New Bookmarks
Year 2009 Quarter 1:  January 31 to March 31 Additions to Bob Jensen's Bookmarks
Bob Jensen at Trinity University

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

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

Choose a Date Below for Additions to the Bookmarks File

March 31

February 28

January 31  


March 31, 2009

Bob Jensen's New Bookmarks on  March 31, 2009
Bob Jensen at Trinity University 

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

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

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

Many useful accounting sites (scroll down) ---

Accounting program news items for colleges are posted at
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

Federal Revenue and Spending Book of Charts (Great Charts on Bad Budgeting) ---

Humor Between March 1 and March 31, 2009 ---  

Humor Between February 1 and February 28, 2009 ---   

Humor Between January 1 and January 31, 2009 ---

Changes in the Wind for the FASB's Accounting Standards Codification Database Project --- 

"FASB Advances GAAP Codification Plan," Journal of Accountancy, March 31, 2009 ---

FASB took another step forward in its plan to codify U.S. GAAP with the release Friday of an exposure draft on changes to the GAAP hierarchy.


FASB is taking comments on the proposal until May 8. In the draft, the standard setter reiterates the planned July 1 effective date for the FASB Accounting Standards Codification to become the single source of authoritative U.S. accounting and reporting standards, except for SEC rules and interpretive releases.


The 20-page proposal would modify FASB Statement no. 162, The Hierarchy of Generally Accepted Accounting Principles. The proposal would establish only two levels of GAAP—authoritative and nonauthoritative.


As of July 1, the FASB Accounting Standards Codification (ASC) would supersede all then-existing, non-SEC accounting and reporting standards for nongovernmental entities.  The FASB ASC disassembled and reassembled thousands of nongovernmental accounting pronouncements (including those of FASB, the Emerging Issues Task Force, and the AICPA) to organize them under roughly 90 topics and include all accounting standards issued by a standard setter within levels A–D of the current U.S. GAAP hierarchy. The ASC also includes relevant portions of authoritative content issued by the SEC, as well as selected SEC staff interpretations and administrative guidance issued by the SEC.


FASB points out in the exposure draft that it decided to include in the codification the AICPA Technical Inquiry Service (TIS) Section 5100, Revenue Recognition, paragraphs 38–76, which may result in an accounting change for private entities that had not previously applied the guidance. FASB provided specific transition provisions for private entities affected by the change.    

Visit the AICPA Web site’s GAAP Codification page to review resources related to the codification project.

Accounting Standards Codification Site (free but registration required) ---

It just gets deeper and deeper for Deloitte

Why would four universities (Carnegie-Mellon, Pittsburgh, Bowling Green, and Ohio Northern) invest hundreds of millions dollars in a fraudulent investment fund and what makes this fraud different from the Madoff and Stanford fund scandals?

One of the reasons is that the fraudulent Westridge Capital Management Fund was audited by the reputable Big Four firm of Deloitte. It seems to be Auditing 101 to verify that securities investments actually exist and have not be siphoned off illegally. Purportedly, Paul R. Greenwood and Stephen Walsh siphoned off hundreds of millions to fund their lavish personal lifestyles

Koch recently told state lawmakers that Iowa officials believed they had "covered the bases" but that "obviously, something went wrong." He and Cochrane, in an interview, said that there was no apparent problem with Westridge that would raise concerns. Numerous government regulatory agencies had audited the company and the venerable Deloitte and Touche firm was Westridge's auditor. The company's investment returns did not raise suspicion because they generally followed market trends: The firm gained and lost money when the rest of the market did.
Stephen C. Fehr, "Iowa, N.D. victims of investment fraud," McClatchy-Tribune News Service, March 16, 2009 ---

As with the investors who lost $65 billion in the Madoff Fund, word of mouth from respected people and institutions seem to weigh more than factual analysis for countless investors? Rabbi Ragan says a good man runs this fund? If Carnegie-Mellon's investing in it it most be safe? Yeah Right!
Various other investors and investment funds allegedly lost millions in the Greenwood-Walsh Fund Fraud --- greenwood&st=cse
The Pennsylvania Employees’ Retirement System  was saved in the nick of time from investing nearly a billion dollars in the fund upon discovering that the National Futures Association began an investigation of the Greenwood-Walsh Fund. For other duped investors it was too late.

But in some cases the auditing firm is reputable and has deep pockets.

"A 4th University Is Missing Money in Alleged $554-Million Swindle," by Paul Fain, Chronicle of Higher Education, March 19, 2009 --- Click Here

Ohio Northern University is the fourth higher-education institution to announce that it is seeking to recoup money in an alleged $554-million investment fraud, university officials said today. Ohio Northern’s endowment had $10-million invested with two Wall Street veterans who face criminal charges for allegedly using investors’ money as a “personal piggy bank,” spending at least $160-million on mansions, horses, rare books, and collectible toys.

Also tied up in the apparent swindle is $65-million from the University of Pittsburgh, $49-million from Carnegie Mellon University, and $15-million from Bowling Green State University. Securities lawyers say little value from the original investments will be recovered. Officials from all of the universities say the potential losses will have no immediate impact on their operations.

Most college endowments rely on outside investment consultants to help direct their money. Hartland & Company, a financial firm in Cleveland, steered the now-missing investments by Ohio Northern and Bowling Green to the firm running the allegedly-fraudulent scheme. Pitt and Carnegie Mellon relied on the advice of Wilshire Associates, a major California-based consulting firm.

Paul R. Greenwood and Stephen Walsh, the two Wall Street traders who owned the suspect firm, face charges of securities fraud, wire fraud, and conspiracy. Federal regulators have also sued the men, and are pursuing their assets.

"Pitt, CMU money managers arrested in fraud FBI says they misappropriated $500 million for lavish lifestyles," by Jonathon Silver, Pittsburgh Post-Gazette, February 26, 2009 ---

Two East Coast investment managers sued for fraud by the University of Pittsburgh and Carnegie Mellon University misappropriated more than $500 million of investors' money to hide losses and fund a lavish lifestyle that included purchases of $80,000 collectible teddy bears, horses and rare books, federal authorities said yesterday.

As Pitt and Carnegie Mellon were busy trying to learn whether they will be able to recover any of their combined $114 million in investments through Westridge Capital Management, the FBI yesterday arrested the corporations' managers.

Paul Greenwood, 61, of North Salem, N.Y., and Stephen Walsh, 64, of Sands Point, N.Y., were charged in Manhattan -- by the same office prosecuting the Bernard L. Madoff fraud case -- with securities fraud, wire fraud and conspiracy.

Both men also were sued in civil court by the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission, which alleged that the partners misappropriated more than $553 million and "fraudulently solicited" $1.3 billion from investors since 1996.

The Accused

Paul Greenwood and Stephen Walsh are accused of misappropriating millions from investors. Here is a look at some of their biggest personal purchases:

• HOME: Mr. Greenwood, a horse breeder, owned a horse farm in North Salem, N.Y., an affluent community that counts David Letterman as a resident.

• BEARS: Mr. Greenwood owns as many as 1,350 Steiff toys, including teddy bears costing as much as $80,000.

• DIVORCE: Mr. Walsh bought his ex-wife a $3 million condominium as part of their divorce settlement.

"This is huge," said David Rosenfeld, associate regional director of the SEC's New York Regional Office. "This is a truly egregious fraud of immense proportions."

Lawyers for the defendants either could not be reached or had no comment.

Mr. Greenwood and Mr. Walsh, longtime associates and former co-owners of the New York Islanders hockey team, ran Westridge Capital Management and a number of affiliated funds and entities.

As late as this month, the partners appeared to be doing well. Mr. Greenwood told Pitt's assistant treasurer Jan. 21 that they had $2.8 billion under management -- though that number is now in question. And on Feb. 2, Pitt sent $5 million to be invested.

But in the course of less than three weeks, Westridge's mammoth portfolio imploded in what federal authorities called an investment scam meant to cover up trading losses and fund extravagant purchases by the partners.

An audit launched Feb. 5 by the National Futures Association proved key to uncovering the alleged deceit and apparently became the linchpin of the case federal prosecutors are building.

That audit came about in an indirect way. The association, a self-policing membership body, had taken action against a New York financier. That led to a man named Jack Reynolds, a manager of the Westridge Capital Management Fund in which CMU invested $49 million; and Mr. Reynolds led to Westridge.

"We just said we better take a look at Jack Reynolds and see what's happening, and that led us to Westridge and WCM, so it was a domino effect," said Larry Dyekman, an association spokesman. "We're just not sure we have the full picture yet."

Mr. Reynolds has not been charged by federal authorities, but he is named as a defendant in the lawsuit that was filed last week by Pitt and CMU.

"Greenwood and Walsh refused to answer any of our questions about where the money was or how much there was," Mr. Dyekman continued.

"This is still an ongoing investigation, and we can't really say at this point with any finality how much has been lost."

The federal criminal complaint traces the alleged illegal activity to at least 1996.

FBI Special Agent James C. Barnacle Jr. said Mr. Greenwood and Mr. Walsh used "manipulative and deceptive devices," lied and withheld information as part of a scheme to defraud investors and enrich themselves.

The complaint refers to a public state-sponsored university called "Investor 1" whose details match those given by Pitt in its lawsuit.

The SEC's Mr. Rosenfeld said the fraud hinged not so much on the partners' investment strategy but on the fact that they are believed to have simply spent other people's money on themselves.

"They took it. They promised the investors it would be invested. And instead of doing that they misappropriated it for their own use," Mr. Rosenfeld said.

Not only do federal authorities believe Mr. Greenwood and Mr. Walsh used new investors' funds to cover up prior losses in a classic Ponzi scheme, they used more than $160 million for personal expenses including:

• Rare books bought at auction;

• Steiff teddy bears purchased for up to $80,000 at auction houses including Sotheby's;

• A horse farm;

• Cars;

• A residence for Mr. Walsh's ex-wife, Janet Walsh, 53, of Florida, for at least $3 million;

• Money for Ms. Walsh and Mr. Greenwood's wife, Robin Greenwood, 57, both of whom are defendants in the SEC suit. More than $2 million was allegedly wired to their personal accounts by an unnamed employee of the partners.

"Defendants treated investor money -- some of which came from a public pension fund -- as their own piggy bank to lavish themselves with expensive gifts," said Stephen J. Obie, the Commodity Futures Trading Commission's acting director of enforcement.

It is not clear how Pitt and CMU got involved with Mr. Greenwood and Mr. Walsh. But there is at least one connection involving academia. The commission suit said Mr. Walsh represented to potential investors that he was a member of the University at Buffalo Foundation board and served on its investment committee.

Mr. Walsh is a 1966 graduate of the State University of New York at Buffalo where he majored in political science.

He was a trustee of the University at Buffalo Foundation, but the foundation did not have any investments in Westridge or related firms.

