies.) It looked for correlations among the ratings and five basic performance metrics: restatements of financial results, shareholder lawsuits, return on assets, a measure of stock valuation known as the Q Ratio, and Alpha—a measure of an investment’s stock price performance on a risk-adjusted basis.

    In the case of ISS, the results were particularly shocking. There was no significant correlation between its Corporate Governance Quotient (or CGQ) ratings and any of the five metrics. Audit Integrity fared better, showing “a significant, but generally substantively weak” correlation between its ratings and four of the five metrics (the Q ratio was the exception.) The other two governance firms fell in between, with GMI and TCL each showing correlation with two metrics. But in all three cases, the correlations were very small “and did not appear to be useful,” said Larcker.

    There have been many academic attempts to develop a rating that would reflect the overall quality of a firm’s governance, as well as numerous studies examining the relation between various corporate governance choices and corporate performance. But the Stanford study appears to be the first objective analysis of the predictive value of the work of the corporate governance firms.

    The Rock Center for Corporate Governance is a joint effort of the schools of business and law. The research was conducted jointly by Robert Daines, the Pritzker Professor of Law and Business, who holds a courtesy appointment at the Business School; Ian Gow, a doctoral student at the Business School; and Larcker. It is the first in a series of multidisciplinary studies to be conducted by the  Rock Center and the Corporate Governance Research Program 

    The current study also examined the proxy recommendations to shareholders issued by ISS, the most influential of the four firms. The recommendations delivered by ISS are intended to guide shareholders as they vote on corporate policy, equity compensation plans, and the makeup of their company’s board of directors. The researchers initially assumed that the ISS proxy recommendations to shareholders also reflect their ratings of the corporations.

    But the study found there was essentially no relation between its governance ratings and its recommendations. “This is a rather odd result given that [ISS’s ratings index] is claimed to be a measure of governance quality, but ISS does not seem to use their own measure when developing voting recommendations for shareholders,” the study says. Even so, the shareholder recommendations are influential; able to swing 20 to 30 percent of the vote on a contested matter, says Larcker.

    There’s another inconsistency in the work of the four rating firms. They each look at the same pool of publicly available data from the Securities and Exchange Commission and other sources, but use different criteria and methodology to compile their ratings.

    ISS says it formulates its ratings index by conducting “4,000-plus statistical tests to examine the links between governance variables and 16 measures of risk and performance.” GMI collects data on several hundred governance mechanisms ranging from compensation to takeover defenses and board membership. Audit Integrity’s AGR rating is based on 200 accounting and governance metrics and 3,500 variables while The Corporate Library does not rely on a quantitative analysis, instead reviewing a number of specific areas, such as takeover defenses and board-level accounting issues.

    Despite the differences in methodology, one would expect that the bottom line of all four ratings—a call on whether a given corporation is following good governance practices—should be similar. That’s not the case. The study found that there’s surprisingly little correlation among the indexes the rating firms compile. “These results suggest that either the ratings are measuring very different corporate governance constructs and/or there is a high degree of measurement error (i.e., the scores are not reliable) in the rating processes across firms,” the researchers wrote.

    The study is likely to be controversial. Ratings and proxy recommendations pertaining to major companies and controversial issues such as mergers are watched closely by the financial press and generally are seen as quite credible. Indeed, board members of rated firms spend significant amounts of time discussing the ratings and attempt to bring governance practices in line with the standards of the watchdogs, says Larcker.

    But given the results of the Stanford study, the time and money spent by public companies on improving governance ratings does not appear to result in significant value for shareholders.  


    Debt Versus Equity: Dense Fog on the Mezzanine Level
    Deloitte has submitted a Letter of Comment (PDF 277k) on the IASB's Discussion Paper: Financial Instruments with Characteristics of Equity. We strongly support development of a standard addressing how to distinguish between liabilities and equity. We do not support any of the three approaches outlined in the Discussion Paper, but we believe that the basic ownership approach is a suitable starting point. Below is an excerpt from our letter. Past comment letters are Here.
    IASPlus, September 5, 2008 --- http://www.iasplus.com/index.htm

    What is debt? What is equity? What is a Trup?
    Banks are going to create huge problems for accountants with newer hybrid instruments

    From Jim Mahar's Blog on February 6, 2005 --- http://financeprofessorblog.blogspot.com/

    The Financial Times has a very cool article on financial engineering and the development of securities that combine debt and equity-like features.

    FT.com / Home UK - Banks hope to cash in on rush into hybrid securities: "Securities that straddle the debt and equity worlds are not new. They combine features of debt such as regular interest-like payments and equity-like characteristics such as long or perpetual maturities and the ability to defer payments."

    "About a decade ago, regulated financial institutions started issuing so-called trust preferred securities, or Trups, which are functionally similar to preferred stock but can be structured to achieve extra benefits such as tax deductibility for the issuing company. Other hybrid structures have also been tried.

    But bankers were still searching for what several called the “holy grail” – an instrument that looked like debt to its issuer, the tax man and investors, but like equity to credit rating agencies and regulators.

    That goal came closer a year ago when Moody’s, the credit rating agency, changed its previously conservative policies, opening the door for it to treat structures with some debt-like features more like equity."

    The link to the Financial Times article ---
    http://news.ft.com/cms/s/e22d70f2-9674-11da-a5ba-0000779e2340.html

     


     


    The CAlCPA Tax Listserv

    September 4, 2008 message from Scott Bonacker [lister@bonackers.com]
    Scott has been a long-time contributor to the AECM listserv (he's a techie as well as a practicing CPA)

    I found another listserve that is exceptional -

    CalCPA maintains http://groups.yahoo.com/taxtalk/  and they let almost anyone join it.
    Jim Counts, CPA is moderator.

    There are several highly capable people that make frequent answers to tax questions posted there, and the answers are often in depth.

    Scott

    Bob Jensen's threads on blogs and listservs are at http://www.trinity.edu/rjensen/ListServRoles.htm


    "Pressure gauge," The Economist, August 21, 2008 --- http://www.economist.com/finance/displaystory.cfm?story_id=11985964

    IN THE weeks before Bear Stearns, a Wall Street bank, collapsed in March, nervous investors scanned not just its share price for a measure of its health, but the price of its credit-default swaps (CDSs), too. These once-obscure instruments, now widely enough followed that they have even earned a mention on an American TV crime series, clearly indicated that the firm’s days were numbered. The five-year CDS spread had more than doubled to 740 basis points (bps), meaning it cost $740,000 to insure $10m of its debt. The higher the spread, the greater the expectation of default.

    Once again, CDS spreads on Wall Street banks are pushing higher, having fallen in March after the Federal Reserve extended emergency lending facilities to them. Reportedly one firm, Morgan Stanley, is monitoring its own CDS spreads to assess the market’s perception of its corporate health; if they rise too high, it intends to cut back its lending. Whether the CDS market is accurately assessing the creditworthiness of Lehman Brothers, trading on August 20th at 376 bps, double the level in early May, will be the next test of its worth.

    There are some who doubt whether the CDS market is a reliable barometer of financial health. Though its gross value has ballooned in size from $4 trillion in 2003 to over $62 trillion, many of the contracts written on individual companies are thinly traded, lack transparency, and are prone to wild swings.

    Recent spikes in CDS spreads on the three largest Icelandic banks are a case in point. In July spreads on Kaupthing and Glitnir rose to levels 35% higher than those observed for Bear Stearns in the days before it was bought out, according to Fitch Solutions, part of the Fitch rating and risk group. But the panic subsided after they released second-quarter earnings. Insiders say CDSs are increasingly used for speculation as well as hedging, which creates distracting “noise” particularly when the markets are as fearful as they have been recently.

    On the other hand, although CDS spreads may overshoot, they do not generally stay wrong for long. Moody’s, another rating agency, says that market-implied ratings, such as those provided by CDS spreads, tally loosely with credit ratings 80% of the time. What is more, CDS spreads frequently anticipate ratings changes. Fitch Solutions reckons that the CDS market has anticipated over half of all observed ratings activities on CDS-traded entities as much as three months in advance. Though the magnitude of the moves may at times be unrealistic, the direction is usually at least as good a distress signal as the stock market.

    Damocles sword waiting to fall
    CDS = Credit Default Swap (or is the Credit Default Sword?)

    "Hedge Funds in Swaps Face Peril With Rising Junk Bond Defaults," by David Evans, Bloomberg, May 20, 2008 ---
    http://www.bloomberg.com/apps/news?pid=20601109&sid=aCFGw7GYxY14&refer=home

     

    "Credit Derivatives Get Spotlight," by Henny Sender, The Wall Street Journal, July 28, 2005; Page C3 --- http://online.wsj.com/article/0,,SB112249648941697806,00.html?mod=todays_us_money_and_investing

    A group of finance veterans released its report on financial-markets risk yesterday, highlighting the mixed blessing of credit derivatives, financial instruments that barely existed the last time the markets seized up almost seven years ago.

    "The design of these products allows risk to be divided and dispersed among counterparties in new ways, often with embedded leverage," the report of the Counterparty Risk Management Policy Group II states, adding that "transparency as to where and in what form risks are being distributed may be lost as risks are fragmented and dispersed more widely."

    Credit-default swaps are at the heart of the credit-derivatives market. They allow players to buy insurance that compensates them in the case of debt defaults. The market enables parties to hedge against company or even country debt, but the market's opacity makes it difficult for regulators and market participants to sort out who is involved in various trades.

    The report also notes that credit derivatives can potentially complicate restructurings of the debt of ailing companies and countries. "To the extent primary creditors use the credit-default swap market to dispose of their credit exposure, restructuring in the future may be much more difficult," the report says.

    Already, there have been cases where some banks have been accused of triggering defaults after they had already hedged their risk through the credit-derivatives markets. In other cases, when the cost of credit-default protection on a company has risen, market participants have taken that as a harbinger of more troubles to come, making it harder for a company to get financing, and thereby forcing it into a sale or a restructuring.

    Continued in article

    Bob Jensen's threads on Credit Derivative and Credit Risk Swap --- http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm#C-Terms
    Scroll down to "Credit Derivative and Credit Risk Swap."


    Question
    Where were the auditors when auditing those risky investments and bad debt reserves of the ailing banks?
    Answer:  Not sure.


    Where will the auditors be in after the shareholders in the failing banks lose all or almost all in the meltdowns?
    Answer: In court, because the shareholders are the fall guys not being bailed out in when banks declare bankruptcy or are bought out cheap just before declaring bankruptcy. Shareholder will understandably turn to the deep pocket auditors.

    "The harder they fall: Will the Big Four survive the credit crunch?" by Rob Lewis, AccountingWeb, October 2008 ---
    http://www.accountingweb.com/cgi-bin/item.cgi?id=106124

    Ever since Arthur Andersen left the market after its scandalous role in the fall of Enron, people have been asking how long it will be before another big firm follows suit. The (UK) Financial Reporting Council (FRC) has been trying ever since to make sure that the Big Four will be protected if found guilty of similar negligence. The introduction of limited liability should help, but given the accelerating meltdown of the global financial system, will it be enough?

    As always, and as was the case with Arthur Andersen, it will be events in America that determine the fate of the Big Four. This summer the U.S. Treasury's Advisory Committee of the Auditing Profession met in Washington and heard that between them the six largest firms had 27 outstanding litigation proceedings against them with damage exposure above $1 billion, seven of which exceed $10 billion. It is impossible to buy insurance that will cover such catastrophic liability and any one of them, if successful, could prove a fatal blow.

    That U.S. Treasury committee met again last week to discuss the viability of limited liability for auditors in the U.S., but the 21-strong panel decided against it. With that, the hope of some silver bullet solution to the Big Four's problems expired. Committee member Lynn Turner, formerly a chief accountant to the Securities and Exchange Commission (SEC), was plainly baffled such an idea had even been seriously suggested.

    "Do you believe that an auditor found to have been aware of financial reporting problems but never reporting them to the public should be the subject of liability caps or some type of litigation reform protecting them?" he asked. Turner summed the situation up nicely when he described the big accounting firms as a "federally mandated and authorized cartel" which was "too big to [be allowed to] fail".

    When Arthur Andersen went down six years ago, Turner had never been quite able to believe that the firm's bad behavior had really been all that anomalous. "It's beyond Andersen," he told CBS Frontline that same year, "it's something that's embedded in the system at this time. This notion that everything is fine in the system just because you can't see it is totally off-base."

    The credibility of the markets

    Looking at recent economic events, Turner's suspicions that the credibility of the markets were at stake has plainly proved prescient. So too may his belief that unethical accounting was not so much a case of a few bad apples, but a bad barrel.

    Consider some of the recent and outstanding claims against the biggest six firms. In Miami last August a jury ordered BDO Seidman to pay $521 million in damages for its negligence in a Portuguese bank audit; almost as much as the firm's estimated revenue for that year. In the U.S., banks and the shareholders of banks are perfectly prepared to go after auditors, and when they win they tend to win big. Note than when Her Majesty's Treasury hired the BDO's valuation partner Andrew Caldwell for the controversial Northern Rock valuation, they hired the man and not the firm. The firms are already worried enough about litigation.