Universities, charitable organizations, retirement and pension funds are among the investors who have done business with Mr. Greenwood and Mr. Walsh.

Among those investors are the Sacramento County Employees' Retirement System, the Iowa Public Employees' Retirement System and the North Dakota Retirement and Investment Office, which handles $4 billion in investments for teachers and public employees.

The North Dakota fund received about $20 million back from Westridge Capital Management, but has an undetermined amount still out in the market, said Steve Cochrane, executive director.

Mr. Cochrane said Westridge Capital was cooperative in returning what money it could by closing out their position and sending them the money.

"I dealt with them exclusively all these years," Mr. Cochrane said.

"They always seemed to be upfront and honest. I think they're as stunned and as victimized as we are, is my guess."

He said Westridge Capital had done an excellent job over the years.

The November financial statement indicated that the one-year return from Westridge Capital was a negative 11.87 percent, but the five-year annualized rate of return was a positive 8.36 percent.

Bob Jensen's fraud updates are at

Bob Jensen's Rotten to the Core threads are at

Deloitte is getting deeper and deeper into new lawsuits, one of which is the huge Washington Mutual (WaMu) failed bank lawsuit ---

Bob Jensen's threads on Deloitte are at

It Just Gets Deeper and Deeper for KPMG

"Subprime Suit Accuses KPMG of Negligence:  A trustee for New Century Financial claims KPMG partners ignored lower ranks' concerns about the lender's accounting for loan reserves," by Sarah Johnson,, April 2, 2009 ---

Two complaints filed in federal courts yesterday claim that KPMG auditors were complicit in allowing "aggressive accounting" to occur under their watch at New Century Financial, the mortgage lender that collapsed two years ago at the beginning of the subprime-mortgage mess.

The plaintiff, a New Century trustee, alleges that misstated financial reports were filed with the audit firm's rubber stamp because of its partners' fears of losing the lender's business. "KPMG acted as a cheerleader for management, not the public interest," one of the complaints says. The trustee further accuses the firm of "reckless and grossly negligent audits."

The plaintiff's law firm, Thomas Alexander & Forrester LLP, filed one action against KPMG LLP in California and another in New York against KPMG International. With the authority to "manage and control" its member firm, KPMG International failed to "ensure that audits under the KPMG name" lived up to the quality control and branding value that "it promised to the public," the lawsuit alleges.

Similar litigation has been unsuccessful in holding international auditing firms responsible for their affiliated but independent members. For example, a lawsuit that Thomas Alexander filed against BDO Seidman in a negligence case involving Banco Espirito Santo's financial statements resulted in a $521 million win for the plaintiff, pending an appeal. A case against BDO International is expected to go to trial later this year after an appeals court ruled that a jury should have decided whether it should have also been considered liable in the Banco case. Initially, a lower-court judge had dismissed the international organization from the case.

the international arm was intitially ruled as not being c, accused of also , the trial against BDO International for the same matter has yet to occur; courts have yet to decide whether BDO International could be held liable in the same matter after the international firm was but lawyers have been unable to get a judgment against BDO International in the same case. Steven Thomas, a partner at the law firm, did not immediately return's request for comment.

KPMG resigned as New Century's auditor soon after the Irvine, California-based lender filed for bankruptcy protection in 2007. The auditor's role in the firm's failure has been questioned since then, by New Century's unsecured creditors and the bankruptcy court.

In the new lawsuit, KPMG LLP is accused of not giving credence to lower-level employees' concerns about their client's accounting flaws and not finishing its audit work before giving its final opinion — an account the firm disputes. In 2005, for instance, a partner was said to have "silenced" one of the firm's specialists who had questioned New Century's "incorrect accounting practice." The partner allegedly said, "I am very disappointed we are still discussing this.... The client thinks we are done. All we are going to do is piss everybody off."

Dan Ginsburg, KPMG LLP spokesman,says the above account is taken out of context and that the firm had followed its normal process; the firm's national office had already reviewed and signed off on the issue being disputed.

Furthermore, Ginsburg says any claims that the firm gave in to its client's demands "is unsupportable." He adds, "any implication that the collapse of New Century was related to accounting issues ignores the reality of the global credit crisis. This was a business failure, not an accounting issue."

New Century's business was heavy on loaning subprime-level mortgages, but its accounting methods did not fully recognize the risk of doing so, the lawsuit alleges. It also says the firm violated GAAP by using inaccurate loan-reserve calculations by taking out certain factors to keep its liability numbers down and its net income falsely propped up. KPMG is accused of ignoring this GAAP violation and advising the firm on how to get around the rules. The complaint says this was a $300 million mistake.

In its most recent inspection of KPMG, the Public Company Accounting Oversight Board noted two occasions when the firm did not do enough audit work to be able to confidently trust its clients' allowances for loan losses.

Bob Jensen's threads on KPMG legal woes ---


Congratulations to Janek Ratnatunga, Norman Gray and Bala K.R. (Kashi) Balachandran

"Researchers Win Award in Management Accounting," Journal of Accountancy, April 2009 ---

Janek Ratnatunga, Norman Gray and Bala K.R. (Kashi) Balachandran are the winners of the first Greatest Potential Impact on Practice Award for research in management accounting, an award given by the American Accounting Association’s Management Accounting Section and sponsored by the AICPA, the Chartered Institute of Management Accountants and the Society of Management Accountants of Canada.

The award, which recognizes academic papers considered to be most likely to have a significant impact on management accounting practice, was presented in January at the AAA MAS Midyear Meeting in Florida.

Their paper, “The Capability Economic Value of Intangible and Tangible Assets (CEVITA): The Valuation and Reporting of Strategic Capabilities,” was originally published in Management Accounting Research, CIMA’s research journal, and introduces a new technique for measuring and reporting the impact of tangible and intangible asset combinations on the value creation potential, or strategic capability of a business.

Ratnatunga is the head of the School of Commerce at the University of South Australia. He has also held academic positions at the University of Melbourne, Monash University and the University of Canberra in Australia and the universities of Washington, Richmond and Rhode Island in the United States. Previously, he practiced as a chartered accountant with KPMG.

Now retired, Gray previously was the head of the Airborne Early Warning and Control Division of the Defence Materiel Organization within the Department of Defence in Australia.

Balachandran is a professor of accounting and operations management at New York University Stern School of Business. He received his bachelor of engineering in mechanical engineering from the University of Madras, India, and attended the University of California, Berkeley, for his master of science in industrial engineering and Ph.D. in operations research.

March 13, 2009 message from Zafar Khan

Why was Sarbanes-Oxley enacted?

Zafar Khan, Ph.D.
Eastern Michigan University

March 14, 2009 reply from Bob Jensen

Hi Zafar,

Sarbanes (SOX) was enacted to keep investors from abandoning the U.S. stock market after enormous scandals like Enron, WorldCom, and other huge scandals that revealed CPA audits themselves were becoming both substandard and non-profitable ---

To make money, auditing firms themselves were profiting from irresponsible audit cost cutting and non-audit consulting that compromised their auditing independence. Inside corporations, internal controls for responsible financial reporting had broken down or never existed in the first place.

Sarbanes forced auditors to become more independent and also made it possible to double or triple audit fees, thereby restoring auditing to profitable services rather than services that lost money for auditing firms trying to be responsible auditors.

SOX also created the PCAOB that got serious about reviewing auditor performance (including fining Deloitte a million dollars). Many of the large and smaller CPA firms failed the PCAOB tests early on and soon cleaned up their audit practices with the PCAOB breathing down their backs.

Among other things SOX increased government funding for the SEC and the FASB (which before SOX received no taxpayer funding). This, in turn, made the FASB less dependent upon sales of publications. The FASB then made many publications free electronically, most notably free distribution of standards and interpretations. The IASB, sadly, still depends upon publication revenue such that IFRS are not free unless you play games like download the equivalent Hong Kong accounting standards.


A variety of complex factors created the conditions and culture in which a series of large corporate frauds occurred between 2000-2002. The spectacular, highly-publicized frauds at Enron (see Enron scandal), WorldCom, and Tyco exposed significant problems with conflicts of interest and incentive compensation practices. The analysis of their complex and contentious root causes contributed to the passage of SOX in 2002. In a 2004 interview, Senator Paul Sarbanes stated:


The Senate Banking Committee undertook a series of hearings on the problems in the markets that had led to a loss of hundreds and hundreds of billions, indeed trillions of dollars in market value. The hearings set out to lay the foundation for legislation. We scheduled 10 hearings over a six-week period, during which we brought in some of the best people in the country to testify...The hearings produced remarkable consensus on the nature of the problems: inadequate oversight of accountants, lack of auditor independence, weak corporate governance procedures, stock analysts' conflict of interests, inadequate disclosure provisions, and grossly inadequate funding of the Securities and Exchange Commission.


  • Auditor conflicts of interest: Prior to SOX, auditing firms, the primary financial "watchdogs" for investors, were self-regulated. They also performed significant non-audit or consulting work for the companies they audited. Many of these consulting agreements were far more lucrative than the auditing engagement. This presented at least the appearance of a conflict of interest. For example, challenging the company's accounting approach might damage a client relationship, conceivably placing a significant consulting arrangement at risk, damaging the auditing firm's bottom line.
  • Boardroom failures: Boards of Directors, specifically Audit Committees, are charged with establishing oversight mechanisms for financial reporting in U.S. corporations on the behalf of investors. These scandals identified Board members who either did not exercise their responsibilities or did not have the expertise to understand the complexities of the businesses. In many cases, Audit Committee members were not truly independent of management.
  • Securities analysts' conflicts of interest: The roles of securities analysts, who make buy and sell recommendations on company stocks and bonds, and investment bankers, who help provide companies loans or handle mergers and acquisitions, provide opportunities for conflicts. Similar to the auditor conflict, issuing a buy or sell recommendation on a stock while providing lucrative investment banking services creates at least the appearance of a conflict of interest.
  • Inadequate funding of the SEC: The SEC budget has steadily increased to nearly double the pre-SOX level. In the interview cited above, Sarbanes indicated that enforcement and rule-making are more effective post-SOX.
  • Banking practices: Lending to a firm sends signals to investors regarding the firm's risk. In the case of Enron, several major banks provided large loans to the company without understanding, or while ignoring, the risks of the company. Investors of these banks and their clients were hurt by such bad loans, resulting in large settlement payments by the banks. Others interpreted the willingness of banks to lend money to the company as an indication of its health and integrity, and were led to invest in Enron as a result. These investors were hurt as well.
  • Internet bubble: Investors had been stung in 2000 by the sharp declines in technology stocks and to a lesser extent, by declines in the overall market. Certain mutual fund managers were alleged to have advocated the purchasing of particular technology stocks, while quietly selling them. The losses sustained also helped create a general anger among investors.
  • Executive compensation: Stock option and bonus practices, combined with volatility in stock prices for even small earnings "misses," resulted in pressures to manage earnings. Stock options were not treated as compensation expense by companies, encouraging this form of compensation. With a large stock-based bonus at risk, managers were pressured to meet their targets.