    KPMG provides a clear example of how the credit crunch might cull the Big Four. The firm was already looking vulnerable before it hit: there was the 2005 'deferred prosecution' agreement with the New York Attorney's Office, the damning German probe into the Siemens bribery scandal, a lawsuit from superconductor company Vitesse for 'audit failures' and a minor fine from the UK's Joint Disciplinary Scheme (JDS) for allowing fraud to occur at Independent Insurance (it may only have been half a million, but it was the JDS' biggest fine to date). But when the subprime problems of U.S. lender New Century enter the picture, the damages involved escalate drastically.

    A U.S. Justice Department report has already concluded that KPMG either helped perpetrate the fraud at the mortgager or deliberately ignored it. Class-action lawsuits are already pending. Only weeks before the report was published the U.S. Supreme Court's Stone Ridge ruling immunized third party advisers like accountants and bankers from the disgruntled shareholders of other entities, but that may be not much of a shield. Of course, New Century might not be KPMG's biggest problem. That's probably the Federal National Mortgage Association, or Fannie Mae.

    Fannie Mae initiated litigation way back in 2006, and is trying to reclaim more than $2 billion from its old auditors. That's on top of the $400 million KPMG agreed to pay the SEC to settle the regulator's fraud allegations. Its defense so far has been one of complete innocence, asserting that Fannie Mae successfully hid all evidence of anything untoward. Now that the FBI is investigating the mortgage lender, such a position will have to be abandoned if incriminating evidence turns up. Ostensibly, the Federal investigation relates to Fannie Mae's relationship with ratings agencies, but you never know what will fall out of the closet.

    So KPMG is in a spot of bother, but it's not alone. Ernst and Young will almost inevitably see itself in court over the demise of its audit client Lehman Brothers. Similarly, PricewaterhouseCoopers is surely going to feel some heat for its auditing of what was once the world's largest insurance company, AIG, assuming the Northern Rock Shareholders Group doesn't take a pop at it first.

    Continued in article

    Bob Jensen's threads on the litigation woes of the large auditing firms are at http://www.trinity.edu/rjensen/Fraud001.htm


    Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161
    FASB, September 12, 2008 --- http://www.fasb.org/pdf/fsp_fas133-1&fin45-4.pdf


    Debt Versus Equity: Dense Fog on the Mezzanine Level
    Deloitte has submitted a Letter of Comment (PDF 277k) on the IASB's Discussion Paper: Financial Instruments with Characteristics of Equity. We strongly support development of a standard addressing how to distinguish between liabilities and equity. We do not support any of the three approaches outlined in the Discussion Paper, but we believe that the basic ownership approach is a suitable starting point. Below is an excerpt from our letter. Past comment letters are Here.
    IASPlus, September 5, 2008 --- http://www.iasplus.com/index.htm

    What is debt? What is equity? What is a Trup?
    Banks are going to create huge problems for accountants with newer hybrid instruments

    From Jim Mahar's Blog on February 6, 2005 --- http://financeprofessorblog.blogspot.com/

    The Financial Times has a very cool article on financial engineering and the development of securities that combine debt and equity-like features.

    FT.com / Home UK - Banks hope to cash in on rush into hybrid securities: "Securities that straddle the debt and equity worlds are not new. They combine features of debt such as regular interest-like payments and equity-like characteristics such as long or perpetual maturities and the ability to defer payments."

    "About a decade ago, regulated financial institutions started issuing so-called trust preferred securities, or Trups, which are functionally similar to preferred stock but can be structured to achieve extra benefits such as tax deductibility for the issuing company. Other hybrid structures have also been tried.

    But bankers were still searching for what several called the “holy grail” – an instrument that looked like debt to its issuer, the tax man and investors, but like equity to credit rating agencies and regulators.

    That goal came closer a year ago when Moody’s, the credit rating agency, changed its previously conservative policies, opening the door for it to treat structures with some debt-like features more like equity."

    The link to the Financial Times article ---
    http://news.ft.com/cms/s/e22d70f2-9674-11da-a5ba-0000779e2340.html


    A CPA Auditor in Deloitte Commits Felony Fraud Over Years of Managing Audits
    Question
    How should his fraud be disclosed on a victim's financial statements?

    October 31, 2008 message from Dennis Beresford [dberesfo@terry.uga.edu]

    Deloitte Says Partner Traded Illegally

    WILMINGTON, DEL. (CN) -
    Deloitte & Touche says a 30-year partner traded on inside information he got from audits, and lied about it for years. It sued Thomas P. Flanagan in Chancery Court. Flanagan "for 30 years was a partner" in Deloitte & Touche or a predecessor "until his abrupt resignation less than two months ago," Deloitte claims. It says he betrayed his trust and violated company policy by trading in securities of audit clients, including some of his own accounts, since 2005. "Compounding his wrongdoing, Flanagan repeatedly lied to Deloitte about his clandestine trading activities in annual written certifications, going to far as to conceal the existence of a number of his brokerage accounts to avoid detection of his improper conduct," Deloitte says. It says that both Deloitte and its clients have had to pay legal costs to investigate Deloitte's ability to continue as independent auditor, due to Flanagan's shenanigans. It seeks monetary damages. The complaint does not state, or estimate, how much Flanagan made from his alleged inside trades. Deloitte says that it still does not know the extent of them. Deloitte & Touche is represented by Paul Lockwood with Skadden Arps.

    http://www.courthousenews.com/2008/10/30/Deloitte_Says_Partner_Traded_Illegally.htm

     

    October 31, 2008 message from Dennis Beresford [dberesfo@terry.uga.edu]

    Bob,

    Here's a little more information. This is from the most recent 10-Q for USG. I understand that similar approaches were used in the other cases where this occurred.

    Note that the person in question was the "advisory partner" rather than engagement partner or concurring partner. Most of the large firms use senior partners in a similar "relationship management" way. So the person wouldn't necessarily have been involved in detailed auditing or review, but he might have been involved if there were significant judgmental issues that the engagement team needed to resolve. In this case it looks like D&T decided that wasn't the case.

    Denny

    ITEM 5. OTHER INFORMATION
    Since 2002, Deloitte & Touche LLP has served as the independent registered public accountants with respect to our financial statements. In September 2008, Deloitte advised us that they believed a member of Deloitte’s client service team that serves us had entered into two option trades involving our securities in July 2007. This individual had served as the advisory partner on Deloitte’s client service team for us from 2004 until September 2008. The advisory partner is no longer an active partner at Deloitte. Under the Deloitte client service model as we understand it, the role of an advisory partner is primarily to serve in a client-relationship maintenance and assessment role. Securities and Exchange Commission rules require that we file annual financial statements that are audited by registered independent public accountants. SEC rules also provide that when a partner serving in a capacity such as that of this advisory partner has an investment in securities of an audit client, the audit firm should not be considered independent with respect to that client. Based on our review of the former advisory partner’s role and activities, we do not believe that he had any substantive role or influenced any substantive portion of any audit or review of our financial statements. The former advisory partner attended many, but not all, of our audit committee meetings. At these meetings, he reviewed with the committee reports of the annual inspection of Deloitte conducted by the Public Company Accounting Oversight Board as well as Deloitte’s annual client service assessments. He did not review any substantive audit matters with the committee at any of these meetings or at any other time. The former advisory partner also met once or twice a year with our audit committee chair and once per year with the other members of our audit committee as well as our chief executive officer and chief financial officer. The stated purpose of these meetings was to foster and strengthen Deloitte’s ongoing relationship with us. The former advisory partner attended our annual meetings of shareholders as one of the Deloitte representatives attending those meetings. Neither the former advisory partner nor any other Deloitte representatives spoke at any of these meetings and no questions were asked of Deloitte. At the direction of our audit committee, we conducted an extensive investigation into the facts and circumstances of the extent of any involvement of the former advisory partner with our audit. We retained outside counsel and a consulting firm specializing in accounting issues to assist in this investigation. Outside counsel led the process and conducted personal interviews with the current and former lead client service partners, the concurring review partner, the current and former senior managers on our account and the tax matters partner, as well as the members of our audit committee and key members of our internal finance and accounting departments, including our chief financial

     

    Deloitte has sued its former partner --- http://www.accountingweb.com/cgi-bin/item.cgi?id=106418

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

    Bob Jensen's Fraud Updates --- http://www.trinity.edu/rjensen/FraudUpdates.htm


    Question
    Where were the auditors when reviewing bad debt allowances?

    Hint
    The were hiding behind the same reasons to be used again and again when fair value accounting is required by the IASB and the FASB.

    From The Wall Street Journal Accounting Weekly Review on September 12, 2008 ---
    http://online.wsj.com/article/SB122083722708908863.html?mod=djem_jiewr_AC

    No End Yet to the Capital Punishment
    by Peter Eavis
    The Wall Street Journal

    Sep 08, 2008
    Page: C10
    Click here to view the full article on WSJ.com ---
    http://online.wsj.com/article/SB122083722708908863.html?mod=djem_jiewr_AC
     

    TOPICS: Accounting, Allowance For Doubtful Accounts, Bad Debts, Banking, Financial Analysis, Financial Statement Analysis, Loan Loss Allowance, Reserves

    SUMMARY: "The chief problem at Fannie and Freddie -- an inadequate capital cushion against losses -- also bedevils large banks in the U.S. and Europe more than 12 months into the credit crunch. The broader strains now facing the markets are not as easily relieved by central banks or governments as the company specific crises at Fannie and Freddie or Bear Stearns earlier this year. Of course, central banks could cut interest rates in the face of this threat. The trouble is banks are being extra cautious, justifiably, about lending as the economy slows. And while banks are reluctant to lend, many are having problems borrowing to fund themselves. That is because the market's assessment of their creditworthiness is darkening."

    CLASSROOM APPLICATION: Couching the continued problems in credit markets in terms of adequacy of loan loss reserves can help students in accounting classes better understand the credit market issues--and put a real world example to the academic learning about the importance of the accrual for bad debts. The article therefore is useful in any financial or MBA accounting course covering bad debts and the impact of the accounting for loan losses on capital accounts. Questions also discuss a related article on the topic of Fannie Mae, Freddie Mac, and banks' preferred stock.

    QUESTIONS: 
    1. (Introductory) Describe the recent events undertaken by the U.S. government in relation to the Federal National Mortgage Association (nickname Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac). You may use the related articles to do so. In your answer, describe the roles of these entities in facilitating mortgage lending and home ownership across the U.S.

    2. (Introductory) The article states "the chief problem at Fannie and Freddie is an inadequate capital cushion against losses." Whether they are business accounts receivable for a company or mortgage loan receivables on a bank or mortgage entity's balance sheet, how do we establish an allowance for losses on receivables? How does this procedure help to properly present a receivable balance on the balance sheet and an uncollectable accounts expense on the income statement?

    3. (Introductory) What is the impact of recording an allowance for doubtful accounts on an entity's capital or stockholders' equity?

    4. (Advanced) What is the purpose of requirements for banks, Fannie Mae and Freddie Mac to maintain a "cushion" of capital? How is that "cushion" eroded when loan losses prove greater than previously anticipated?

    5. (Advanced) How is it possible that Fannie Mae and Freddie Mac have inadequate allowances for doubtful mortgage loans?

    6. (Advanced) Why is it likely that inadequate allowances for losses on loan and accounts receivable are established in times of significant change in the product market generating the receivables? Did such a change occur in mortgage loan markets?

    7. (Introductory) One of the related articles discusses the implications of the government takeover and its suspension of dividends on the value of Fannie Mae and Freddie Mac preferred stock. How does preferred stock differ from common stock? How are these types of ownership interests similar in cases of failure of the entity issuing them?

    8. (Advanced) Why do debtholders fare better than common and preferred shareholders in this case of government takeover or any case of corporate failure?

    9. (Advanced) Why might investors "view preferred stock as debt by another name"?
     

    Reviewed By: Judy Beckman, University of Rhode Island
     

    RELATED ARTICLES: 
    No Longer Preferred: A Lesson From Paulson
    by David Reilly and Peter Eavis
    Sep 08, 2008
    Page: C10

    Mounting Woes Left Officials with Little Room to Maneuver
    by Deborah Solomon, Sudeep Reddy and Susanne Craig
    Sep 08, 2008
    Page: A1

    U.S. Seizes Mortgage Giants
    by James R. Hagerty, Ruth Simon and Damina Palette
    Sep 08, 2008
    Page: A1
     

    "No End Yet to the Capital Punishment," by Peter Eavis and David Reilly, The Wall Street Journal, September 8, 2008; Page C10             http://online.wsj.com/article/SB122083722708908863.html?mod=djem_jiewr_AC 

    Investors may be tempted to see the government's takeover of Fannie Mae and Freddie Mac as the kind of cathartic action that marks a decisive turning point for the U.S. banking system and the wider stock market.

    But the chief problem at Fannie and Freddie -- an inadequate capital cushion against losses -- also bedevils large banks in the U.S and Europe more than 12 months into the credit crunch.

    While the capital shortage may not be as dire as at Fannie and Freddie, private banks can't count on a government rescue. Some will fail. Others will have to issue massive amounts of capital to shore up their shaky balance sheets.

    Make no mistake, the government's move to shore up Fannie and Freddie will likely give markets a short-term boost, especially if investors believe this can help underpin house prices in the U.S. But this move by the Treasury comes just as a new, more general threat looms: On top of U.S. economic problems, underlined by Friday's jump in the unemployment rate, the rest of the world is slowing.