Pay Me More and More and More
Sadly, SOX did not attack the root problems that led to the subsequent subprime lending scandals. These root problems included pay-for-performance compensation plans that motivated mortgage brokers, real estate appraisers, banks, and investment banks to screw both shareholders and home owners.

Pass the Trash
Added to this was Congressional pressure on Fannie Mae and Freddie Mack to buy hopeless mortgages that had almost no chance of being repaid. Banks commenced a practice of passing the trash to Freddie, Fannie, and Wall Street investment banks that, in turn, passed the trash to their customers in CDOs that were intended to diversify the bad loan risks (but failed to do so when the real estate bubble burst).

SOX has worked in countless ways, but not all ways
There are countless success stories where SOX led to better internal controls and better auditing with more substantive testing in place of lousy analytical reviews. However, SOX did almost nothing to prevent fraud in the mortgage brokering and banking sectors.

You can read more about subprime sleaze at

You can read more about auditing professionalism at

Fiduciaries turned into whores
One of the most sad things for me is the way that CPA auditing firms failed to signal the public that banks were filling up on toxic loans. Equally unprofessional were the credit rating agencies like Standard and Poors and Moody’s that in essence became Wall Street’s whores.

Why regulations fail and succeed in the turning of the carousel
The main problem with government regulations on industry is that industry eventually runs the regulators (e.g., the Federal Reserve, SEC, FDA, FAA, FCC, etc.) until some enormous scandals force the regulators to use the powers entrusted to them. Then we get new regulations that industry eventually figures out how to circumvent. Then we wait for more huge scandals. And so the carousel goes round and round.

Socialism bypasses the regulation process by owning and running the industries. Then the abuses really begin
The inherent vice of capitalism is the unequal sharing of the blessings. The inherent blessing of socialism is the equal sharing of misery.
Winston Churchill

May 14, 2009 reply from Zafar Khan [zkhan@EMICH.EDU]

Hi Bob, one can always depend upon you to set the record straight. Otherwise, some might continue to believe that this (SOX) was another gratuitous government intervention to disrupt the smooth functioning of our self correcting financial markets.

I also read in a recent post that the government should not do anything about executive compensation despite the obscene abuse of power by the executives of public companies who have enriched themselves while running their companies into the ground because the market will in the end sort it out. My humble response to that is dream on.

Zafar Khan, Ph.D.
Eastern Michigan University

March 15, 2009 reply from Bob Jensen

Hi again Zafar,

After the fall of Andersen you would've thought CPA auditors would've "self corrected" without having SOX since their reputations had hit bottom.

In 2003 a former professor of accounting at the University of Illinois and long-time executive partner with Andersen told accounting professors that the CPA firm executives "still didn't get it." This is probably why we needed SOX and the PCAOB to help them "get it." Art Wyatt’s plenary session speech at the 2003 American Accounting Association annual meetings is at
Art is also a former AAA President and a member of the Accounting Hall of Fame. His opinions have a lot of clout in both the CPA profession and academe.

From “Topics for Class Debate” at
This might be a good topic of debate for an ethics and/or fraud course.  The topic is essentially the problem of regulating and/or punishing many for the egregious actions of a few.  The best example is the major accounting firm of Andersen in which 84,000 mostly ethical and highly professional employees lost their jobs when the firm's leadership repeatedly failed to take action to prevent corrupt and/or incompetent audits of a small number audit partners.  Clearly the firm's management failed and deserves to be fired and/or jailed for obstruction of justice and failure to protect the public in general and 83,900 Andersen employees.  A former Andersen executive partner, Art Wyatt, contends that Andersen's leadership did not get the message and that leadership in today's leading CPA firms is still not (just before SOX) getting the message --- 

Bob Jensen's threads on auditing professionalism are at

Free IEASB Standards (but not IASB Standards themselves)
The International Accounting Education Standards Board (IAESB) has released the 2009 edition of its Handbook of International Education Pronouncements. The Handbook contains the IAESB's eight International Education Standards (IESs), including the IAESB Framework for International Education Pronouncements and Introduction to International Education Standards, as well as three International Education Practice Statements. The handbook can be downloaded free of charge in PDF format from the IFAC Online Bookstore . Printed copies can be ordered now for shipment in early April.
Deloitte's IASB Plus, March 27, 2009 ---

January 22, 2009 message from Patricia Walters [patricia@DISCLOSUREANALYTICS.COM]

IFRS standards (usually referred to as the "bound volume") are only available for a fee because sales of publications is one of the IASB's primary revenue streams.

That said, academics can get an on-line subscription to the IASB (ability to download the standards, etc) for (the dues fee of ) $25 if you join the IAAER and your students can get a subscription for their dues fee of only $20. 

This is a great deal.


January 22, 2009 reply from Dick van Offeren [dvanofferen@GMAIL.COM]

The IAAER-fee is worth every single penny.

In the Netherlands we teach local and IASB-rules. IFRS is obligatory only for consolidated annual reports of listed companies. Besides IFRS we have the commercial code and local Standards for non-listed companies and parent companies statements only. This hodgepodge of sometimes conflicting standards makes teaching financial accounting and reporting a great challenge. However, it makes clear that financial accounting is a professional activity where professional judgements are to be made. There is no single mechanical rule that can be applied in all cases.

In my view the accounting profession can only reach a higher level when prominent accounting scholars lead the way.

I really like this discussion and this (AECM) listserv.


Dick van Offeren
Leiden University the Netherlands


Can the 2008 investment banking failure be traced to a math error?

The first major model of systematic risk and diversification theory was the 1959 Princeton thesis of Harry Markowitz. But the model was totally impractical since we could not and still cannot invert matrices with huge numbers of rows and columns. Along came Bill Sharpe and others who tried to approximate the Markowitz model with the much more practical CAPM. With simplification a model almost always sacrifices accuracy and robustness. The CAPM has had some good applications and some disastrous applications such as the Trillion Dollar Bet disaster of Long Term Capital Management ---

Whenever I get news about increased interest in mathematical models (especially economics and finance) professors on Wall Street, I think back to "The Trillion Dollar Bet" in 1993 (Nova on PBS Video) a bond trader, two Nobel Laureates, and their doctoral students who very nearly brought down all of Wall Street and the U.S. banking system in the crash of a hedge fund known as Long Term Capital Management where the biggest and most prestigious firms lost an unimaginable amount of money ---

The blame for bad decisions that use models must fall on the analysts who apply the model and not on the people that merely derive the seminal model as long as the model builders point out all know limitations of their models. There are some instances of research that should perhaps be banned such as research that could put cheap and effective biological weapons of mass destruction in the hands of any teenager in the world who has a basement laboratory or effective date rape drugs that can be generated quickly, cheaply, and easily from bananas and tomatoes.

There is also a question of enforcement of a ban on research and model building. For example, if we’d had a ban on development of nuclear fission in the U.S., what would’ve prevented Russia, Germany, and Japan from development of nuclear fission in 1940? If David Li was not allowed to invent the credit risk diversification model, who’s to say that China could not invent such a model?

I think the limitations of Li’s model were well known to the bankers who used the disastrous model. In reality it is like the Black Swan theory that a model has a known miniscule (epsilon) chance of disaster but the rewards of using the model seemed to greatly outweigh the risks ---

The CDO bond risks became compounded when so many investment banks commenced to crumble mortgage contracts into diversified CDO bonds dictated by David Li’s model. CDO bond sellers and holders commenced to use this model that essentially leaves out the covariance terms for interactive defaults on investments. The chances that everything would blow up seemed negligible at the time.  Probably the best summary of what happens appears in “In Plato’s Cave.”
Also see
"In Plato's Cave:  Mathematical models are a powerful way of predicting financial markets. But they are fallible" The Economist, January 24, 2009, pp. 10-14 ---


Can the 2008 investment banking failure be traced to a math error?
Recipe for Disaster:  The Formula That Killed Wall Street ---
Link forwarded by Jim Mahar --- 

Some highlights:

"For five years, Li's formula, known as a Gaussian copula function, looked like an unambiguously positive breakthrough, a piece of financial technology that allowed hugely complex risks to be modeled with more ease and accuracy than ever before. With his brilliant spark of mathematical legerdemain, Li made it possible for traders to sell vast quantities of new securities, expanding financial markets to unimaginable levels.

His method was adopted by everybody from bond investors and Wall Street banks to ratings agencies and regulators. And it became so deeply entrenched—and was making people so much money—that warnings about its limitations were largely ignored.

Then the model fell apart." The article goes on to show that correlations are at the heart of the problem.

"The reason that ratings agencies and investors felt so safe with the triple-A tranches was that they believed there was no way hundreds of homeowners would all default on their loans at the same time. One person might lose his job, another might fall ill. But those are individual calamities that don't affect the mortgage pool much as a whole: Everybody else is still making their payments on time.

But not all calamities are individual, and tranching still hadn't solved all the problems of mortgage-pool risk. Some things, like falling house prices, affect a large number of people at once. If home values in your neighborhood decline and you lose some of your equity, there's a good chance your neighbors will lose theirs as well. If, as a result, you default on your mortgage, there's a higher probability they will default, too. That's called correlation—the degree to which one variable moves in line with another—and measuring it is an important part of determining how risky mortgage bonds are."

I would highly recommend reading the entire thing that gets much more involved with the actual formula etc.

The “math error” might truly be have been an error or it might have simply been a gamble with what was perceived as miniscule odds of total market failure. Something similar happened in the case of the trillion-dollar disastrous 1993 collapse of Long Term Capital Management formed by Nobel Prize winning economists and their doctoral students who took similar gambles that ignored the “miniscule odds” of world market collapse -- -  

The rhetorical question is whether the failure is ignorance in model building or risk taking using the model?

Also see
"In Plato's Cave:  Mathematical models are a powerful way of predicting financial markets. But they are fallible" The Economist, January 24, 2009, pp. 10-14 ---

Bob Jensen's threads on the economic crisis and recovery ---

Do you know the difference between Market Risk Beta and Downside Risk Beta? ---

New Off Balance Sheet Financing Vehicles

Accounting for the Shadow Economy
Property is much more than a body of norms. It is also a huge information system that processes raw data until it is transformed into facts that can be tested for truth, and thereby destroys the main catalysts of recessions and panics -- ambiguity and opacity.

See below

There are trillions of dollars of off balance sheet obligations that cannot be easily accounted for.
Hernando de Soto

A Lesson for Auditors:  Accounting for the shadow economy
"Toxic Assets Were Hidden Assets:  We can't afford to allow shadow economies to grow this big," by Hernando de Soto, The Wall Street Journal, March 25, 2009 ---

The Obama administration has finally come up with a plan to deal with the real cause of the credit crunch: the infamous "toxic assets" on bank balance sheets that have scared off investors and borrowers, clogging credit markets around the world. But if Treasury Secretary Timothy Geithner hopes to prevent a repeat of this global economic crisis, his rescue plan must recognize that the real problem is not the bad loans, but the debasement of the paper they are printed on.

Today's global crisis -- a loss on paper of more than $50 trillion in stocks, real estate, commodities and operational earnings within 15 months -- cannot be explained only by the default on a meager 7% of subprime mortgages (worth probably no more than $1 trillion) that triggered it. The real villain is the lack of trust in the paper on which they -- and all other assets -- are printed. If we don't restore trust in paper, the next default -- on credit cards or student loans -- will trigger another collapse in paper and bring the world economy to its knees.

If you think about it, everything of value we own travels on property paper. At the beginning of the decade there was about $100 trillion worth of property paper representing tangible goods such as land, buildings, and patents world-wide, and some $170 trillion representing ownership over such semiliquid assets as mortgages, stocks and bonds. Since then, however, aggressive financiers have manufactured what the Bank for International Settlements estimates to be $1 quadrillion worth of new derivatives (mortgage-backed securities, collateralized debt obligations, and credit default swaps) that have flooded the market.

These derivatives are the root of the credit crunch. Why? Unlike all other property paper, derivatives are not required by law to be recorded, continually tracked and tied to the assets they represent. Nobody knows precisely how many there are, where they are, and who is finally accountable for them. Thus, there is widespread fear that potential borrowers and recipients of capital with too many nonperforming derivatives will be unable to repay their loans. As trust in property paper breaks down it sets off a chain reaction, paralyzing credit and investment, which shrinks transactions and leads to a catastrophic drop in employment and in the value of everyone's property.

Ever since humans started trading, lending and investing beyond the confines of the family and the tribe, we have depended on legally authenticated written statements to get the facts about things of value. Over the past 200 years, that legal authority has matured into a global consensus on the procedures, standards and principles required to document facts in a way that everyone can easily understand and trust.

The result is a formidable property system with rules and recording mechanisms that fix on paper the facts that allow us to hold, transfer, transform and use everything we own, from stocks to screenplays. The only paper representing an asset that is not centrally recorded, standardized and easily tracked are derivatives.

Property is much more than a body of norms. It is also a huge information system that processes raw data until it is transformed into facts that can be tested for truth, and thereby destroys the main catalysts of recessions and panics -- ambiguity and opacity. To bring derivatives under the rule of law, governments should ensure that they conform to six longstanding procedures that guarantee the value and legitimacy of any kind of paper purporting to represent an asset:

- All documents and the assets and transactions they represent or are derived from must be recorded in publicly accessible registries. It is only by recording and continually updating such factual knowledge that we can detect the kind of overly creative financial and contractual instruments that plunged us into this recession.

- The law has to take into account the "externalities" or side effects of all financial transactions according to the legal principle of erga omnes ("toward all"), which was originally developed to protect third parties from the negative consequences of secret deals carried out by aristocracies accountable to no one but themselves.

- Every financial deal must be firmly tethered to the real performance of the asset from which it originated. By aligning debts to assets, we can create simple and understandable benchmarks for quickly detecting whether a financial transaction has been created to help production or to bet on the performance of distant "underlying assets."

- Governments should never forget that production always takes priority over finance. As Adam Smith and Karl Marx both recognized, finance supports wealth creation, but in itself creates no value.

- Governments can encourage assets to be leveraged, transformed, combined, recombined and repackaged into any number of tranches, provided the process intends to improve the value of the original asset. This has been the rule for awarding property since the beginning of time.

- Governments can no longer tolerate the use of opaque and confusing language in drafting financial instruments. Clarity and precision are indispensable for the creation of credit and capital through paper. Western politicians must not forget what their greatest thinkers have been saying for centuries: All obligations and commitments that stick are derived from words recorded on paper with great precision.

Above all, governments should stop clinging to the hope that the existing market will eventually sort things out. "Let the market do its work" has come to mean, "let the shadow economy do its work." But modern markets only work if the paper is reliable.

Continued in article

Bob Jensen's threads on accounting theory are at

Off Balance Sheet Vehicles
The Mother of All Ponzi Schemes According to Top Liberal (Progressive) Economists
The Latest Bailout Plan’s a Disaster According to Paul Krugman and James K. Galbraith

And yet American policy-makers appear convinced that more debt can rescue an economy already drowning in it. If we can just keep the leverage party going, all will be well. $787 billion to fund “stimulus,” another $9 trillion committed to guarantee bad debts, 0% interest rates and quantitative easing to drive more lending, new off balance sheet vehicles to hide from the public the toxic assets they’ve absorbed. All of it to be funded with debt, most of it the responsibility of taxpayers. If I may offer just one reason this will all fail: rising interest rates. Interest rates need only revert to their historical median in order to hammer asset values, and balance sheets, into oblivion.
"Added Debt Won't Rescue the Great American Ponzi Scheme," Seeking Alpha, March 23, 2009 ---

Bob Jensen's threads on off-balance sheet financing (OBSF) are at

Bob Jensen's threads on the bailout mess ---


"Fair Disclosure and Investor Asymmetric Awareness in Stock Markets," by Zhen Liu, SSRN, March 12, 2009 ---
Link Forwarded by Jim Mahar

The U.S. Security and Exchange Commission implemented Regulation Fair Disclosure in 2000. The regulator aims to reduce information asymmetry among investors, and expects public forums to subsume the forbidden information channel of selective forums. We show that even with cooperative managers and effective technology, current public forums is problematic if participants have asymmetric awareness. Namely, when a participant is aware of more uncertainties than are other participants, with zero incentives to share the insights, he would search information privately rather than raising questions in public forums. This causes inefficient information production compared to "unfair'' selective disclosure. Since asymmetric awareness is assumed away in rational expectations models, these models cannot justify the value of insightful questions. Nevertheless, using a standard quote-driven market model, we can compare the effect of the regulation on the price behavior and investors' welfare when awareness is either symmetric or asymmetric, and derive detailed implications. Empirical predictions are presented and they can match some intriguing empirical findings. Finally, we discuss the regulator's consideration on investor awareness.

. . .

At first glance, fair disclosure seems the best remedy for the information asymmetry caused by selective disclosure, without sacrificing the availability of high quality information. However, practitioners have argued that the regulation has produced some undesirable side effects:

1. The ambiguous definition of material information makes issuers reluctant to provide "immaterial" information in private .

2. Professionals may be unable to obtain information because of ineffective technology utilized in public communications.

3. Professionals 'with the most perception, intuition, or experience are not willing to share their insights with other investors under fair disclosure, so that less information can be revealed.

Bob Jensen's threads on accounting theory are at

Auditor "going concern" warnings seen peaking in 2009 ---
The number of "going concern" warnings by corporate auditors could hit an all-time high this year, as the U.S. recession has put the survival of hundreds of companies in doubt, the chief executive of accounting firm Grant Thornton predicted on Thursday.
Emily Chasan, Reuters, February 26, 2009 ---

Every year, U.S. auditors are required to say when they have substantial doubt about whether a company can survive for another 12 months. Auditors' so-called "going concern opinions" are included in companies' Form 10-K annual reports filed with U.S. regulators, and sometimes can put companies in violation of their loan covenants.

"I'm sure we will see a very high percentage -- much higher than ever before -- of companies receiving going concern opinions," Ed Nusbaum, chief executive of Grant Thornton, said in an interview.

Auditors must make their decisions over the next few weeks, and Nusbaum, who heads the sixth-largest U.S. accounting firm, measured by revenue, said there is a risk that many will "get it wrong" this year.

"As we've seen over the last three or four months, markets can change so dramatically," Nusbaum said. "There's no doubt that many going concern opinions will be issued for companies that will survive, and likewise there will be companies that don't get going concern opinions that won't survive."

Automaker General Motors Corp (GM.N) said on Thursday it expects to receive a going concern opinion from its auditors this year, but many more companies should also expect to receive such opinions, Nusbaum said.

While he did not have exact numbers, he said auditors have never before considered giving so many going concern opinions.

"So many companies are being dramatically impacted by the recession, whether it's the fair market value of securities, or a slowdown in manufacturing or oil prices," Nusbaum said.

Nusbaum said investors should expect a slew of going concern opinions in automotive, manufacturing, financial services and retail companies.

In fact, the issuance of auditor going concern opinions has climbed sharply since 2001, according to a December study by professors at the University of Arkansas and Texas A&M University.

The study showed that going concern opinions were issued for 52 percent of distressed and subsequently bankrupt companies in 2001, and that the proportion rose to 72 percent after December 2001.

After the collapse of Enron and its auditor Arthur Andersen, the risk that auditors could be sued for failing to issue a going concern opinion is something that auditors keep in mind when making decisions about the issue, Nusbaum said.

"The risk of litigation is significant and in many cases the only option is to issue a going concern opinion ... there is a legal motivation," Nusbaum said.

But ultimately the trouble in the credit markets and uncertainty about how the economy can recover has put both companies and auditors in a tough position this year, Nusbaum said.

Continued in article

How many companies on Moody's new "Bottom Rung" also get going concern exceptions in auditor reports?

For example, GM already has a going concern exception from Deloitte. But will Ford Motor Company on the "Bottom Rung" also get a going concern exception?

"Moody's Aims to Be Ahead on Defaults," by Jeffrey McCracken, The Wall Street Journal, March 10, 2009 ---

Pilloried for missing credit problems in the nation's mortgage markets, credit-ratings firm Moody's Investors Service is trying to get ahead of corporate bankruptcies. The firm on Tuesday is publishing a list called the Bottom Rung, detailing the companies that Moody's says are most likely to default on their debts.

With 283 companies, the list holds nearly every sector of the economy. The dominant industries on this at-risk list include much of the U.S. auto industry, the casino sector, and many retail chains, newspapers and broadcast-TV and radio-station networks. Energy firms, airlines and restaurant chains appear often.

The Moody's Corp. unit rates debt on about 2073 companies, sizing up each company's ability to pay what it owes. The Bottom Rung, which Moody's began compiling a few months ago and will update monthly, represents roughly the riskiest 20% of all companies it tracks, ranked by those with the lowest credit ratings.

Moody's estimates about 45% of the Bottom Rung companies will default in the next year. Combined these firms have more than $260 billion in bond and bank debt. A default ranges from filing for bankruptcy to a distressed debt-exchange to missing a debt payment.