    The broader strains now facing the markets are not as easily relieved by central banks or governments as the company specific crises at Fannie and Freddie or Bear Stearns earlier this year.

    Of course, central banks could cut interest rates in the face of this threat. Even the Federal Reserve has some room to cut the Fed Funds rate from 2%. That may be one reason bank stocks rallied Friday in the U.S. despite the dismal unemployment figure.

    Rate cuts would theoretically allow banks to harvest easy profits by borrowing more cheaply and lending to high-quality borrowers at attractive rates. The trouble is, banks are being extra cautious, justifiably, about lending as the economy slows.

    The shakeout of the past year has done almost nothing to improve the average U.S. household balance sheet. So while a government commitment to buy mortgage-backed securities, also announced Sunday, may cause mortgage rates to fall, banks may not want to lend at lower rates because they don't feel they're being compensated for the risks in this uncertain economy.

    And while banks are reluctant to lend, many are having problems borrowing to fund themselves. That is because the market's assessment of their creditworthiness is darkening.

    A closely followed yardstick that measures the gap between interbank lending rates and the expected federal-funds rate has widened beyond July's distressed levels. When this gap widens, banks are perceived to be riskier.

    Also, the cost of insuring against default by large banks is rising.

    The takeover of Fannie and Freddie could even worsen that sentiment, as investors grow even more cynical of regulatory measures of capital.

    For months, Fannie, Freddie, their regulator and other government officials have assured investors that measures of regulatory capital showed the mortgage firms weren't financially hobbled.

    The government's takeover shows this wasn't the case. Given that, investors are going to want concrete actions from banks, not continued pronouncements that losses on mortgage-related securities are only temporary and will one day bounce back.

    That will translate into highly dilutive issues of common stock, which will be necessary if banks are to raise capital to the levels required to reassure anxious funding sources.

    And that is why bank investors who place too much hope in the bailout of Fannie and Freddie could get burned.

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




    Complexities in the Definition of a Derivative Financial Instrument

    December 3, 2008 message from David Albrecht [albrecht@PROFALBRECHT.COM]

    Derivatives are contracts to be settled in the future. They have to be based on an asset, an index or a debt security.

    Derivative contracts can be entered into for hedging purposes or speculative purposes

    In the game of monopoly, there are several instances when there is a need for hedging (also known as insurance).

    Frequently, players need to go to jail. The penalties for going to jail are (1) payment of $50 for getting out of jail, and (2) payment of any rent on the first turn when emerging from jail. A trip around the board (40 squares) takes about 5 turns. I have no idea, over the long run, what is your chance of going to jail at least once during a trip around the board. My uninformed guess is that 20% of the time you travel around the board you will end up in jail.

    Early in the game, before there is much development of houses and hotels, your cost for going to jail is most likely only going to be $50. You may pay that immediately in cash, or you can attempt to roll doubles (a very bad strategy). All books on strategy for the game of Monopoly recommend paying the $50 and getting out of jail as quickly as possible if there are still unpurchased properties available.

    I think the expected value or cost of going to jail in such circumstance is $10. Sometimes you are lucky and never go to jail, sometimes you are unlucky and go to jail a lot.

    Later on in a game when an opponent has built hotels on St. James, Tennessee and New York (with rents of 900, 900 and 1,000), the cost of going to jail significantly increases when you consider that eventually you must exit jail and pay rent on any square upon which you land. For example, your odds of avoiding landing any orange property are about 65%. It's the 35% that is the killer.

    I think that as a sideline, a player could offer "going to jail"

    insurance every time someone reaches Go and starts a new trip around the board.

    As I read the literature on derivatives and accounting for derivatives, it seems to me that both sides of the contract qualify as derivatives and therefore need to be accounted for if each token is an SEC reporting token. The token purchasing the insurance is hedging, and the token offering the insurance is speculating. Do I have this right? If an accounting period ends while an insured token still has a reasonable probability of getting sent to jail, then the derivative contract must be valued at some estimate of fair value. Again, do I have this right?

    It also seems to me that depending on whether you are ahead or behind in a game, you might very well wish to offer and sell to other players an opportunity to make a pre-payment in exchange for a certain percentage of rent every time someone lands on your house or hotel, or you might wish to buy into such into either such arrangement. Aren't both sides of this contract for speculative purposes? On the other hand, you might want to offer rent discounts that expire after going around the board once. Again, wouldn't this be hedging for the party that purchases a rent discount and for speculation for the party that sells it?

    I think also, that options can be built into a game of monopoly. For example, upon acquiring the final piece of property that creates a color group monopoly and before making any sort of building plans, you could offer opponents an option to pay future rents at a fixed level. Of course, if you don't build enough houses or a hotel, then the option would not be exercises by the purchasing opponent, but it would be exercises if you had built enough houses or hotels.

    Of course, all sorts of speculative contracts could be entered into. For example, you might bet with opponent B that opponent C will go bankrupt on the current trip around the board. Isn't this also a derivative contract? It is entered into for speculative purposes, I presume. Another example would be to speculate (bet) on whether or not earnings reach a certain dollar amount for the coming accounting period.

    Are there any

     

    December 3m 2008 reply from Bob Jensen

    Hi David,

    I’ve never heard of a derivative contract on the net earnings of a company as a whole. The definition of “net earnings” is generally too complicated and subject to too many contingencies to get counterparties to agree on such complex contracts. I don’t think a net earnings hedge of an entire company would even be eligible for hedge accounting under either the FAS 133 or the IAS 39 standard.

    It is possible to lock in a profit on a contracted commodity notional by hedging both the future purchase price and the future selling price in separate derivative contracts, but this is not the same as net earnings of an entire firm. More commonly the firm already has a position (even ownership of the notional itself) and is locking in a profit on a specific amount of notional.

    Derivative contracts are written on more precise notionals and underlyings such as the price of a commodity or the default of a debt payment.

    You should probably make your definition of derivatives more precise by defining a notional, underlying (index), and net settlement (required in FAS 133 for hedge accounting but not in IAS 39).

    The Monopoly Game could add buying properties with credit (even with accelerated subprime mortgages) and credit derivative swaps (CDSs). It might also be a way of adding Black Swan Theory. But the game would probably become too complicated even for geeks.

    What distinguishes credit derivatives from commodity derivatives is the possibility that the entire notional may be lost in a credit derivative and the virtual impossibility that the notional may be lost in a commodity derivative --- unless the spot price of a commodity like corn, wheat, copper, and oil drops to zero which is not likely even under the Black Swan Theory.

    When Investor I enters into 40 corn futures contracts with Farmer F, most contracts are traded with a "net settlement clause" such the notional value of 100,000 bushels of corn "net settles" is never at risk. At settlement time, Farmer F and Investor I net settle on only the difference between the current spot price and the contracted future (strike) price. The corn itself never changes hands in a physical sense in futures markets. If Investor I really wants corn, he can then buy it at the spot price in the corn market even though his net price depends how he net settled his futures contracts in the futures market.

    Put more simply, there are no black swans in most commodity derivative trades, but there may be black swans in credit derivative trades --- http://en.wikipedia.org/wiki/Black_swan_theory
    There are also quite a few YouTube videos on the Black Swan Theory.

    To distinguish traditional financial securities from derivative financial securities for my students, I always compared bond sales (financial securities sales where the notional changes hands on the date of the sale) with interest rate swaps (derivative financial securities where the notional changes hands).

    When Investor I buys a bond for a $1 million notional from Debtor D, the risk of repayment is transferred from I to D the instant the $1 million is transferred to D.

    When A and B enter into an interest rate swap on a $1 million notional, the notional never changes hands such that the notional itself is never at risk. Net settlement (usually quarterly throughout the life of the swap) is based on the difference between the spot rate of interest and the contracted forward rate. This makes such swaps ideal hedges to convert variable rate bonds to fixed rate risk and vice versa.

     

     

    Credit derivative swaps are not interest rate swaps, and the notional of a credit derivative swap may be at risk if value of the notional itself drops to zero --- that black swan.

    If you are going to teach derivatives, the following distinctions between the FAS 133 and IAS 39 standards should be emphasized, although don't make too much of the fact that the IAS 39 definition does not require net settlement for hedge accounting. Most derivatives encountered when applying IAS 39 will net settle.

     

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

    The terminology related to IAS 39 is very complicated. Bob Jensen maintains an extensive online glossary of FAS 133 and IAS 39 terminology.[1] Entries related to IAS 39 are boxed in green, and entries related to DIG implementation guidelines are blocked in red.

    Paragraph 9 of IAS 39 reads, in part, as follows:

    The following terms are used in this Standard with the meanings specified:

    Definition of a derivative

    A derivative is a financial instrument or other contract within the scope of this Standard (see Paragraphs 2–7) with all three of the following characteristics:

    (a)           its value changes in response to the change in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract (sometimes called the 'underlying');

    (b)           it requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors; and

    (c)           it is settled at a future date.

     

    Later on this definition is elaborated in the following IAS 39 paragraphs:

     

    AG9        Typical examples of derivatives are futures and forward, swap and option contracts. A derivative usually has a notional amount, which is an amount of currency, a number of shares, a number of units of weight or volume or other units specified in the contract. However, a derivative instrument does not require the holder or writer to invest or receive the notional amount at the inception of the contract. Alternatively, a derivative could require a fixed payment or payment of an amount that can change (but not proportionally with a change in the underlying) as a result of some future event that is unrelated to a notional amount. For example, a contract may require a fixed payment of CU1,000 if six-month LIBOR increases by 100 basis points. Such a contract is a derivative even though a notional amount is not specified.

     

    AG10      The definition of a derivative in this Standard includes contracts that are settled gross by delivery of the underlying item (eg a forward contract to purchase a fixed rate debt instrument). An entity may have a contract to buy or sell a non-financial item that can be settled net in cash or another financial instrument or by exchanging financial instruments (eg a contract to buy or sell a commodity at a fixed price at a future date). Such a contract is within the scope of this Standard unless it was entered into and continues to be held for the purpose of delivery of a non-financial item in accordance with the entity's expected purchase, sale or usage requirements (see Paragraphs 5–7).

     

    AG11      One of the defining characteristics of a derivative is that it has an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors. An option contract meets that definition because the premium is less than the investment that would be required to obtain the underlying financial instrument to which the option is linked. A currency swap that requires an initial exchange of different currencies of equal fair values meets the definition because it has a zero initial net investment.

    AG12      A regular way purchase or sale gives rise to a fixed price commitment between trade date and settlement date that meets the definition of a derivative. However, because of the short duration of the commitment it is not recognised as a derivative financial instrument. Rather, this Standard provides for special accounting for such regular way contracts (see Paragraphs 38 and AG53–AG56).

     

    AG12A   The definition of a derivative refers to non-financial variables that are not specific to a party to the contract. These include an index of earthquake losses in a particular region and an index of temperatures in a particular city. Non-financial variables specific to a party to the contract include the occurrence or non-occurrence of a fire that damages or destroys an asset of a party to the contract. A change in the fair value of a non-financial asset is specific to the owner if the fair value reflects not only changes in market prices for such assets (a financial variable) but also the condition of the specific non-financial asset held (a non-financial variable). For example, if a guarantee of the residual value of a specific car exposes the guarantor to the risk of changes in the car's physical condition, the change in that residual value is specific to the owner of the car.[2]

     


    The above definition differs somewhat from the definition of a derivative financial instrument scoped into FAS 133. The key difference is in the concept of “net settlement.”

    Definitions of derivatives

    • IAS 39: Does not define “net settlement” as being required to be scoped into IAS 39 as a derivative such as when interest rate swap payments and receipts are not net settled into a single payment.
    • FAS 133: Net settlement is an explicit requirement to be scoped into FAS 133 as a derivative financial instrument.

    Implications: This is not a major difference since IAS 39 scoped out most of what is not net settled such as Normal Purchases and Normal Sales (NPNS) and other instances where physical delivery transpires in commodities rather than cash settlements. Also IAS 39 applies net settlement as a criterion in scoping a loan commitment into IAS 39.[3]

    And in B2 of IAS 39 we find the following examples of derivatives and examples of derivatives that are not scoped into IAS 39:



     

    Type of contract

    Main pricing-settlement variable (underlying variable)

    Interest rate swap

    Interest rates

    Currency swap (foreign exchange swap)

    Currency rates

    Commodity swap

    Commodity prices

    Equity swap

    Equity prices (equity of another entity)

    Credit swap

    Credit rating, credit index or credit price

    Total return swap

    Total fair value of the reference asset and interest rates

    Purchased or written treasury bond option (call or put)

    Interest rates

    Purchased or written currency option (call or put)

    Currency rates

    Purchased or written commodity option (call or put)

    Commodity prices

    Purchased or written stock option (call or put)

    Equity prices (equity of another entity)

    Interest rate futures linked to government debt (treasury futures)

    Interest rates

    Currency futures

    Currency rates

    Commodity futures

    Commodity prices

    Interest rate forward linked to government debt (treasury forward)

    Interest rates

    Currency forward

    Currency rates

    Commodity forward

    Commodity prices

    Equity forward

    Equity prices (equity of another entity)

     

    The above list is not exhaustive. Any contract that has an underlying may be a derivative. Weather derivatives cannot get hedge accounting under FAS 133. They were excluded in the original version of IAS 39, but an amendment in 2003 made it possible to get hedge accounting treatment if hedged item does not fall under other IFRS 4. The above list provides examples of contracts that normally qualify as derivatives under IAS 39. Moreover, even if an instrument meets the definition of a derivative contract, special provisions of IAS 39 may apply, for example, if it is a weather derivative (see IAS 39.AG1), a contract to buy or sell a non-financial item such as commodity (see IAS 39.5 and IAS 39.AG10) or a contract settled in an entity's own shares (see IAS 32.21–IAS 32.24). Therefore, an entity must evaluate the contract to determine whether the other characteristics of a derivative are present and whether special provisions apply.[4]

    Share-based employee compensation such as employee stock options (ESOs) is not scoped into either IAS 39 or FAS 133. Such compensation contracts are scoped in IFRS 2 and IAS 123(R).