"Sounds like Moody's may be trying to get out in front on defaults, given they were perhaps a little behind on subprime mortgages and commercial mortgage-backed securities," said David Resnick, managing director at investment banking firm Rothschild Inc. which works on many corporate bankruptcies and restructurings.

Moody's and credit-rating rival Standard & Poor's Corp., were criticized by the Senate in hearings late last year about the effectiveness of the ratings agencies.

Sen. Robert Menendez (D. N.J.), said at the time it seems that the agencies "are playing both coach and referee" in giving advice to issuers of debt.

Yet in trying to predict or warn about coming defaults, Moody's is also pushing into a grey zone, singling out some companies that say they're in decent fiscal health. On Monday, imaging company Eastman Kodak objected to the characterization that it rests on "the bottom rung."

"Any speculation, however informed, suggesting that Kodak is less than financially sound, is irresponsible," wrote Eastman Kodak spokesman David Lanzillo in an email statement. "Kodak is financially solid and we are taking the right actions to ensure that we remain a strong and enduring competitor. We ended 2008 with more than $2.1 billion in cash on our balance sheet, a manageable debt balance, and no significant debt payments likely until late 2010."

The Spanish-language media company Univision Communications Inc. also said its inclusion on the list wasn't warranted.

"Univision has more than ample liquidity to operate the business in the current environment, and has sufficient cash on hand to meet all obligations and debt maturities, including repayment of the asset sale bridge due in March 2009. There are no other debt maturities until the later part of 2011."

Some of the names on the list aren't so surprising, such as General Motors Corp. and Chrysler LLC. But some less-obvious names like information-technology giant Unisys Corp., OSI Restaurant Partners, owner of the Outback Steakhouse restaurant chain and the MGM Mirage casino empire are also included. One name not on the list, but likely to be added when it is first updated next month, is Clear Channel Communications, which Monday was downgraded four notches by Moody's. All these companies declined to comment or did not return a request for comment.

To compile the list, Moody's chose the companies with the lowest credit ratings -- those rated B3 or below -- whose ratings were either negative or under review. That rating is the 16th lowest on Moody's 21-step ratings system.

Applying that methodology retroactively to 2008 would have yielded about 157 companies, Moody's officials said, 60 of which would have eventually defaulted.

"Even though it seems like we've had a lot of defaults already this shows we aren't even close to the peak. There is a lot of bad news to come," said David Keisman, Moody's senior vice president of corporate finance. "Our thought was that in this cycle, with all that's happened, we are going to have a lot of bad news. What we can't have is surprise bad news."

Moody's, S&P and other rating agencies are all forecasting corporate defaults will skyrocket this year to three or four times the default rate of 2008, perhaps eclipsing all-time high default rates of the early 1930s.

The list is rapidly growing. Moody's said 73 new companies were added in January and February. Among the new entries: national retailer Bon-Ton Stores Inc., telecommunications company Global Crossing Inc. and auto-seat maker Lear Corp.

Also dotting the list are multi-billion-dollar private-equity backed leverage buyouts, such as Harrah's Entertainment, Burlington Coat Factory and Univision Communications.

"That's not surprising given a lot of private-equity deals were done in 2006 and 2007 that projected business would keep performing at high levels and then were levered off that," said Mr. Resnick of Rothschild.

Another 24 companies left the list recently, 23 of them because they defaulted or the ratings on them were withdrawn. Many of those companies also filed for bankruptcy, such as Trump Entertainment Resorts and the Tribune Co. newspaper chain. Only the Landry's Restaurant Inc. chain made a move up and off the list.

Mr. Keisman said Moody's analysts are calling the companies on the list to let them know they will be on it.

"It's not an editorial platform. It is very data driven. We are just being pro-active. This is like a slow-motion collapse and this shows so much more in the way of bad news is coming," he said.

The 'Bottom Rung' -- Companies at Greatest Risk of Defaulting

Moody's Investors Service is launching a list called the "Bottom Rung," which details 283 companies that are at risk of defaulting on their debt. Below are the 30 largest companies on the list, based on rated debt.

Allison Transmission, Inc.
Automotive: Parts
AMR Corp.
Transportation Services: Airline
Building Materials Corporation of America
Manufacturing: Finished Products
Chrysler LLC
Automotive: Passenger
Citadel Broadcasting Corp.
Media: Broadcast Tv & Radio Stations
Claire's Stores, Inc.
Retail: Department Stores
Dana Holding Corp.
Rating under reveiw
Automotive: Parts
Dole Food Company, Inc.
Natural Products Processor: Agriculture
Eastman Kodak Co.
Technology: Hardware
Ford Motor Co.
Automotive: Passenger
Freescale Semiconductor, Inc.
Technology: Semiconductor
General Motors Corp.
Automotive: Passenger
Georgia Gulf Corp.
Chemicals: Commodity Chemical
Hawker Beechcraft Acquisition Co.
Aircraft & Aerospace: Equipment
Idearc, Inc.
Media Publishing: Books
Lear Corp.
Rating under reveiw
Automotive: Parts
Level 3 Communications, Inc.
Rating under reveiw
Telecommunications: Wireline
Michaels Stores, Inc.
Retail: Specialty
OSI Restaurant Partners, Inc.
Rating under reveiw
Restaurants: Family Dining
R.H. Donnelley Corp.
Media: Printing - Holdco
Reader's Digest Association, Inc.
Media Publishing: Newspapers & Magazines
Realogy Corp.
Services: Consumer
Rite Aid Corp.
Retail: Drug Stores
Source Interlink Companies Inc.
Media Publishing: Newspapers & Magazines
Swift Transportation Co., Inc.
Transportation Services: Trucking
Tenneco Inc.
Automotive: Parts
Univision Communications, Inc.
Media: Diversified Media - Fc
US Airways Group, Inc.
Transportation Services: Airline
Visteon Corp.
Automotive: Parts
Western Refining, Inc.
Energy: Oil - Refining & Marketing
Sources: Moody's Investors Service

Bob Jensen's threads on auditor professionalism are at

We need honest accounting more than ever, not fantasy teases for investors

This is a pretty good article on how players (banks), umpires (regulators), and fans (like billionnaires Stever Forbes and Warren Buffet) have inappropriately blamed the scorekeepers (accounts) for the demise of the big banks. In fact the December 30, 2008 research report calls this attribution of blame just plain wrong (and self-serving).

The wonderful December 30, 2008 research report of the SEC shows that fair value accounting is neither the cause nor the cure for the banking crisis. The liquidity problem of the holders of the toxic investments is caused by trillions of dollars invested in underperforming (often zero performing) of bad investments mortgages or mortgaged-backed bonds that have to be written down unless auditors agree to simply lie about values. That is not likely to happen, but client pressures on auditors to value on the high side for many properties will be heavy handed.
The wonderful full SEC report that bankers and regulators do not want to read can be freely downloaded at

"We Need Honest Accounting:  Relax regulatory capital rules if need be, but don't let banks hide the truth," by James A. Chanos, The Wall Street Journal, March 24, 2009 ---

Mark-to-market (MTM) accounting is under fierce attack by bank CEOs and others who are pressing Congress to suspend, if not repeal, the rules they blame for the current financial crisis. Yet their pleas to bubble-wrap financial statements run counter to increased calls for greater financial-market transparency and ongoing efforts to restore investor trust.

We have a sorry history of the banking industry driving statutory and regulatory changes. Now banks want accounting fixes to mask their recklessness. Meanwhile, there has been no acknowledgment of culpability in what top management in these financial institutions did -- despite warnings -- to help bring about the crisis. Theirs is a record of lax risk management, flawed models, reckless lending, and excessively leveraged investment strategies. In the worst instances, they acted with moral indifference, knowing that what they were doing was flawed, but still willing to pocket the fees and accompanying bonuses.

MTM accounting isn't perfect, but it does provide a compass for investors to figure out what an asset would be worth in today's market if it were sold in an orderly fashion to a willing buyer. Before MTM took effect, the Financial Accounting Standards Board (FASB) produced much evidence to show that valuing financial instruments and other difficult-to-price assets by "historical" costs, or "mark to management," was folly.

The rules now under attack are neither as significant nor as inflexible as critics charge. MTM is generally limited to investments held for trading purposes, and to certain derivatives. For many financial institutions, these investments represent a minority of their total investment portfolio. A recent study by Bloomberg columnist David Reilly of the 12 largest banks in the KBW Bank Index shows that only 29% of the $8.46 trillion in assets are at MTM prices. In General Electric's case, the portion is just 2%.

Why is that so? Most bank assets are in loans, which are held at their original cost using amortization rules, minus a reserve that banks must set aside as a safety cushion for potential future losses.

MTM rules also give banks a choice. MTM accounting is not required for securities held to maturity, but you need to demonstrate a "positive intent and ability" that you will do so. Further, an SEC 2008 report found that "over 90% of investments marked-to-market are valued based on observable inputs."

Financial institutions had no problem in using MTM to benefit from the drop in prices of their own notes and bonds, since the rule also applies to liabilities. And when the value of the securitized loans they held was soaring, they eagerly embraced MTM. Once committed to that accounting discipline, though, they were obligated to continue doing so for the duration of their holding of securities they've marked to market. And one wonders if they are as equally willing to forego MTM for valuing the same illiquid securities in client accounts for margin loans as they are for their proprietary trading accounts?

But these facts haven't stopped the charge forward on Capitol Hill. At a recent hearing, bankers said that MTM forced them to price securities well below their real valuation, making it difficult to purge toxic assets from their books at anything but fire-sale prices. They also justified their attack with claims that loans, mortgages and other securities are now safe or close to safe, ignoring mounting evidence that losses are growing across a greater swath of credit. This makes the timing of the anti-MTM lobbying appear even more suspect. And not all financial firms are calling for loosening MTM standards; Goldman Sachs and others who are standing firm on this issue should be applauded.

According to J.P. Morgan, approximately $450 billion of collateralized debt obligations (CDOs) of asset-backed securities were issued from late 2005 to mid-2007. Of that amount, roughly $305 billion is now in a formal state of default and $102 billion of this amount has already been liquidated. The latest monthly mortgage reports from investment banks are equally sobering. It is no surprise, then, that the largest underwriters of mortgages and CDOs have been decimated.

Commercial banking regulations generally do not require banks to sell assets to meet capital requirements just because market values decline. But if "impairment" charges under MTM do push banks below regulatory capital requirements and limit their ability to lend when they can't raise more capital, then the solution is to grant temporary regulatory capital "relief," which is itself an arbitrary number.

There is a connection between efforts over the past 12 years to reduce regulatory oversight, weaken capital requirements, and silence the financial detectives who uncovered such scandals as Lehman and Enron. The assault against MTM is just the latest chapter.