    A loan obligation is a contract to make or receive a loan in the future. If it is a firm commitment in the sense of a specified rate of interest, its accounting depends a great deal whether or not the loan commitment will net settle due to changes in market rates of interest. FAS 133 is very clear that loan commitments that do not net settle are not required to be booked as derivative financial instruments, although certain problems of conflict between FAS 133 versus FAS 65 had to be resolved in Paragraphs A26-A33 if FAS 149.

    Loan commitments that net settle were more of a problem in IAS 39 since net settlement is not required in the IAS 39 definition of a derivative. However, IAS 39 added a net settlement condition for loan commitments as follows:

    BC15       Loan commitments are firm commitments to provide credit under pre-specified terms and conditions. In the IAS 39 implementation guidance process, the question was raised whether a bank's loan commitments are derivatives accounted for at fair value under IAS 39. This question arises because a commitment to make a loan at a specified rate of interest during a fixed period of time meets the definition of a derivative. In effect, it is a written option for the potential borrower to obtain a loan at a specified rate.

     

    BC16       To simplify the accounting for holders and issuers of loan commitments, the Board decided to exclude particular loan commitments from the scope of IAS 39. The effect of the exclusion is that an entity will not recognise and measure changes in fair value of these loan commitments that result from changes in market interest rates or credit spreads. This is consistent with the measurement of the loan that results if the holder of the loan commitment exercises its right to obtain financing, because changes in market interest rates do not affect the measurement of an asset measured at amortised cost (assuming it is not designated in a category other than loans and receivables).

     

    BC17       However, the Board decided that an entity should be permitted to measure a loan commitment at fair value with changes in fair value recognised in profit or loss on the basis of designation at inception of the loan commitment as a financial liability through profit or loss. This may be appropriate, for example, if the entity manages risk exposures related to loan commitments on a fair value basis.

     

    BC18       The Board further decided that a loan commitment should be excluded from the scope of IAS 39 only if it cannot be settled net.  If the value of a loan commitment can be settled net in cash or another financial instrument, including when the entity has a past practice of selling the resulting loan assets shortly after origination, it is difficult to justify its exclusion from the requirement in IAS 39 to measure at fair value similar instruments that meet the definition of a derivative.

     

    BC19       Some comments received on the Exposure Draft disagreed with the Board's proposal that an entity that has a past practice of selling the assets resulting from its loan commitments shortly after origination should apply IAS 39 to all of its loan commitments. The Board considered this concern and agreed that the words in the Exposure Draft did not reflect the Board's intention. Thus, the Board clarified that if an entity has a past practice of selling the assets resulting from its loan commitments shortly after origination, it applies IAS 39 only to its loan commitments in the same class.

     

    BC20       Finally, the Board decided that commitments to provide a loan at a below-market interest rate should be initially measured at fair value, and subsequently measured at the higher of (a) the amount that would be recognised under IAS 37 and (b) the amount initially recognised less, where appropriate, cumulative amortisation recognised in accordance with IAS 18 Revenue. It noted that without such a requirement, liabilities that result from such commitments might not be recognised in the balance sheet, because in many cases no cash consideration is received.

     

    BC20A   As discussed in paragraphs BC21–BC23E, the Board amended IAS 39 in 2005 to address financial guarantee contracts. In making those amendments, the Board moved the material on loan commitments from the scope section of the Standard to the section on subsequent measurement (Paragraph 47(d)). The purpose of this change was to rationalise the presentation of this material without making substantive changes.[5]

     

     

    Paragraph BC18 above especially brings IAS 39 closer to FAS 133 with respect to the net settlement criterion for loan commitments to be derivatives. Paragraph 4 of IAS 39 notes that installment payments are not the same as net settlements.

    If a loan commitment with a locked in rate of interest net settles and is booked as a derivative financial instrument, a hedge of this loan commitment cannot get hedge accounting. However, if the loan commitment does not net settle and is not booked, then the question of hedge accounting depends upon how the loan eventually will be carried when it is transacted and booked. If it will be carried at fair value, then hedge accounting is not allowed for any derivative that hedges this unbooked loan commitment. If the loan will be carried at amortized cost, however, fair value hedge accounting is available for the hedging derivative just as it is for a purchase commitment of inventory and fixed assets. Cash flow hedging makes no sense since there is no cash flow risk on a loan commitment that has a contracted interest rate.

    In matters of valuing loan commitments at fair value, if they meet the net settlement condition of a derivative and are booked at fair value, a question arises as to fair value measurement when future servicing rights are embedded in the value of the loan as is the case for most mortgage loans. A key paragraph of the SEC’s SAB 105 reads as follows:

    Facts: Bank A enters into a loan commitment with a customer to originate a mortgage loan at a specified rate. As part of this written loan commitment, Bank A expects to receive future net cash flows related to servicing rights from servicing fees (included in the loan's interest rate or otherwise), late charges, and other ancillary sources, or from selling the servicing rights to a third party. If Bank A intends to sell the mortgage loan after it is funded, pursuant to paragraph 6 of FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by FASB Statement No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities ("Statement 133"), the written loan commitment is accounted for as a derivative instrument and recorded at fair value through earnings (referred to hereafter as a "derivative loan commitment"). If Bank A does not intend to sell the mortgage loan after it is funded, the written loan commitment is not accounted for as a derivative under Statement 133. However, paragraph 7(c) of FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities ("Statement 159"), permits Bank A to record the written loan commitment at fair value through earnings (referred to hereafter as a "written loan commitment"). Pursuant to Statement 159, the fair value measurement for a written loan commitment would include the expected net future cash flows related to the associated servicing of the loan.[6]

     

    In summary, the loan commitment must in some instances be booked at fair value and in other instances it may be booked at fair value under the Fair Value Option (FVO) in FAS 159. However, FAS 159 makes fair value booking optional when it is not required under SAB 105, FAS 133, and FAS 149. If the loan commitment is not booked, the accounting for it would be much like the accounting for unbooked purchase/sale contracts illustrated by Bob Jensen.[7]

    Additional Considerations

     

    PwC in Comperio makes the following observation:

    SEC Staff Accounting Bulletin 105, Application of Accounting Principles to Loan Commitments (SAB 105), specifies that in estimating the fair value of loan commitments that are subject to FAS 133, an entity should exclude from its calculation the expected future cash flows related to the associated servicing of the loan. It is unclear whether the guidance in SAB 105 would also apply to loan commitments that are not subject to FAS 133 but are eligible for the FVO under FAS 159. The SEC Staff has requested that an industry group led by the Mortgage Bankers Association assist in resolving this issue[8]

     

    Also consider DIG Issue No. C-13 as amended by FAS 149. Pursuant to FAS 156, a mortgage banking enterprise may elect to subsequently measure (BOOKED) servicing assets and servicing liabilities at fair value with changes in fair value reported in the period in which they occur. By electing the Fair Value Measurement Method, the mortgage banking enterprise may simplify its objective for hedge accounting because the Fair Value Measurement Method requires income statement recognition of the changes in fair value of those servicing assets and servicing liabilities, which will potentially offset the changes in fair value of the derivative instruments in the same accounting period without designating formal FAS 133 hedging relationships. The FASB’s Accounting Standards Codification online database provides useful information regarding recognition of derivatives. Derecognition of derivatives is also discussed.[9]

     

    (i)                  Rationale and Synthesis

    There are occasional differences between IAS 39 and FAS 133 in terms of what types of contracts must be booked as derivative financial instruments. Some examples of differences and similarities are listed below:

    1.      FAS 133 requires that a derivative contract have at least one specified notional. IAS 39 makes some exceptions such as the exception illustrated in AG1 above. However, in nearly all cases derivatives have at least one specified notional upon which settlements are based. Paragraph B8 of IAS 39 also allows the notional to be variable in the case of foreign exchange (FX) hedging and illustrates this with a derivative settlement based on sales volume.

    2.      FAS 133 requires that contract payments be net settled with only the difference between what is owed being transmitted in cash. For example, in an interest rate swap, FAS 133 requires that the swap receivable be netted against the swap payable on each settlement date with only the net difference actually being transmitted. Paragraph B3 of IAS 39 allows that gross payments be swapped. There are, however, no cross payments of the notionals themselves used in calculating the interest payments. The net versus gross settlement differences in the two standards is generally not very important. If a derivative is likely to entail physical delivery in place of cash settlement, it is not scoped into either FAS 133 or IAS 39.

    3.      Both standards specify no initial investment or a very small investment (usually called a premium) that is nowhere close to the value of the notional of the contract. This is a main difference between a financial instrument (such as a bond or a purchase/sale contract) and a derivative financial instrument. The usual example of a small investment is the premium that is paid by the purchaser of an option to the writer (seller) of the option, although there can also be small premiums on other contracts such as interest rate swaps. Most forward, futures, and swap contracts have no initial investment and the risks involved are usually much less than the full value of the entire notional. IAS 39 allows interest rate swap payments to be prepaid without affecting the “no initial investment” constraint.[10] Like FAS 133, IAS 39 does not allow for prepayments at the full notional value of a forward contract.[11]

    4.      IAS 39 Paragraph B18 (g) allows some leeway as to whether companies want to account for credit default swaps as insurance contracts or derivative financial instruments. FAS 133 in general is more specific as to what is to be accounted for as insurance by standards other than FAS 133 relative to discretion permitted under IAS 39 for insurance-like derivatives. Although various international standards cover some aspects of insurance, IFRS 4 is the main standard for insurance accounting guidelines.

     

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

     


     

    [2] Extracted from IAS 39, Financial Instruments: Recognition and Measurement. © IASC Foundation.

    [3] Paragraph BC18 of IAS 39, Financial Instruments: Recognition and Measurement. © IASC Foundation.

    [4] Extracted from IAS 39, Guidance on Implementing. © IASC Foundation.

    [5] Extracted from IAS 39, Financial Instruments: Recognition and Measurement. © IASC Foundation.

    [6] SAB105 of the Securities Exchange Commission --- http://www.sec.gov/interps/account/sab105.htm

    [8] Comperio database available from PricewaterhouseCoopers --- https://www.pwccomperio.com/Common/Logon.aspx?ReturnUrl=%2f&https=true

    [9] FASB Accounting  Standards Codification online database  --- http://asc.fasb.org/home .
    Section 815-10 provides an introductory summary of accounting for derivative financial instruments.

    Recognition of derivatives for booking purposes is discussed in Section 815-25.

    Derecognition is discussed in Section 815-40.

    [10] Paragraphs B4 and B5 of IAS 39.

    [11] Paragraph B9 of IAS 39.

    You can read more about derivative financial instruments and their components at http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm




    Humor Between November 1 and November 30, 2008 --- http://www.trinity.edu/rjensen/book08q4.htm#Humor113008

    Humor Between October 1 and October 31, 2008 --- http://www.trinity.edu/rjensen/book08q4.htm#Humor103108

    Humor Between September 1 and September 30, 2008 --- http://www.trinity.edu/rjensen/book08q4.htm#Humor093008 

    Humor Between July 1 and August 31, 2008 --- http://www.trinity.edu/rjensen/book08q3.htm#Humor083108

    Humor Between June 1 and June 30, 2008 --- http://www.trinity.edu/rjensen/book08q2.htm#Humor063008

    Humor Between May 1 and May 31, 2008 --- http://www.trinity.edu/rjensen/book08q2.htm#Humor053108

    Humor Between May 1 and May 31, 2008 --- http://www.trinity.edu/rjensen/book08q2.htm#Humor053108

    Humor Between April 1 and April 30, 2008 --- http://www.trinity.edu/rjensen/book08q2.htm#Humor043008

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

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

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

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




    Humor Between November 1 and November 30, 2008

    In an attempt to understand the extent of cow flatulence on global warming, scientists in Argentina are strapping plastic bags to the backs of cows to capture their emissions.
    See an actual photograph  at --- http://www.physorg.com/news135003243.html
    Watch a good one catch on fire (methane will burn but this one may be faked) --- http://www.youtube.com/watch?v=5XYiC6n0CCk
    Hillary's reason for funding this type of "catch and release" research in the U.S.  --- http://www.youtube.com/watch?v=DlkxQMxJmEU
    The college prankster version --- http://www.youtube.com/watch?v=NsBa7v9sh1k
    Eddie Murphy thinks its all a game --- http://www.youtube.com/watch?v=QSZJJc3T1RQ
    Bad taste commentaries about this to ad nauseam on The View --- http://www.youtube.com/watch?v=br0Kn5w5kyw


    Forwarded by my Good Neighbors

    ITALIAN WOMEN

    An elderly Italian man lay dying in his bed. While suffering the agonies of impending death, he suddenly smelled the aroma of his favorite ravioli wafting up the stairs..