Instead of acknowledging mistakes, we are told this is a "once in 100 years" anomaly with the market not functioning correctly. It isn't lost on investors that the MTM criticisms come, too, as private equity firms must now report the value of their investments. The truth is the market is functioning correctly. It's just that MTM critics don't like the prices that investors are willing to pay.

The FASB and Securities and Exchange Commission (SEC) must stand firm in their respective efforts to ensure that investors get a true sense of the losses facing banks and investment firms. To be sure, we should work to make MTM accounting more precise, following, for example, the counsel of the President's Working Group on Financial Markets and the SEC's December 2008 recommendations for achieving greater clarity in valuation approaches.

Unfortunately, the FASB proposal on March 16 represents capitulation. It calls for "significant judgment" by banks in determining if a market or an asset is "inactive" and if a transaction is "distressed." This would give banks more discretion to throw out "quotes" and use valuation alternatives, including cash-flow estimates, to determine value in illiquid markets. In other words, it allows banks to substitute their own wishful-thinking judgments of value for market prices.

The FASB is also changing the criteria used to determine impairment, giving companies more flexibility to not recognize impairments if they don't have "the intent to sell." Banks will only need to state that they are more likely than not to be able to hold onto an underwater asset until its price "recovers." CFOs will also have a choice to divide impairments into "credit losses" and "other losses," which means fewer of these charges will be counted against income. If approved, companies could start this quarter to report net income that ignores sharp declines in securities they own. The FASB is taking comments until April 1, but its vote is a fait accompli.

Obfuscating sound accounting rules by gutting MTM rules will only further reduce investors' trust in the financial statements of all companies, causing private capital -- desperately needed in securities markets -- to become even scarcer. Worse, obfuscation will further erode confidence in the American economy, with dire consequences for the very financial institutions who are calling for MTM changes. If need be, temporarily relax the arbitrary levels of regulatory capital, rather than compromise the integrity of all financial statements.

Bob Jensen's threads about all this bull crap blaming of the bean counters can be found at

Bob Jensen's threads on fair value accounting are at

FASB Eases Fair-Value Rules Amid Lawmaker Pressure

April 2, 2009 message from Ganesh M. Pandit [profgmp@HOTMAIL.COM]

The FASB has voted to relax the fair value accounting rules.

Ganesh M Pandit
Adelphi University


April 2, 2009 reply from Bob Jensen

Hi Ganesh,

The FASB, now offers an audio file has an audio explanation of why they’re making special fair value accounting allowances for banks. It is linked at the FASB home page.---

Be patient. This audio file loads very slowly. 
It may have long pauses while it loads new segments, but these pauses will vary with your bandwidth.

It is not streaming audio and can be easily saved as a file.

 It probably should be shared with all accounting students!

April 2, 2009
Audio of Today's Press Conference with Robert Herz, Teresa Polley, and Russell Golden on Fair Value and OTTI Actions
(Posted: 04/02/09)

 "FASB Eases Fair-Value Rules Amid Lawmaker Pressure (Update3)," by Ian Katz, Bloomberg News, April 2, 2009 --- 

The Financial Accounting Standards Board, pressured by U.S. lawmakers and financial companies, voted to relax fair-value rules that Citigroup Inc. and Wells Fargo & Co. say don’t work when markets are inactive.

The changes to so-called mark-to-market accounting allow companies to use “significant” judgment when gauging the price of some investments on their books, including mortgage-backed securities. Analysts say the measure may reduce banks’ writedowns and boost their first-quarter net income by 20 percent or more. FASB voted 3-2 to approve the rules at a meeting today in Norwalk, Connecticut.

“Congress clearly indicated that some easing was probably appropriate in this instance,” House Democratic Leader Steny Hoyer of Maryland said today in a Bloomberg Television interview.

House Financial Services Committee members pressed FASB Chairman Robert Herz at a March 12 hearing to revise fair-value, which requires banks to mark assets each quarter to reflect market prices, saying the rule unfairly punished financial companies. FASB’s proposals, made four days later, spurred criticism from investor advocates and accounting-industry groups, which say fair-value forces companies to disclose their true financial health.

Financial shares rose after the FASB move. Citigroup rose 4 percent to $2.79 at 11:46 a.m. in New York Stock Exchange composite trading. Bank of America Corp. added 5.5 percent to $7.44. JPMorgan Chase & Co. rose 1 percent to $28.36.

Seeking Suspension

Blackstone Group LP Chairman Stephen Schwarzman, the American Bankers Association and 65 lawmakers in the House of Representatives last September urged that fair-value accounting, mandated by FASB, be suspended. William Isaac, chairman of the Federal Deposit Insurance Corp. from 1981 to 1985, has called fair value “extremely and needlessly destructive” and “a major cause” of the credit crisis. Robert Rubin, the former Citigroup senior counselor and Treasury secretary, said Jan. 27 the rule has done “a great deal of damage.”

“Good decision,” Citigroup Chairman Richard Parsons said of FASB’s move. The market for mortgages and other assets was not working, so something had to change, Parsons said in a New York interview today.

Banks rely on competitors’ asset sales to help determine the fair-market value of similar securities they hold on their own books. FASB’s staff conceded their March 17 proposal led to a “presumption” that all security sales are “distressed” unless evidence proves otherwise. Such an interpretation may have allowed financial companies to ignore transactions in valuing their assets.

‘Orderly’ Transactions

FASB staff said banks should only disregard transactions that aren’t “orderly,” including situations in which the “seller is near bankruptcy” or needed to sell the asset to comply with regulatory requirements. Responding to criticism from investor and accounting groups, the staff said in a report today it was not FASB’s intent “to change the objective of a fair-value measurement.”

Fair-value “provides the kind of transparency essential to restoring public confidence in U.S. markets,” former Securities and Exchange Commission Chairman Arthur Levitt said in an interview yesterday.

Levitt is co-chairman, along with former SEC head William Donaldson, of the Investors’ Working Group, a non-partisan panel formed to recommend improvements to regulation of U.S. financial markets. Other members of the group, which met in New York yesterday, include Brooksley Born, former chairman of the Commodity Futures Trading Commission, and Bill Miller, chief investment officer of Legg Mason Capital Management Inc.

‘Deeply Concerned’

“The group is deeply concerned about the apparent FASB succumbing to political pressures, which prevent U.S. investors from understanding the true obligations of U.S. financial institutions,” Levitt said. Levitt is a senior adviser at buyout firm Carlyle Group and a board member at Bloomberg LP, the parent of Bloomberg News.

Fair-value requires companies to set values on most securities each quarter based on market prices. Wells Fargo and other banks argue the rule doesn’t make sense when trading has dried up because it forces companies to write down assets to fire-sale prices.

By letting banks use internal models instead of market prices and allowing them to take into account the cash flow of securities, FASB’s changes could raise bank industry earnings by 20 percent, according to Robert Willens, a former managing director at Lehman Brothers Holdings Inc. who runs his own tax and accounting advisory firm in New York.

Companies weighed down by mortgage-backed securities, such as New York-based Citigroup, could cut their losses by 50 percent to 70 percent, said Richard Dietrich, an accounting professor at Ohio State University in Columbus.

FASB rejected requests from banks to let them apply the fair-value change to their year-end financial statements for 2008. While the new standard takes effect for earnings reports filed at the end of June, FASB said companies could apply it to their first-quarter financial statements.


"FASB's FSP Decisions: Bigger than Basketball?" Seeking Alpha, April 2, 2009 ---

Finally, the FASB held its long-anticipated meeting on the two FSPs that would have gutted fair value reporting as it exists. There's been more hoopla (and hope-la) about these two amendments than in all of March Madness.

Briefly, here's what transpired, as best as I could tell from the webcast of the meeting:

1. FSP 157-e, the proposal which would have provided a direct route to Level 3 modeling of fair values whenever there was a problem with quoted prices, will be quite different from the original plan. There will be indicators of inactive markets in the final FSP, but they'll only be indicators for a preparer to consider - and more importantly, their presence WILL NOT create a presumption of a distressed price for securities in question. That part of the proposal would have greased the skids for Level 3 modeling. Not now.

There will be added required disclosures, which were not in the exposure draft. One that I caught: quarterly "aging" disclosures of the securities that are in a continuous loss position for more than 12 months and less than 12 months. As discussed in last week's report on the proposals, these now-annual disclosures are useful for assessing riskiness of assets that could become a firm's next other-than-temporary impairment charge.

Bottom line: investors didn't lose here.

2. FSP FAS 115-a, 124-a, and EITF 99-20-b, the proposal that softens the blow of recognizing other-than-temporary impairments, was essentially unchanged from the original proposal. It remains a chancre on the body of accounting literature. The credit portion of an other-than-impairment loss will be recognized in earnings, with all other attributed loss being recorded in "other comprehensive income," to be amortized into earnings over the life of the associated security. That's assuming the other-than-temporary impairment is recognized at all, because the determination will still be largely driven by the intent of the reporting entity and whether it's more likely than not that it will have to sell the security before recovery. This is a huge mulligan for banks with junky securities.

If OTT charges are taken, the full amount of the impairment will be disclosed on the income statement with the amount being shunted into other comprehensive income shown as a reduction of the loss, leaving only the credit portion to be recognized in current period earnings.

Bottom line: Investors lost on this vote, and they will have to pay more attention to OCI in the future, as it becomes a more frequently-used receptacle for unwanted debits. When investors note these "detoured charges" in earnings, they should skip the detour and factor the full charge into their evaluation of earnings. A small victory for investors: the original proposal would have included other-than-temporary impairments on equity securities. The final decision will affect only debt securities.

There was a third, much less-heralded FSP voted upon at the meeting:

3. FSP FAS 107-a and APB 28-a, which will make the now-annual fair value disclosures for all financial instruments required on a quarterly basis. This will be required beginning in the second quarter, with early implementation allowed in the first quarter.

All three FSPs will become effective in the second quarter, with early implementation allowed in the first quarter. Note: any firm electing early adoption of the impairment FSP cannot wait until later to adopt the FSP 157-e fair value amendment. If they change the way they recognize impairments, they also have to change how they consider the calculation of fair values.

Some board members expressed hope that this was the last of the "emergency amendments" to take place at the end of a reporting period. It seems too much to hope for; there could more ahead, depending on how meddlesome the G-20 would like to be. Remember when IFRS in the United States was a hot topic? To a very large degree, that sprouted from a trans-Atlantic summit meeting between the EU and the White House. The same thing could happen again if the G-20 gang decides they know accounting better than the standard-setters.


Jensen Comment
It’s another one of those 3-2 FASB votes that gets Tom Selling hot under the collar. Guess which Board members voted yes?

I’m less critical of the so-called “easing of fair value rules” because I always thought it was possible to estimate cash flows and build a model under Level 3 of FAS 157. To me this is all smoke and mirrors that lend added justification for banks to underestimate their bad debt reserves. When the lawsuits roll in there will be more authoritative support for inflating income of banks --- that’s what its all about isn’t it?

Banks need to attract more investors to their manure piles. It’s a whole new springtime for maggots to pursue outrageous leveraging.

The best illustration of the smoke and mirrors part comes from the incomprehensible FASB audio mp3 file on April 2. Try to get your best students to make any sense out of that magic lantern show!

April 2, 2009—
 Audio of Today's Press Conference with Robert Herz, Teresa Polley, and Russell Golden on Fair Value and OTTI Actions
(Posted: 04/02/09)

April 3, 2009 reply from Dennis Beresford [dberesfo@TERRY.UGA.EDU

One of the IASB board members is on my campus today and he fully expects the IASB to follow the FASB's lead, which he strongly disagrees with. For the record, I think the FASB's action was much needed clarification of the intent of SFAS 157 and I applaud its efforts. This was not at all a situation of "bowing to pressure" but rather one of realizing that earlier guidance hadn't been applied in the intended manner. The FASB clearly accelerated its work in response to Congressional concerns but moving too slowly has been a fault of the FASB from the beginning, including the 10 1/2 years I was there.

Bob Jensen


From The Wall Street Journal Accounting Weekly Review on April 1, 2009
This case was published one day prior to the FASB decision to ease the rules on fair value accounting for banks.

Accounting Rules Should Avoid Impairment
by Michael Rapoport
The Wall Street Journal

Apr 01, 2009
Click here to view the full article on ---

TOPICS: Available-for-Sale, FASB, Financial Accounting, Financial Accounting Standards Board, Mark-to-Market, Mark-to-Market Accounting

SUMMARY: Accounting rule makers will vote Thursday on proposals to soften "mark-to-market" accounting, the controversial rules requiring companies to peg their investments' value to the market's ups and downs. Many banks blame the rules for worsening their current problems, by locking in losses that they say are merely temporary.

CLASSROOM APPLICATION: Financial institutions continue to criticize the mark-to-market accounting rules. This article reports on the proposal to soften those rules, keeping our classes current on the issue. Additionally, this article offers an opportunity to discuss an opinion piece, which takes the slant that the criticism of these rules is "largely bogus." You could use this article as an opportunity to discuss opinion pieces versus articles that report only news with no commentary, as well as ask the students their opinions on whether they agree with the writer.

1. (Introductory) What changes have been proposed regarding mark-to-market accounting? What body votes on these proposals?

2. (Advanced) Why is mark-to-market accounting such a big issue in the business world? What claims do financial institutions make regarding mark-to-market? What do mark-to-market supporters say?

3. (Advanced) What are "available-for-sale" investments? What is the current accounting treatment for these assets? Please explain the changes under the proposal. How would the change affect financial reporting and investors?

4. (Introductory) What is the FASB? What concerns does the writer have regarding FASB independence? Do you think those concerns are legitimate?

5. (Introductory) What is the position of the writer in this article? How does this article differ from news stories? Why do newspapers publish these types of articles? Do you agree with the writer? Why or why not?

Reviewed By: Linda Christiansen, Indiana University Southeast

No Easy Answers
by Paul Gigot
Mar 30, 2009
Online Exclusive

Move to Ease 'Mark' Rule May Subvert Treasury Plan
by Heidi N. Moore
Apr 01, 2009
Online Exclusive

Banks, Grasping for Good News, Look to FASB Ruling for a Boost
by David Gaffen
Apr 02, 2009
Online Exclusive

Bob Jensen’s threads on accounting valuation are at

Hi Tom, 

Your latest Onion piece is a good starting point for a “blank paper” beginning for the debate on fair value accounting ---  

But it overlooks some of the major problems, particularly problems in current (replacement) cost accounting that are summarized at

One of the main problems with exit value accounting is the huge problem of measuring covariance of exit value of one item with interactive values of other items, particularly covariance with intangible items.

Another huge problem with exit value accounting is that installation costs are often enormous, have future economic benefit, and have zero exit value because they cannot be put back on the market. This includes installation costs and costs of obtaining Government Agency approval of drugs, mining permits, oil drilling permits, etc.

Replacement costs also have huge problems as summarized below.

Market Value Accounting: Entry Value (Current Cost, Replacement Cost) Accounting

Beginning in 1979, FAS 33 required large corporations to provide a supplementary schedule of condensed balance sheets and income statements comparing annual outcomes under three valuation bases --- Unadjusted Historical Cost, Price Level Adjusted (PLA) Historical Cost, and Current Cost Entry Value (adjusted for depreciation and amortization). Companies complained heavily that users did not obtain value that justified the cost of implementing FAS 33. Analysts complained that the FASB allowed such crude estimates that the FAS 33 schedules were virtually useless, especially the Current Cost estimates. The FASB rescinded FAS 33 when it issued FAS 89 in 1986.

Current cost accounting by whatever name (e.g., current or replacement cost) entails the historical cost of balance sheet items with current (replacement) costs. Depreciation rates can be re-set based upon current costs rather than historical costs. 

Beginning in 1979, FAS 33 required large corporations to provide a supplementary schedule of condensed balance sheets and income statements comparing annual outcomes under three valuation bases --- Unadjusted Historical Cost, PLA-Adjusted historical cost, and Current Cost Entry Value (adjusted for depreciation and amortization). Companies are no longer required to generate FAS 33-type comparisons. The primary basis of accounting in the U.S. is unadjusted historical cost with numerous exceptions in particular instances. For example, price-level adjustments may be required for operations in hyperinflation nations. Exit value accounting is required for firms deemed highly likely to become non-going concerns. Exit value accounting is required for personal financial statements (whether an individual or a personal partnership such as two married people). Economic (discounted cash flow) valuations are required for certain types of assets and liabilities such as pension liabilities. Hence in the United States and virtually every other nation, accounting standards do not require or even allow one single basis of accounting. Beginning in January 2005, all nations in the European Union adopted the IASB's international standards that have moved closer and closer each year to the FASB/SEC standards of the United States.


Advantages of Entry Value (Current Cost, Replacement Cost) Accounting

Although I am not in general a current cost (replacement cost, entry-value) advocate, I think you and Tom are missing the main theory behind the passage of the now defunct FAS 33 that leaned toward replacement cost valuation as opposed to exit valuation.

The best illustration in favor of replacement cost accounting is the infamous Blue Book used by automobile and truck dealers that lists composite wholesale trading for each make and model of vehicle in recent years. The Blue Book illustration is relevant with respect to business equipment currently in use in a company since virtually all that equipment is now in the “used” category, although most of it will not have a complete Blue Book per se.

The theory of Blue Book pricing in accounting is that each used vehicle is unique to a point that exit valuation in particular instances is very difficult since no two used vehicles have the same exit value in a particular instances. But the Blue Book is a market-composite hundreds of dealer transactions of each make and model in recent months and years on the wholesale market.

Hence I don’t have any idea about what my 1999 Jeep Cherokee in particular is worth, and any exit value estimate of my vehicle is pretty much a wild guess relative to what it most likely would cost me to replace it with another 1999 Jeep Cherokee from a random sample selection among 2,000 Jeep dealers across the United States. I merely have to look up the Blue Book price and then estimate what the dealer charges as a mark up if I want to replace my 1999 Jeep Cherokee.

Since Blue Book pricing is based upon actual trades that take place, it’s far more reliable than exit value sticker prices of vehicles in the sales lots.

It is sometimes the replacement market of actual transactions that makes a Blue Book composite replacement cost more reliable than an exit value estimate of what I will pay for a particular car from a particular dealer at retail. Of course this argument is not as crucial to financial assets and liabilities that are not as unique as a particular used vehicle. Replacement cost valuation for accounting becomes more defensible for non-financial assets.


Disadvantages of Entry Value (Current Cost, Replacement Cost) Accounting


Market Value Accounting: Exit Value (Liquidation, Fair Value) Accounting

Whereas entry value is what it will cost to replace an item, exit value is the value of disposing of the item. It can even be negative in some instances where costs of clean up and disposal make to exit price negative. Exit value accounting is required under GAAP for personal financial statements (individuals and married couples) and companies that are deemed likely to become non-going concerns. See "Personal Financial Statements," by Anthony Mancuso, The CPA Journal, September 1992 --- 

Some theorists advocate exit value accounting for going concerns as well as non-going concerns. Both nationally (particularly under FAS 115 and FAS 133) and internationally (under IAS 32 and 39 for), exit value accounting is presently required in some instances for financial instrument assets and liabilities. Both the FASB and the IASB have exposure drafts advocating fair value accounting for all financial instruments.

FASB's Exposure Draft for Fair Value Adjustments to all Financial Instruments
On December 14, 1999 the FASB issued Exposure Draft 204-B entitled Reporting Financial Instruments and Certain Related Assets and Liabilities at Fair Value.


If an item is viewed as a financial instrument rather than inventory, the accounting becomes more complicated under FAS 115. Traders in financial instruments adjust such instruments to fair value with all changes in value passing through current earnings. Business firms who are not deemed to be traders must designate the instrument as either available-for-sale (AFS) or hold-to-maturity (HTM). A HTM instrument is maintained at original cost. An AFS financial instrument must be marked-to-market, but the changes in value pass through OCI rather than current earnings until the instrument is actually sold or otherwise expires.  Under international standards, the IASB requires fair value adjustments for most financial instruments. This has led to strong reaction from businesses around the world, especially banks. There are now two major working group debates. In 1999 the Joint Working Group of the Banking Associations sharply rebuffed the IAS 39 fair value accounting in two white papers that can be downloaded from


·         Financial Instruments: Issues Relating to Banks (strongly argues for required fair value adjustments of financial instruments). The issue date is August 31, 1999.


·         Accounting for financial Instruments for Banks (concludes that a modified form of historical cost is optimal for bank accounting). The issue date is October 4, 1999.


Advantages of Exit Value (Liquidation, Fair Value) Accounting

Exit value reporting is not deemed desirable or practical for going concern businesses for a number of reasons that I will not go into in great depth here.


Disadvantages of Exit Value (Liquidation, Fair Value) Accounting

·     Operating assets are bought to use rather than sell. For example, as long as no consideration is being given to selling or abandoning a manufacturing plant, recording the fluctuating values of the land and buildings creates a misleading fluctuation in earnings and balance sheet volatility. Who cares if the value of the land went up by $1 million in 1994 and down by $2 million in 1998 if the plant that sits on the land has been in operation for 60 years and no consideration is being given to leaving this plant?