    He gathered his remaining strength, and lifted himself from the bed.

    Gripping the railing with both hands, he crawled downstairs.

    When he reached the bottom of the stairs, he leaned against the door frame, gazing into the kitchen, where if not for death's agony, he would have thought himself already in heaven, for there, spread out upon waxed paper on the kitchen table were hundreds of his favorite ravioli.

    Was it heaven? Or was it one final act of love from his wife of sixty years, seeing to it that he left this world a happy man?

    He threw himself towards the table, landing on his knees in a crumpled posture. His parched lips parted, the wondrous taste of the ravioli was already in his mouth.

    With a trembling hand he reached up to the edge of the table, when suddenly he was smacked with a wooden spoon by his wife.

    "Hands off!" she said. "Those are for the funeral."


    Forwarded from Niki

    The letter was sent to the principal's office after the school had sponsored a luncheon for the elderly. An old lady received a new radio at the lunch as a door prize and was writing to say thank you. This story is a credit to all humankind. Forward to anyone you know who might need a lift today.

    Dear Kean Elementary:

    God bless you for the beautiful radio I won at your recent senior citizens luncheon. I am 84 years old and live at the Sprenger Home for the Aged. All of my family has passed away. I am all alone now and it's nice to know that someone is thinking of me. God bless you for your kindness to an old forgotten lady.

    My roommate is 95 and has always had her own radio, but before I received one, she would never let me listen to hers, even when she was napping. The other day her radio fell off the nightstand and broke into a lot of pieces. It was awful and she was in tears. She asked if she could listen to mine, and I told her to kiss my diaper.

    Thank you for that opportunity.

    Sincerely,

    Edna


    Forwarded by Maureen

    A study conducted by UCLA's Department of Psychiatry has revealed that the kind of face a woman finds attractive on a man can differ depending on where she is in her menstrual cycle. For example: If she is ovulating, she is attracted to men with rugged and masculine features. However, if she is menstruating, or menopausal, she tends to be more attracted to a man with duct tape over his mouth and a spear lodged in his chest while he is on fire. No further studies are planned at this time.


    Forwarded by Maureen

    TEXAS BLONDES

    Three Blondes were all applying for the last available position on the Texas Highway Patrol.. The detective conducting the interview looked at the three of them and said, 'So y'all want to be cops, huh?'

    The blondes all nodded.

    The detective got up, opened a file drawer and pulled out a folder. Sitting back down, he opened it and pulled out a picture, and said, 'To be a detective, you have to be able to detect. You must be able to notice things such as distinguishing features and oddities such as scars and so forth.'

    So saying, he stuck the photo in the face of the first blonde and withdrew it after about two seconds.

    Now,' he said, 'did you notice any distinguishing features about this man?'

    The blonde immediately said, 'Yes, I did.. He has only one eye!'

    The detective shook his head and said, 'Of course he has only one eye in this picture! It's a profile of his face!

    You're dismissed!'

    The first blonde hung her head and walked out of the office.

    The detective then turned to the second blonde, said, 'What about you? Notice anything unusual or outstanding about this man?'

    'Yes! He only has one ear!'

    The detective put his head in his hands and exclaimed, 'Didn't you hear what I just told the other lady? This is a profile of the man's face! Of course you can only see one ear!! You're excused too!'

    The second blonde sheepishly walked out of the office.

    The detective turned his attention to the third and last blonde and said, 'This is probably a waste of time, but... 'He flashed the photo in her face for a couple of seconds and withdrew it, saying, 'All right, did you notice anything distinguishing or unusual about this man?'

    The blonde said, 'I sure did. This man wears contact lenses.'

    The detective frowned, took another look at the picture and began looking at some of the papers in the folder.

    He looked up at the blonde with a puzzled expression and said, 'You're absolutely right! His bio says he wears contacts! How in the world could you tell that by looking at his picture?'

    The blonde rolled her eyes and said, 'Well, Helloooo! With only one eye and one ear, he certainly can't wear glasses.'


    Forwarded by Maureen

    Miss Beatrice, the church organist, was in her eighties and had never been married. She was admired for her sweetness and kindness to all. One afternoon the pastor came to call on her and she showed him into her quaint sitting room. She invited him to have a seat while she prepared tea. as he sat facing her old Hammond organ, the young minister noticed a cut glass bowl sitting on top of it.

    The bowl was filled with water, and in the water floated, of all things, a condom!

    When she returned with tea and scones, they began to chat.

    The pastor tried to stifle his curiosity about the bowl of water and its strange floater, but soon it got the better of him and he could no longer resist. 'Miss Beatrice,' he said, 'I wonder if you would tell me about this?' pointing to the bowl. 'Oh, yes,' she replied, 'Isn't it wonderful? I was walking through the park a few months ago and I found this little package on the ground. The directions said to place it on the organ, keep it wet and that it would prevent the spread of disease. Do you know I haven't had the flu all winter.'


    Forwarded by Maureen

    While walking down the street one day a US senator is tragically hit by a truck and dies. His soul arrives in heaven and is met by St. Peter at the entrance.

    'Welcome to heaven,' says St. Peter. 'Before you settle in, it seems there is a problem. We seldom see a high official around these parts, you see, so we're not sure what to do with you.'

    'No problem, just let me in,' says the senator.

    'Well, I'd like to, but I have orders from higher up. What we'll do is have you spend one day in hell and one in heaven. Then you can choose where to spend eternity.'

    'Really, I've made up my mind. I want to be in heaven,' says the senator.

    'I'm sorry, but we have our rules.'

    And with that, St. Peter escorts him to the elevator and he goes down, down, down to hell. The doors open and he finds himself in the middle of a green golf course. In the distance is a clubhouse and standing in front of it are all his friends and other politicians who had worked with him.

    Everyone is very happy and in evening dress. They run to greet him, shake his hand, and reminisce about the good times they had while getting rich at the expense of the people.

    They play a friendly game of golf and then dine on lobster, caviar and champagne.

    Also present is the devil, who really is a very friendly guy who has a good time dancing and telling jokes. They are having such a good time that before he realizes it, it is time to go.

    Everyone gives him a hearty farewell and waves while the elevator rises ..

    T he elevator goes up, up, up and the door reopens on heaven where St. Peter is waiting for him.

    'Now it's time to visit heaven.'

    So, 24 hours pass with the senator joining a group of contented souls moving from cloud to cloud, playing the harp and singing. They have a good time and, before he realizes it, the 24 hours have gone by and St. Peter returns.

    'Well, then, you've spent a day in hell and another in heaven. Now choose your eternity.'

    The senator reflects for a minute, then answers: 'Well, I would never have said it before, I mean heaven has been delightful, but I think I would be better off in hell.'

    So St. Peter escorts him to the elevator and he goes down, down, down to hell.

    Now the doors of the elevator open and he's in the middle of a barren land covered with waste and garbage.

    He sees all his friends, dressed in rags, picking up the trash and putting it in black bags as more trash falls from above ... The devil comes over to him and puts his arm around his shoulder. 'I don't understand,' stammers the senator. 'Yesterday I was here, and there was a golf course and clubhouse, and we ate lobster and caviar, drank champagne, and danced and had a great time. Now there's just a wasteland full of garbage and my friends look miserable. What happened?'

    The devil looks at him, smiles and says ... ... .

    'Yesterday we were campaigning.

    Today you voted.'


    Forwarded by Maureen

    My wife sat down on the couch next to me as I was flipping channels. She asked, "What's on TV?" I said, "Dust."

    And then the fight started.

    ------------------------------------------------------------------------ -------------------------------------------------

    My wife was hinting about what she wanted for our upcoming anniversary. She said, "I want something shiny that goes from 0 to 150 in about 3 seconds." I bought her a scale.

    And then the fight started.

    ------------------------------------------------------------------------ -------------------------------------------------

    When I got home last night, my wife demanded that I take her someplace expensive... so, I took her to a gas station...

    And then the fight started....

    ------------------------------------------------------------------------ ------------------------- ------------------------

    When I retired, I went to the Social Security office to apply for Social Security. The woman behind the counter asked me for my driver's license to verify my age. I looked in my pockets and realized I had left my wallet at home. I told the woman that I was very sorry, but I would have to go home and come back later. The woman said, "Unbutton your shirt." So I opened my shirt revealing my curly silver chest hair. She said, "That silver hair on your chest is proof enough for me" and she processed my Social Security application. When I got home, I excitedly told my wife about my experience at the Social Security office. She said, "You should have dropped your pants. You might have gotten disability, too."

    And then the fight started...

    ------------------------------------------------------------------------ ------------------------------------------------- My wife and I were sitting at a table at my high school reunion, and I kept staring at a drunken lady swigging her drink as she sat alone at a nearby table. My wife asked, "Do you know her?" "Yes," I sighed, "She's my old girlfriend. I understand she took to drinking after we split up those many years ago, and she hasn't been sober since." "My God!", said my wife, "Who would think a person could go on celebrating that long?"

    And then the fight started... ------------------------------------------------------------------------ -------------------------------------------------

    I rear-ended a car this morning. So there I was alongside the road when slowly the other driver got out of his car. You know how sometimes you just get so stressed and little things just seem funny? Yeah, well I couldn't believe it... he was a DWARF!!! He stormed over to my car, looked up at me, and shouted, "I AM NOT HAPPY!" So I looked down at him and said, "Well, then which one are you?"

    And then the fight started..


    Humor in Accident Reports --- http://people.msoe.edu/~taylor/humor/accident.htm

    Humorous State Mottos --- http://funny2.com/states.htm

    Exam Answers --- http://www.masalatime.com/?p=419


    Forwarded by Dick Haar

    I ran across this and it seemed so easy I thought I should pass it on.

    The article suggested doing it three times a week.

    Begin by standing on a comfortable surface, where you have plenty of room at each side.

    With a 5 pound potato sack in each hand, extend your arms straight out from your sides and hold them there as long as you can. Try to reach a full minute, then relax. Each day you will find that you can hold this position a little longer.

    After a couple of weeks, move up to 10 lb potato sacks. Then to 50 lb potato sacks and eventually try to get where you can lift a 100 lb potato sack in each hand and hold your arms straight for more that a full minute.

    Once you feel confident at that level, put a potato in each sack.

     


    Proposed Dilbert Quotations Forwarded by James Don Edwards

    These are some great reminders of life in the corporate world! And one of my all time favorites - "that's the way it always is sometimes."

    A magazine recently ran a 'Dilbert Quotes' contest. They were looking for people to submit quotes from their real-life Dilbert-type managers. These were voted the top ten quotes in corporate America:

    'As of tomorrow, employees will only be able to access the building using individual security cards. Pictures will be taken next Wednesday, and employees will receive their cards in two weeks.' (This was the winning quote from Fred Dales, Microsoft Corp. in Redmond WA)

    'What I need is an exact list of specific unknown problems we might encounter.' (Lykes Lines Shipping)

    'E-mail is not to be used to pass on information or data. It should be used only for company business.' (Accounting manager, Electric Boat Company)

    'This project is so important we can't let things that are more important interfere with it.' (Advertising/ Marketing manager, United Parcel Service)

    'Doing it right is no excuse for not meeting the schedule.' (Plant Manager, Delco Corporation)

    'No one will believe you solved this problem in one day! We've been working on it for months. Now go act busy for a few weeks and I'll let you know when it's time to tell them.' (R&D supervisor, Minnesota Mining and Manufacturing/ 3M Corp.)

    Quote from the Boss: 'Teamwork is a lot of people doing what I say.' (Marketing executive, Citrix Corporation)

    My sister passed away and her funeral was scheduled for Monday. When I told my Boss, he said she died on purpose so that I would have to miss work on the busiest day of the year. He then asked if we could change her burial to Friday. He said, 'That would be better for me.' (Shipping executive, FTD Florists)

    'We know that communication is a problem, but the company is not going to discuss it with the employees.' (Switching supervisor, AT&T Long Lines Division)


    Forwarded by Auntie Bev

    01. The roundest knight at King Arthur's round table was Sir Cumference. He acquired his size from too much pi.

    02. I thought I saw an eye doctor on an Alaskan island. It turned out to be an optical Aleutian.

    03. She was only a whiskey maker, but he loved her still.

    04. A rubber band pistol was confiscated from algebra class because it was a weapon of math disruption.

    05. The butcher backed into the meat grinder and got a little behind in his work.

    06. No matter how much you push the envelope, it'll still be stationery.

    07. A dog gave birth to puppies near the road and was cited for littering.

    08. A grenade thrown into a kitchen in France would result in Linoleum Blownapart.

    09. Two silk worms had a race. They ended up in a tie.

    10. Time flies like an arrow. Fruit flies like a banana.

    11. A hole has been found in the nudist camp wall. The police are looking into it.

    12. Atheism is a non-prophet organization.

    13. Two hats were hanging on a hat rack in the hallway. One hat said to the other, "You stay here, I'll go on a-head."

    14. I wondered why the baseball kept getting bigger. Then it hit me.

    15. A sign on the lawn at a drug rehab center said: "Keep off the Grass."

    16. A small boy swallowed some coins and was taken to a hospital. When his grandmother telephoned to ask how he was, a nurse said, "No change yet."

    17. A chicken crossing the road is poultry in motion.

    18. It's not that the man did not know how to juggle, he just didn't have the balls to do it.

    19. The short fortune-teller who escaped from prison was a small medium, at large.

    20. The man who survived mustard gas and pepper spray is now a seasoned veteran.

    21. A backward poet writes in-verse.

    22. In democracy it's your vote that counts. In feudalism it's your count that votes.

    23. When cannibals ate a missionary, they got a taste of religion.

    24. Don't join dangerous cults, practice safe sects!

    25. Did you hear about the woman who backed into a fan? Disaster!

     


    Forwarded by Moe

    I just read an article on the dangers of drinking....
    Scared the crap out of me. So that's it!
    After today, no more reading.


    Sardar jokes in India are similar to blonde jokes in America --- http://www.dinesh.com/India_Jokes-Humor/Sardar_Jokes/

    Santa Singh and Banta Singh landed up in Bombay. They managed to get into a double-decker bus. Santa Singh somehow managed to get a bottom seat, But unfortunate Banta got pushed to the top. After a while when the rush is over, Santa went upstairs to see friend Bannta Singh.

    He met Banta in a bad condition clutching the seats in front with both hands, scared to death. He says, "Are Banta Singh! What the heck's going' on? Why are you scared ? I was enjoying my ride down there ?"

    Scared Banta replies. "Yeah, but you've got a driver. "

    Hint for Blondes
    There is no driver on the top deck of a double-decker bus. If this was a U.S. railroad, however, feather bedding would require an upstairs driver.


    Brains and Personality

    There’s an old joke first told by Pete Seeger about a maggot named High Cotton in a wagon load of manure being pulled down the road by a team of horses. High Cotton looks down and sees his brother on the road below. What’d happened was that a few months earlier both baby brothers were airborne in the rear end of a huge crow. The crow dropped Brother Bad Luck onto a crack in the pavement and Brother High Cotton onto a ripe manure pile early on in the summer.

    Late in that summer the sickly and scrawny Brother Bad Luck squints up at the moving wagon and asks Brother High Cotton how he became so fat and prosperous?

    “Let me tell you Brother,” says High Cotton, “the reason is brains and personality.”

    This is a very old joke oft repeated by public speakers in one form or another with reference to what it takes to be successful in life or how unjust life can be in terms of factors outside our control --- Click Here

    I think it gives an alternate meaning whenever somebody talks about "being pooped out."

     


    Forwarded by Auntie Bev

    Southern Skinny Dippin'

    An elderly man in North Carolina had owned a large farm for several years. He had a large pond in the back, fixed up really
    nice, along with some picnic tables, horseshoe courts, and some apple and peach trees. The pond was properly shaped and fixed
    up for swimming when it was built.

    One evening the old farmer decided to go down to the pond, as he hadn't been there for a while, and look it over. 
     
    He grabbed a five gallon bucket to bring back some fruit. As he neared the pond, he heard voices shouting and laughing with glee. When he came closer, he realized it was a bunch of young women skinny-dipping in his pond. He made the women aware of his presence, and they all went to the deep end to shield themselves.

    One of the women shouted to him, 'We're not coming out until you leave!'

    The old man frowned and replied, 'I didn't come down here to watch you ladies swim naked or make you get out of the pond naked.'  Holding the bucket up he said, 'I'm here to feed the alligator.'

    Moral of the story:  Old men may move slow, but can still think fast.

    Forwarded by Paula

    The Cajun Family Tree of Beau Geaux

    Dizzy Aunt - Vertie Geaux

    Brother who loved prunes - Gotta Geaux

    Constipated Brother - Neaux Geaux

    Cousin who worked at a convenience store - Shop N. Geaux

    Grandfather from Yugoslavia - U Geaux

    Niece from Illinois - She Car Geaux

    Magician Uncle - Where Diddy Geaux

    Mexican Cousin - Ah Me Geaux

    Mexican Cousin's American brother - Gring Geaux

    Nephew who drove an armored car - Wells Far Geaux

    Uncle serving time in Angola - Lemme Geaux

    Ballroom dancer - Tang Geaux

    Bird-lover - Flo Ming Geaux

    Over-confident Nephew - E. Geaux

    Fruit-loving Cousin - Mang Geaux

    Optimistic Aunt - Way To Geaux

    Bouncy little Nephew - Po Geaux

    Niece with the oversized van - Winnie Bay Geaux

    And there you Geaux


    Forwarded by Maureen

    Whatever you give a woman, she's going to multiply.

    If you give her a house, she'll give you a home.

    If you give her groceries, she'll give you a meal.

    If you give her a smile, she'll give you her heart.

    She multiplies and enlarges what is given to her.

    So - if you give her crap, you will receive more shit than any one human being can handle!


    Forwarded by Maureen

    A bald man with a wooden leg is invited to a Halloween party. He doesn't know what costume to wear to hide his head and his leg so he writes to a costume company to explain his problem. A few days later, he received a Parcel with the following note:

    Dear Sir, Please find enclosed a pirate's outfit. The spotted handkerchief will cover your bald head and, with your wooden leg, you will be just right as a pirate. Very truly yours, Acme Costume Co.

    The man thinks this is terrible because they have emphasized his wooden leg and so he writes a letter of complaint. A week goes by and he receives another parcel and a note, which says:

    Dear Sir, Please find enclosed a monk's habit. The long robe will cover your wooden Leg and, with your bald head, you will really look the part. Very truly yours, Acme Costume Co.

    Now the man is really upset since they have gone from emphasizing his wooden leg to emphasizing his bald head so again he writes the company another nasty letter of complaint. The next day he gets a small parcel and a note, which reads:

    Dear Sir, Please find enclosed a bottle of molasses and a bag of crushed nuts. Pour the molasses over your bald head, pat on crushed nuts, stick your wooden leg up your ass and go as a caramel apple.
    Very truly yours, Acme Costume Co

     


    Forwarded by Auntie Bev

     
    Hey  Dad,' one of my kids asked the other day, 'What was your favorite fast  food when you were growing up?  ' 'We  didn't have fast food when I was growing up,' I informed him. 'All the  food was slow.'  
    'C'mon,  seriously. Where did you eat ?'  
    'It  was a place called 'at home,'' I explained. 'Grandma cooked every day and  when Grandpa got home from work, we sat down together at the dining room  table, and if I didn't like what she put on my plate I was allowed to sit  there until I did like it.'
    By this time, the kid was laughing so hard I was afraid he was going to  suffer serious internal damage, so I didn't tell him the part about how I  had to have permission to leave the table. But here are some other things  I would have told him about my childhood if I figured his system could have handled it:
    Some  parents NEVER owned their own house, wore Levis, set foot on a golf  course, traveled out of the country or had a credit card. In their later  years they had something called a revolving charge card. The card was good  only at Sears Roebuck. Or maybe it was Sears AND Roebuck. Either way,  there is no Roebuck anymore. Maybe he died.  
    My  parents never drove me to soccer practice. This was mostly because we  never had heard of soccer. I had a bicycle that weighed probably 50  pounds, and only had one speed, (slow). We didn't have a television in our  house until I was 11, but my g randparents had one before that. It was, of course, black and white, but they bought a piece of colored plastic to  cover the screen. The top third was blue, like the sky, and the bottom  third was green, like grass. The middle third was red. It was perfect for  programs that had scenes of fire trucks riding across someone's lawn on a  sunny day. Some people had a lens taped to the front of the TV to make the  picture look larger.



    I was  13 before I tasted my first pizza, it was called 'pizza pie.' When I bit  into it, I burned the roof of my mouth and the cheese slid off, swung  down, plastered itself against my chin and burned that, too. It's still  the best pizza I ever had.
    We  didn't have a car until I was 15. Before that, the only car in our family  was my grandfather's Ford. He called it a 'machine.'
    I  never had a telephone in my room. The only phone in the house was in the living room and it was on a party line. Before you could dial, you had to listen and make sure some people you didn't know or amaybe knew very well weren't already using the  line.
    Pizzas  were not delivered to our home. But milk was.
     
    All newspapers were delivered by boys and all boys delivered newspapers. I  delivered a newspaper, six days a week. It cost 7 c e nts a paper, of  which I got to keep 2 cents. I had to get up at 4 AM every morning.. On  Saturday, I had to collect the 42 cents from my customers. My favorite  customers were the ones who gave me 50 cents and told me to keep the  change. My least favorite customers were the ones who seemed to never be  home on collection day.
    Movie  stars kissed with their mouths shut. At least, they did in the movies.  Touching someone else's tongue with yours was called French kissing and  they didn't do that in movies. I don't know what they did in French  movies. French movies were dirty and we weren't allowed to see them.  
    If you  grew up in a generation before there was fast food, you may want to share  some of these memories with your children or grandchildren.. Just don't  blame me if they bust a gut laughing.
    Growing  up isn't what it used to be, is it?
     

    MEMORIES  from a friend:  
    My  Dad is cleaning out my grandmother's house (she died in December) and he  brought me an old Royal Crown Cola bottle. In the bottle top was a stopper  with a bunch of holes in it. I knew immediately what it was, but my  daughter had no idea. She thought they had tried to make it a salt shaker  or something. I knew it as the bottle that sat on the end of the ironing  board to 'sprinkle' clothes with because we didn't have steam irons. Man,  I am old.  
    How  many do you remember?
     
    Head  lights dimmer switches on the floor.  
    Ignition  switches on the dashboard.
     
    Heaters  mounted on the inside of the fire wall.  
    Real  ice boxes.
    Pant  leg clips for bicycles without chain guards.
     
    Soldering  irons you heat on a gas burner.
    Using  hand signals for cars without turn signals.
     
     

    Add to this the fact that the most pornographic photographs generally available were the underwear pages in the Sears and Roebuck Catalog.
    Now one click and you can watch videos men and women having sex with horses, dogs, goats, accountants, etc.

     

    Older  Than Dirt Quiz:  

    Count all the ones that you remember, NOT the ones you were told about! Your  ratings at the bottom.  




    1.  Blackjack chewing gum
    2.  Wax  Coke-shaped bottles with colored sugar water  
    3.  Candy cigarettes
    4.  Soda pop machines that dispensed glass bottles
     
    5.  Coffee shops or diners with tableside juke boxes  
    6
      Home milk delivery in glass bottles with cardboard stoppers  
    7.  
      Party lines
     
    8. Newsreels before the movie
    9. P.F. Flyers
    10. Butch wax
     
    11.  Telephone numbers with a word prefix  (OLive-6933)  
    12.  Peashooters
    13.  Howdy Doody
     
    14.  45 RPM records  
    15.  S&H Green Stamps
    16  Hi-fi's
    17.  Metal ice trays with lever
     
    18.  Mimeograph paper  
    19  Blue flashbulb  
    20.  Packards  
    21.  Roller skate keys  
    22.  Cork popguns
    23.  Drive-ins  
    24.  Studebakers
     
    25.  Wash tub wringers  
    If  you remembered 0-5 = You're still young
     
    If  you remembere d 6-10 = You are getting older  
    If  you remembered 11-15 = Don't tell your age,  
    If  you remembered 16-25 = You're older than dirt!  
    I  might be older than dirt but those memories are  the  best  part of my life.
     

     



     

    Humor Between November 1 and November 30, 2008 --- http://www.trinity.edu/rjensen/book08q4.htm#Humor113008

    Humor Between October 1 and October 31, 2008 --- http://www.trinity.edu/rjensen/book08q4.htm#Humor103108

    Humor Between September 1 and September 30, 2008 --- http://www.trinity.edu/rjensen/book08q4.htm#Humor093008 

    Humor Between July 1 and August 31, 2008 --- http://www.trinity.edu/rjensen/book08q3.htm#Humor083108

    Humor Between June 1 and June 30, 2008 --- http://www.trinity.edu/rjensen/book08q2.htm#Humor063008

    Humor Between May 1 and May 31, 2008 --- http://www.trinity.edu/rjensen/book08q2.htm#Humor053108

    Humor Between May 1 and May 31, 2008 --- http://www.trinity.edu/rjensen/book08q2.htm#Humor053108

    Humor Between April 1 and April 30, 2008 --- http://www.trinity.edu/rjensen/book08q2.htm#Humor043008

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

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

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

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

     




    And that's the way it was on November 30, 2008 with a little help from my friends.

     

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

     

    International Accounting News (including the U.S.)

    AccountingEducation.com and Double Entries --- http://www.accountingeducation.com/
            Upcoming international accounting conferences --- http://www.accountingeducation.com/events/index.cfm
            Thousands of journal abstracts --- http://www.accountingeducation.com/journals/index.cfm
     

    Deloitte's International Accounting News --- http://www.iasplus.com/index.htm
     

    Association of International Accountants --- http://www.aia.org.uk/ 

    Wikipedia has a rather nice summary of accounting software at http://en.wikipedia.org/wiki/Accounting_software
    Bob Jensen’s accounting software bookmarks are at http://www.trinity.edu/rjensen/Bookbob1.htm#AccountingSoftware

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

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

     

    AccountingWeb --- http://www.accountingweb.com/
    AccountingWeb Student Zone --- http://www.accountingweb.com/news/student_zone.html

     

    Introducing the New journalofaccountancy.com  (free) --- http://www.journalofaccountancy.com/Issues/2008/Nov/NovSmartStops.htm

     

    SmartPros --- http://www.smartpros.com/

     

    I highly recommend TheFinanceProfessor (an absolutely fabulous and totally free newsletter from a very smart finance professor, Jim Mahar from St. Bonaventure University) --- http://www.financeprofessor.com/ 

     

    Financial Rounds (from the Unknown Professor) --- http://financialrounds.blogspot.com/

     

    The Bea Sanders/AICPA Innovation in Teaching Award  --- Click Here  http://ceae.aicpa.org/Resources/Scholarships+and+Awards/The+Bea+Sanders+AICPA+Innovation+in+Teaching+Award.htm

    American Accounting Association Awards --- http://aaahq.org/awards/InventoryofAwards08.pdf

    Bob Jensen's bookmarks for accounting newsletters are at http://www.trinity.edu/rjensen/bookbob1.htm#News 

    News Headlines for Accounting from TheCycles.com --- http://www.thecycles.com/business/accounting 
    An unbelievable number of other news headlines categories in TheCycles.com are at http://www.thecycles.com/ 

     

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

     

    Jack Anderson's Accounting Information Finder --- http://www.umsl.edu/~anderson/accsites.htm

     

    Gerald Trite's great set of links --- http://www.zorba.ca/bookmark.htm 

     

    The Finance Professor --- http://www.financeprofessor.com/about/aboutFP.html 

     

    Walt Mossberg's many answers to questions in technology --- http://ptech.wsj.com/

     

    How stuff works --- http://www.howstuffworks.com/ 

     

    Household and Other Heloise-Style Hints --- http://www.trinity.edu/rjensen/bookbob3.htm#Hints 

     

    Bob Jensen's video helpers for MS Excel, MS Access, and other helper videos are at http://www.cs.trinity.edu/~rjensen/video/ 
    Accompanying documentation can be found at http://www.trinity.edu/rjensen/default1.htm and http://www.trinity.edu/rjensen/HelpersVideos.htm 

     

    Click on www.syllabus.com/radio/index.asp 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) http://www.trinity.edu/rjensen
    190 Sunset Hill Road
    Sugar Hill, NH 03586
    Phone:  603-823-8482 
    Email:  rjensen@trinity.edu  

     

     

     

     

    Free Harvard Classics --- http://www.bartleby.com/hc/
    Free Education and Research Videos from Harvard University --- http://athome.harvard.edu/archive/archive.asp

     

    I highly recommend TheFinanceProfessor (an absolutely fabulous and totally free newsletter from a very smart finance professor, Jim Mahar from St. Bonaventure University) --- http://www.financeprofessor.com/ 

     

    Bob Jensen's bookmarks for accounting newsletters are at http://www.trinity.edu/rjensen/bookbob1.htm#News 

    News Headlines for Accounting from TheCycles.com --- http://www.thecycles.com/business/accounting 
    An unbelievable number of other news headlines categories in TheCycles.com are at http://www.thecycles.com/ 

     

    Many useful accounting sites (scroll down) --- http://www.iasplus.com/links/links.htm

     

    Jack Anderson's Accounting Information Finder --- http://www.umsl.edu/~anderson/accsites.htm

     

    Gerald Trite's great set of links --- http://www.zorba.ca/bookmark.htm 

     

    The Finance Professor --- http://www.financeprofessor.com/about/aboutFP.html 

     

    Walt Mossberg's many answers to questions in technology --- http://ptech.wsj.com/

     

    How stuff works --- http://www.howstuffworks.com/ 

     

    Household and Other Heloise-Style Hints --- http://www.trinity.edu/rjensen/bookbob3.htm#Hints 

     

    Bob Jensen's video helpers for MS Excel, MS Access, and other helper videos are at http://www.cs.trinity.edu/~rjensen/video/ 
    Accompanying documentation can be found at http://www.trinity.edu/rjensen/default1.htm and http://www.trinity.edu/rjensen/HelpersVideos.htm 

     

    Click on www.syllabus.com/radio/index.asp 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) http://www.trinity.edu/rjensen
    190 Sunset Hill Road
    Sugar Hill, NH 03586
    Phone:  603-823-8482 
    Email:  rjensen@trinity.edu  

     

     

     

     

     

     

     

     

    October 31, 2008

     

     

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

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

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

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

    Many useful accounting sites (scroll down) --- http://www.iasplus.com/links/links.htm

    Peter, Paul, and Barney: An Essay on 2008 U.S. Government Bailouts of Private Companies ---
    http://www.trinity.edu/rjensen/2008Bailout.htm

    Humor Between October 1 and October 31, 2008 --- http://www.trinity.edu/rjensen/book08q3.htm#Humor103108

    Humor Between September 1 and September 30, 2008 --- http://www.trinity.edu/rjensen/book08q3.htm#Humor093008

    Humor Between July 1 and August 31, 2008 --- http://www.trinity.edu/rjensen/book08q3.htm#Humor083108 

    Humor Between June 1 and June 30, 2008 --- http://www.trinity.edu/rjensen/book08q2.htm#Humor063008

    Humor Between May 1 and May 31, 2008 --- http://www.trinity.edu/rjensen/book08q2.htm#Humor053108

    Humor Between April 1 and April 30, 2008 --- http://www.trinity.edu/rjensen/book08q2.htm#Humor043008

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

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

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

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


     

    A NYT reporter asked me to comment on the Treasury Department’s final report on the accounting/auditing profession --- http://www.ustreas.gov/press/releases/hp1159.htm

    I only spent 15 minutes on this and am not especially proud of anything I do off the cuff and extemporaneously. But since reporters only quote about one percent or less of what you give them, perhaps more of what I said may be of value to some readers.

    Robert (Bob) Jensen
    Emeritus Accounting Professor From Trinity University
    190 Sunset Hill Road
    Sugar Hill, NH 03586
    603-823-8482
    http://www.trinity.edu/rjensen/  


    From: Jensen, Robert
    Sent: Friday, September 26, 2008 4:07 PM
    To: '
    Cc: Jensen, Robert
    Subject: RE: treasury report on auditing

     

    Hi XXXXX,

    I made brief responses directly onto the summary you sent to me. My main point is for you to look into the Accounting Court idea.
    Especially note http://www.nysscpa.org/cpajournal/2004/304/perspectives/nv6.htm

    Please forgive me for only devoting 15 minutes to this effort. I’m very, very busy at the moment.

    One of my best friends and former professor and former Deputy Chief Accountant at the SEC submitted a long input letter. He allowed me to serve it up at my Website --- http://www.trinity.edu/rjensen/Bailey2008.htm
    Although I don’t agree with him on some issues, you perhaps should seek Andy Bailey’s input on this as well --- jabaile@uiuc.edu
    Andy’s input is much more complete than my few comments in this email message.

    Hope this helps!

     

    Robert (Bob) Jensen
    Emeritus Accounting Professor From Trinity University
    190 Sunset Hill Road
    Sugar Hill, NH 03586
    603-823-8482
    http://www.trinity.edu/rjensen/  

    American Accounting Association members should visit the AAA Commons today --- http://commons.aaahq.org


     The U.S. Treasury Department Advisory Committee of the Auditing Profession issued its final report on September 26, 2008 --- http://www.treas.gov/offices/domestic-finance/acap/index.shtml

    A summary is provided below with Bob Jensen's comments in blue.

    September 26, 2008
    HP-1158

    Fact Sheet: Final Report of the Advisory Committee on the Auditing Profession

    The U.S. Treasury Department's Advisory Committee on the Auditing Profession adopted a Final Report containing more than 30 recommendations to improve the sustainability of the public company auditing profession.  The report is separated into three sections by principal areas of focus.

    Human Capital recommendations focused on improving accounting education and strengthening human capital, including:

    • Implementation of accounting education curricula and content that continuously evolves to reflect current market developments to help prepare new entrants to the profession.
      This is motherhood and apple pie, but keep in mind that the financial accounting part of the curriculum is 95% driven by the CPA examination. To change the curriculum all NASBA has to do is change the CPA Exam, which I will now have to do since all FASB standards will be trashed in favor of IFRS standards because Chris Cox abused his authority as Chair of the SEC --- http://www.trinity.edu/rjensen/theory01.htm#MethodsForSetting
    • Improvement of the representation and retention of minorities in the auditing profession through mentoring programs and recruiting at community colleges.
      Some progress is being made in the effort to get more minority professors and role models, but the CPA examination is a tough, tough hurdle for entry into the public accounting profession ---
       http://www.kpmgfoundation.org/foundinit.asp
      Also see http://www.aicpa.org/members/div/career/mini/index.htm
      Great progress is being made for women since 60% of the new hires are women --- http://www.trinity.edu/rjensen/bookbob1.htm#careers
    • Ensuring an adequate supply of qualified accounting faculty through public and private sector funding to meet future demands and help prepare students to execute high quality audits.
      This is an enormous failure because virtually all doctoral programs wanted to become mathematics programs more than accounting programs --- http://www.trinity.edu/rjensen/theory01.htm#DoctoralPrograms
    • Development and maintenance of demographic data on the accounting profession so that the profession can understand the human capital situation and its impact on the profession's future and sustainability.
      The AICPA keeps a pretty good database for this.
    • Study of the future of education for the accounting profession, including the potential for graduate schools of accounting, to determine the best way to educate students to deal with the challenging financial reporting and auditing environment.
      The AICPA is so concerned about the shortage of auditing and tax professors that it just now created a fund to provide five years of full ride funding to each of 30 doctoral students who will commit to auditing and tax specialties
      Requests for applications and additional information may be obtained online from the AICPA Foundation at ADSprogram@AICPA.org. or by calling 919-402-4524

    Firm Structure and Finances recommendations focused on enhancing auditing firm governance, transparency, responsibility, communications, and audit quality, including:

    • Creation of a national center at the Public Company Accounting Oversight Board to provide a forum for auditing firms and other market participants to share their fraud detection experiences in order to improve audit quality.
      Probably a good idea, but I doubt that firms will devote a whole lot of hours making this a success.
    • Granting accountants licensed in one state with reciprocity to practice in other states to foster a more efficient operation of the capital markets given the multi-state operations of many public companies and multi-state practices of many auditing firms.
      This has some real problems. For example, most but not all states now require five-years (150 semester credits) to sit for the CPA examination, but there are some states that only require four years. Should students will four-year degrees become licensed in states that have tougher standards? Also there’s a huge problem with varying experience requirements among states. And there are societal problems. Florida does not want all the semi-retired CPAs from NY to set up shop in Florida.
    • Exploration of the feasibility of appointing independent members with full voting power to firm boards and/or advisory boards to improve the governance and transparency of auditing firms.
      Probably a good idea, but there are problems with confidentiality of client information.
    •  Enhancement of disclosure requirements regarding public company auditor changes will improve transparency and enhance investor confidence.
      There has been progress here with SEC rules, but more could be accomplished. It’s hard to separate reasons from excuses.
    • Enhancements to make the auditor's standard reporting model more useful to investors by including more relevant information, such as key accounting estimates and judgments.
      The estimation process is so complex, that “more relevant information” might only add trees in front of somebody already lost in the forest.
    • Mandating the engagement partner's signature on the auditor's report to improve accountability among auditing firms.
      A good idea, but not as important as rotating the engagement partner more frequently, including bringing in new engagement partners from other offices.
    •  Requirement for larger auditing firms to produce a public annual report with relevant firm information and file on a confidential basis with the PCAOB audited financial statements to improve transparency at auditing firms.
      Yes, yes, yes.

    The Concentration and Competition recommendations focused on ways to increase audit market competition and auditor choice, including:

    • Having the PCAOB monitor potential sources of catastrophic risk at auditing firms to prevent reduced auditor choice and significant market disruptions.
      At the moment really large clients like Bank of America can create a catastrophe by dropping their auditing firm. The audit model is basically broken since audit firms are chosen by and paid by executives of firms that they audit. I’m not saying that government auditors would be an improvement, because we all know that industries pretty much get control of the government agencies that regulate them. But there should be some type of “accounting court” for resolving auditor-client conflicts in confidentiality. This was first proposed in a big way by a managing partner of Arthur Andersen named Leonard Spacek --- http://fisher.osu.edu/departments/accounting-and-mis/the-accounting-hall-of-fame/membership-in-hall/leonard-paul-spacek/
      Especially note --- http://www.nysscpa.org/cpajournal/2004/304/perspectives/nv6.htm
    • Creation of a mechanism for the preservation and rehabilitation of troubled larger public company auditing firms to prevent reduced auditor choice and significant market disruptions.
      Especially note --- http://www.nysscpa.org/cpajournal/2004/304/perspectives/nv6.htm
    •  Development and publication of key indicators of audit quality and effectiveness to promote competition and choice in the industry based on audit quality.
      The PCAOB is doing a pretty good job in this department. For example it has found deficiencies in some of the audits of public accounting firms of all sizes, including the recent PCAOB fine of $1 million for Deloitte --- http://www.pcaobus.org/Inspections/index.aspx
    •  Promotion of the understanding of and compliance with auditor independence requirements to enhance investor confidence in the quality of audit processes and audits.
      Academics have been clamoring about this for years, but it’s almost impossible to make significant progress beyond the litigation threat. At the moment, the risk of being sued in the U.S. is probably the biggest factor keeping auditing firms professional and honest, but there are many failures --- http://www.trinity.edu/rjensen/Fraud001.htm
      It should be noted that most of the litigation of CPA firms centers on mistakes, incompetence, and cost-saving practices that were not a good idea such as substituting substantive testing with analytical reviews. There have been some, but very few, outright frauds and collusions of auditors in frauds.
    • Adoption of annual shareholder ratification of public company auditors by all public companies to enhance the audit committee's oversight to ensure that the auditor is suitable for the company's size and financial reporting needs.
      Shareholder ratifications are a pile of crap since most of the shares are held by enormous funds (pension funds, mutual funds, etc.). The ideal that Main Street will thereby have a huge input into the choice of an auditor is nonsense. Most individuals don’t know one auditor from another. And for huge clients there are only about six choices anyway.
    • Enhancement of collaboration and coordination between the PCAOB and its foreign counterparts so that investors can be confident that auditing firms of all sizes are contributing effectively to audit quality.
      Sounds great but this is motherhood and apple pie that’s difficult to implement effectively in practice. Mostly it sounds good on paper.

     

    Closing Comment
    What’s really needed is an Accounting Court much like operates in The Netherlands, although it will be much more difficult to operate in the U.S. because of the much greater size of the U.S. I still like Spacek’s basic idea of an Accounting Court.
    Especially note --- http://www.nysscpa.org/cpajournal/2004/304/perspectives/nv6.htm

     

    The main advantage of an Accounting Court is that auditors could get more backing from experts when confronting clients on some sticky issues, and clients would have a more difficult time bullying their auditors.

     

    THE MAIN PROBLEM WITH OUR BROKEN AUDITING MODEL IS THAT IT ENCOURAGES CLIENTS TO BECOME BULLIES JUST TO HAVE THEIR OWN WAYS!

    The most serious problem in the U.S. audit model is that clients are becoming bigger and bigger due to non-enforcement of anti-trust laws. For example, the merger of Mobile and Exxon created an even larger single client. The merger of Bear Stearns and JP Morgan created a much larger client. The number of potential clients is shrinking while the size of the clients is exploding. According to the CEO of Bank of America, in a CBS Sixty Minutes interview on October 19, 2008, half of all banking customers in the United States now have accounts with Bank of America. That was before Bank of America bought out Merrill Lynch.

    As these giants merge to become bigger giants, it gets to a point where their auditors cannot afford to lose a giant client producing upwards of $100 million in audit revenue each year. Real independence of audits breaks down because a giant client can become a bully with its audit firm fearful of losing giant clients.

    Enron was an extreme but not necessarily an outlier. It will most likely be alleged in court over the next few years that giant Wall Street banks bullied their auditors into going along with understating financial risk before the 2008 banking meltdown. We certainly witnessed the understating of financial risk in 2007 and 2008.

    I think we need an Accounting Court to deal with clients who become bullies --- http://www.trinity.edu/rjensen/Fraud001.htm#Professionalism

    The Accounting Hall of Fame Citation for Leonard Spacek --- http://fisher.osu.edu/acctmis/hof/spacek.html

    It must be kept in mind that the statements certified are not ours but are our clients--and our clients do not care to mix explanations of accounting theory with explanations of their business nor can we pass onto our readers the responsibility for appraisal of differences in accounting theory. Those fields are for you and me to grapple with, not the public. In general, clients are not primarily interested in arguments of accounting theory at the time of preparing their reports. The companies whose accounts are certified are chiefly interested in what is said to their shareholders, and in the hard practical facts of how accounting rules affect them, their competitors and other companies. Usually they are very critical of what we call accounting principles when these called principles are unrealistic, inconsistent, or do not protect or distinguish scrupulous management from the scrupulous.
    "The Need for An Accounting Court," by Leonard Spacek, The Accounting Review, 1958, Pages 368-379  --- http://www.trinity.edu/rjensen/FraudSpacek01.htm

    Jensen Comment
    Fifty years later I'm a strong advocate of an accounting court, but I envision a somewhat different court than than envisioned by the great Leonard Spacek in 1958. Since 1958, the failure of anti-trust enforcement has allowed business firms to merge into enormous multi-billion or even trillion dollar clients who've become powerful bullies that put extreme pressures on auditors to bend accounting and auditing principles. For example see the way executives of Fannie Mae pressured KPMG to bend the rules (an act that eventually got KPMG fired from the audit).

    In my opinion the time has come where auditors and clients can take their major disputes to an Accounting Court that will use expert independent judges to resolve these disputes much like the Derivatives Implementation Group (DIG)  resolved technical issues for the implementation of FAS 133. The main difference, however, is that an Accounting Court should hear and resolve disputes in private confidence that allows auditors and clients to keep these disputes away from the media. The main advantage of such an Accounting Court is that it might restrain clients from bullying auditors such as became the case when Fannie Mae bullied KPMG.


    "Market and Political/Regulatory Perspectives on the Recent Accounting Scandals," by Ray Ball at the University of Chicago, SSRN, September 17, 2008 --- (free download) --- http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1272804

    Not surprisingly, the recent accounting scandals look different when viewed from the perspectives of the political/regulatory process and of the market for corporate governance and financial reporting. We do not have the opportunity to observe a world in which either market or political/regulatory processes operate independently, and the events are recent and not well-researched, so untangling their separate effects is somewhat conjectural. This paper offers conjectures on issues such as: What caused the scandalous behavior? Why was there such a rash of accounting scandals at one time? Who killed Arthur Andersen – the SEC, or the market? Did fraudulent accounting kill Enron, or just keep it alive for too long? What is the social cost of financial reporting fraud? Does the US in fact operate a “principles-based” or a “rules-based” accounting system? Was there market failure? Or was there regulatory failure? Or both? Was the Sarbanes-Oxley Act a political and regulatory over-reaction?

    Jensen Comment
    Although Professor Ball is best known for empirical research of capital markets data, the above article is best described as a commentary of his personal opinion. On many issues I agree with him, but on some issues I disagree.

     

    Would market forces have killed Enron even if there was no criminal case for document destruction?

    Ray Ball (opinion with no supporting evidence)
    I conclude that market forces, left to their own devices, would have closed Andersen.

    Bob Jensen (agrees completely with supporting evidence)
    I don't think there's any doubt that Andersen would've folded due to market forces of a succession of failed audits for which it did not change its fundamental behavior and questions of auditor independence after losing a succession of failed audit lawsuits prior to Enron. For example, it continued to hire hire the in-charge auditor of Waste Management even after his felony conviction.

    When the Securities and Exchange Commission found evidence in e-mail messages that a senior partner at Andersen had participated in the fraud at Waste Management, Andersen did not fire him. Instead, it put him to work revising the firm's document-retention policy. Unsurprisingly, the new policy emphasized the need to destroy documents and did not specify that should stop if an S.E.C. investigation was threatened. It was that policy David Duncan, the Andersen partner in charge of Enron audits, claimed to be following when he shredded Andersen's reputation.
    Floyd Norris, "Will Big Four Audit Firms Survive in a World of Unlimited Liability?," The New York Times, September 10, 2004


    Although Ray Ball does not cite the empirical evidence, there is empirical evidence that ultimately, due to a succession of incompetent or fraudulent audits, having Andersen as an auditor raised a client's cost of capital.

    "The Demise of Arthur Andersen," by Clifford F. Thies, Ludwig Von Mises Institute, April 12, 2002 --- http://www.mises.org/fullstory.asp?control=932&FS=The+Demise+of+Arthur+Andersen

    From Yahoo.com, Andrew and I downloaded the daily adjusted closing prices of the stocks of these companies (the adjustment taking into account splits and dividends). I then constructed portfolios based on an equal dollar investment in the stocks of each of the companies and tracked the performance of the two portfolios from August 1, 2001, to March 1, 2002. Indexes of the values of these portfolios are juxtaposed in Figure 1.

    From August 1, 2001, to November 30, 2001, the values of the two portfolios are very highly correlated. In particular, the values of the two portfolios fell following the September 11 terrorist attack on our country and then quickly recovered. You would expect a very high correlation in the values of truly matched portfolios. Then, two deviations stand out.

     

    In early December 2001, a wedge temporarily opened up between the values of the two portfolios. This followed the SEC subpoena. Then, in early February, a second and persistent wedge opened. This followed the news of the coming DOJ indictment. It appears that an Andersen signature (relative to a "Final Four" signature) costs a company 6 percent of its market capitalization. No wonder corporate clients--including several of the companies that were in the Andersen-audited portfolio Andrew and I constructed--are leaving Andersen.

    Prior to the demise of Arthur Andersen, the Big 5 firms seemed to have a "lock" on reputation. It is possible that these firms may have felt free to trade on their names in search of additional sources of revenue. If that is what happened at Andersen, it was a big mistake. In a free market, nobody has a lock on anything. Every day that you don’t earn your reputation afresh by serving your customers well is a day you risk losing your reputation. And, in a service-oriented economy, losing your reputation is the kiss of death.

     

    Did (undetected) fraudulent accounting keep Enron alive too long?

    Ray Ball
    It is difficult to escape the conclusion that market forces caused Enron’s bankruptcy, for the simple reason that it had invested enormous sums and by 2000 was not generating profits. Conversely, its accounting transgressions kept the company alive for some period (perhaps one or two years) longer than would have occurred if it had reported its true profitability. The welfare loss arose from keeping an unprofitable company alive longer than optimal, and wasting capital and labor that were better used elsewhere.

    Bob Jensen (disagrees with the power of GAAP in the case of Enron)
    I think Ray Ball is attributing too much to financial reports of past transactions. Even if Enron's financial reports were "true" in terms of conformance with GAAP, the market may well have kept Enron alive because of profit potential of some of the huge, albeit presently losing, ventures. The counter example here is the more legitimate reporting losses in Amazon.com  for almost its entire history and the willingness of investors to "bet on the come" of Amazon's ventures in spite of the reported losses in conformance with GAAP. Furthermore, Enron's executives were so skilled at sales pitches, I think Enron might've actually kept going much, much longer if it conformed to GAAP and simply pitched its sweet-sounding ventures and political connections in Washington DC. Enron was primarily brought down by fraud that commenced to appear in the media and the pending lawsuits that formed overhead due to the fraud.

     

    Who killed Enron – the SEC or the market?

    Ray Ball
    It is difficult to escape the conclusion that market forces caused Enron’s bankruptcy, for the simple reason that it had invested enormous sums and by 2000 was not generating profits. Conversely, its accounting transgressions kept the company alive for some period (perhaps one or two years) longer than would have occurred if it had reported its true profitability. The welfare loss arose from keeping an unprofitable company alive longer than optimal, and wasting capital and labor that were better used elsewhere.

    Bob Jensen (disagrees because losing divisions could've been dropped in favor of continued operations of highly profitable divisions)
    What Ray does not seek out is the first tip of the demise of Enron. The single event that commenced Enron's dominos to fall has to be the reporting of illegal related party transactions by a Wall Street Journal Reporter. Once these became known, the SEC had to act and commenced a chain of events from which Enron could not possibly survive in terms of lawsuits and market reactions with lawsuit risks that bore down on the market prices of Enron shares.

    After John Emshwiller's WSJ report, determining whether the market or the SEC brought down Enron is a chicken versus egg question!

    Eichenwald states the following on pp. 490-492 in Conspiracy of Fools --- http://www.trinity.edu/rjensen/FraudEnronQuiz.htm#22

    It was section eight, called "Related Party Transactions," that got John Emshwiller's juices flowing.

    After being assigned to follow the Skilling resignation, Emshwiller had put in a request for an interview, then scrounged up a copy of Enron's most recent SEC filing in search of any nuggets.

    What he found startled him.  Words about some partnerships run by an unidentified "senior officer."  Arcane stuff, maybe, but the numbers were huge.  Enron reported more than $240 million in revenues in the first six months of the year from its dealings with them.

    One fact struck Emshwiller in particular.  This anonymous senior officer, the filing said, had just sold his financial interest in the partnerships.  Now, it said, the partnerships were no longer related to Enron.

    The senior officer had just sold his interest, Skilling had just resigned.  The connection seemed obvious.

    Could Enron have actually allowed Jeff Skilling to run partnerships that were doing massive business with the company?  Now that, Emshwiller thought, would be a great story.

    Emshwiller was back on the phone with Mark Palmer.  With no better explanation for Skilling's resignation, he said, the Journal was going to dig through everything it could find.  Right now he was focusing on these partnerships.  Were those run by Skilling?

    "No, that's not Skilling," Palmer replied, almost nonchalantly.  "That's Andy Fastow."

    A pause.  "Who's Andy Fastow?" Emshwiller asked.

    The message was slipped to Skilling later that day.  A Journal reporter was pushing for an explanation of his departure and now was rooting around, looking for anything he could find.  Probably best just to give the paper a call.

    Emshwiller was at his desk when the phone rang.

    "Hi," a soft voice said.  "It's Jeff Skilling."

    It was a startling moment.  Emshwiller had been on the hunt, and suddenly the quarry just walked in and lay down on the floor, waiting for him to fire.  So he did: why was Skilling quitting his job?

    "It's all pretty mundane," Skill