·     Some assets like software, knowledge databases, and Web servers for e-Commerce cost millions of dollars to develop for the benefit of future revenue growth and future expense savings. These assets may have immense value if the entire firm is sold, but they may have no market as unbundled assets. In fact it may be impossible to unbundle such assets from the firm as a whole. Examples include the Enterprise Planning Model SAP system in firms such as Union Carbide. These systems costing millions of dollars have no exit value in the context of exit value accounting even though they are designed to benefit the companies for many years into the future


·     Exit value accounting records anticipated profits well in advance of transactions. For example, a large home building company with 200 completed houses in inventory would record the profits of these homes long before the company even had any buyers for those homes. Even though exit value accounting is billed as a conservative approach, there are instances where it is far from conservative


·     Value of a subsystem of items differs from the sum of the value of its parts. Investors may be lulled into thinking that the sum of all subsystem net assets valued at liquidation prices is the value of the system of these net assets. Values may differ depending upon how the subsystems are diced and sliced in a sale.


·     Appraisals of exit values are both to expensive to obtain for each accounting report date and are highly subjective and subject to enormous variations of opinion. The U.S. Savings and Loan scandals of the 1980s demonstrated how reliance upon appraisals is an invitation for massive frauds. Experiments by some, mostly real estate companies, to use exit value-based accounting died on the vine, including well-known attempts decades ago by TRC, Rouse, and Days Inn.


·     Exit values are affected by how something is sold. If quick cash is needed, the best price may only be half of what the price can be by waiting for the right time and the right buyer.


·     Financial contracts that for one reason or another are deemed as to be "held-to-maturity" items may cause misleading increases and decreases in reported values that will never be realized.  A good example is the market value of a fixed-rate bond that may go up and down with interest rates but will always pay its face value at maturity no matter what happens to interest rates.


·         Exit value markets are often thin and inefficient markets.


Economic Value (Discounted Cash Flow, Present Value) Accounting

There are over 100 instances where present GAAP requires that historical cost accounting be abandoned in favor of discounted cash flow accounting (e.g., when valuing pension liabilities and computing fair values of derivative financial instruments). These apply in situations where future cash inflows and outflows can be reliably estimated and are attributable to the particular asset or liability being valued on a discounted cash flow basis.

Advantages of Economic Value (Discounted Cash Flow, Present Value) Accounting

Disadvantages of Economic Value (Discounted Cash Flow, Present Value) Accounting

Bob Jensen’s threads on accounting valuation are at

The Accounting Onion ---   





FAS 141(R)-1 ---
Title: Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies
Date Issued: April 1, 2009
Jensen Comment
This is an illustration of a principles based "standard" that will be very difficult to implement and virtually impossible to consistently apply among different firms.

PwC recommends the following on January 20, 2009 --- Click Here


There are various instances where fair value accounting is required for non-financial as well as financial items under current standards. These include the following:

Under international accounting standards, it is possible to update fixed assets like real estate to fair values on occasion such as every five or ten years. This is not as acceptable under FASB standards.

Hi again Tom,

I know Walter very well and have argued this point with him before, especially in the context of FAS 123. ---

If General Electric buys a factory robot for $10 million and pays another $10 million for installation in a plant producing wind turbines, suppose the following:

Historical Cost:  $20 million (early in 2008) with an estimated productive life of 15 years
Replacement Cost:  $30 million (with the increase attributed in large measure to increased robot demand due to environmental and energy legislation in 2009)
Exit Value:  $0 with the loss caused mainly by immense transaction costs of dismantling, transporting, and re-assembly that make buying a new robot cheaper than moving a used robot.
Value in Use:  Unknown because of unknown discount rates, covariances with other tangible and intangible items, and inseparability of future cash flows attributable to one robot in one factory. In terms of covariance, if wind turbines have the GE boiler plate, the value in use of the robot is much higher than if wind turbines have the Yugo boiler plate.

From what I know of Walter’s position, Walter will place $0 exit value on the balance sheet for this robot. Unless this wind turbine plant is deemed a non-going concern, the $0 exit value is the worst possible valuation in terms of error in estimating value in use and earnings. Under a double entry system, growth company earnings will nearly always get clobbered by exit values relative to stagnant companies. In a sense Replacement (Current) Cost companies also get clobbered for non-financial assets that can be used effectively and efficiently for many years of production without replacement. Of course Replacement Cost accounting conforms to Capital Maintenance Theory ---

I‘ve never agreed with Walter on exit valuation except in the case of financial instruments and derivative financial instruments and non-going concerns.

 Some might argue that all partionings of balance sheet item values into components are arbitrary. We should only generate aggregated line items such as Factory 1 value, Factory 2, value, etc. Or perhaps we cannot partition value any further than one line item called Value of General Electric. Of course this cannot be reliably measured from thin trades of a miniscule proportion of marginal trades day-to-day on the stock market (called the blockage valuation problem). Nor can it be reliably estimated via economic models due to unknown future cash flows, unknown discount rates, unknown and unstable values of intangibles, unknown environmental and labor legislation, and the thinnest possible market for the purchase of the entire conglomerate of General Electric as a whole.

For a time Baruch Lev strongly advocated using market share prices for valuing intangibles, but his models proved be particularly unstable and lacked robustness ---
Furthermore they put the cart before the horse. Accounting reports are supposed to help decision makers make market decisions. Lev’s approach works backwards by using market values to make accounting decisions.

The FASB and IASB both want financial reporting in terms of value in use. The trouble is that for most non-financial balance sheet items the only person with a valuation estimate worth considering is the Wizard of Oz. Witness how badly Bank America overvalued Merrill Lynch when the toxic Merrill Lynch was purchased by B of A in 2008. CEO Lewis should've consulted the Wizard of Oz before agreeing to an outrageous purchase price. The point here is that experts in huge corporations make huge mistakes when valuing companies to buy and sell. The markets are just too thin at this level of aggregation.

The FASB and IASB both want financial reporting in terms of value in use. The trouble is that for most non-financial balance sheet items the only person with a valuation estimate worth considering is the Wizard of Oz.

 Bob Jensen

Of course, historical cost as we know it is highly corrupted. 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.
"Global Financial Reporting: Implications for U.S.," by Mary Barth, The Accounting Review, Vol. 83, No. 5, September 2008 ---
 Not free at


What is the current huge tax incentive for buying back debt such as non-toxic bonds that have plunged in value?

From The Wall Street Journal Accounting Weekly Review on March 20, 2009

Debt Buybacks Garner a Tax Incentive
by Michael Aneiro
The Wall Street Journal

Mar 12, 2009
Click here to view the full article on ---

TOPICS: Bond Prices, Bonds, Debt, Early Retirement of Debt, Financial Accounting, Tax Laws, Taxation

SUMMARY: "With bond prices continuing to fall and companies struggling, more issuers may look to buy back their own debt...A new tax break makes such debt purchases more attractive...[because the] stimulus legislation allows delay...taxes [on the gains] until 2014 and then spread the tax out over a five-year period....This week, homebuilder Hovnanian Enterprises said it had paid $105 million to repurchase $315 million of its unsecured senior notes....The company used proceeds from a $145 million 2008 tax refund to help fund the note repurchase." In the related article, repurchases by closely held Glencore International AG has resulted in speculation that the company is in poor financial condition. Those concerns also initially rose in 2008 "...following a marked increase in the cost of insuring its debt against default."

CLASSROOM APPLICATION: The articles can be used to introduce students to early extinguishments of debt and debt features such as insuring against default.

1. (Introductory) How do debt repurchases create a gain, particularly in the current economic climate?

2. (Introductory) What recent tax law change made debt repurchase more attractive to companies such as Hovnanian Enterprises and GE Capital?

3. (Advanced) What do you think generated the $145 million tax refund to Hovnanian Enterprises that was used to finance the debt repurchase?

4. (Advanced) Why are debt repurchases a reasonable way to use cash in the current economic environment? Alternatively, what at are the risks associated with this step?

5. (Advanced) Refer to the related article. Explain the market reaction to news that Glencore International AG bought back its debt. Include in your answer, a comment on the role in insuring against default by debt issuers.

Reviewed By: Judy Beckman, University of Rhode Island

Glencore Buys Back Own Debt
by Andrea Hotter
Mar 12, 2009
Page: C3

"Debt Buybacks Garner a Tax Incentive," by Michael Aneiro, The Wall Street Journal, March 12, 2009 ---

With bond prices continuing to fall and companies struggling, more issuers may look to buy back their own debt.

Repurchasing debt can be an especially beneficial use of cash for companies during a downturn, when consumer demand slows and other capital investments are unlikely to offer immediate returns.

A new tax break makes such debt purchases more attractive for companies. Debt forgiven through buybacks is usually taxed as income, but stimulus legislation allows companies that repurchase debt to delay those taxes until 2014, and then to spread the tax out over a five-year period.

Several companies in troubled industries such as housing and casinos lobbied for the tax break, just as some issuers in those industries are starting to avail themselves of the chance to repurchase debt.

This week, home builder Hovnanian Enterprises said it had paid $105 million to repurchase $315 million of its unsecured senior notes, resulting in a $210 million gain in its latest quarter and a corresponding increase in stockholders' equity. The company used proceeds from a $145 million 2008 tax refund to help fund the note repurchase.

Underscoring how quickly debt value has deteriorated, Hovnanian just last May sold $600 million of five-year notes that pay an 11.5% coupon at 99 cents on the dollar. Those notes have since faded to 71 cents on the dollar, according to bond trading platform MarketAxess.

Last week, General Electric unit GE Capital offered to buy back $1.46 billion of its bonds as a way to boost its financial flexibility and possibly make it easier to participate in new government financing programs.

Unlike distressed debt exchanges, where companies invite investors to trade in large blocks of bonds at a steep discount to face value in exchange for new notes, debt buybacks tend to rarely be announced until after they are conducted. Evidence of any significant uptick so far is elusive.

"The buyback issue has kind of been percolating in the background," said Christopher Garman of Garman Research. "The tax issue is helpful on the margins but doesn't carry a lot of broader market impact. Still, you could see more companies starting to look to buy back debt."

But as defaults continue to rise, for some particularly at-risk companies looking to buy back debt while they burn through cash, the tax breaks mightn't come soon enough to matter.

"If they're around to file income taxes again, that's great," said Vicki Bryan, an analyst at bond research firm GimmeCredit. "But between now and then, it's a horse race: How fast can they buy back debt until they come down to a minimum amount of cash?"

Jensen Comment
There seems to be some moral hazard in this particular bailout legislation. Suppose homebuilder Hovnanian Enterprises insiders anticipate declaring Chapter 11 bankruptcy. The company pays $105 million to repurchase $315 million of its unsecured senior notes and garners proceeds from a $145 million 2008 tax refund to help fund the note repurchase. The extra cash from the tax refund is then used to pay $40 million in bonuses to employees before bankruptcy is declared.

Second Life (3-D) Virtual Worlds in Ernst & Young Training Programs

March 12, 2005 message from Steve Hornik

Ernst & Young Uses Avatars to Test the Use of Virtual Worlds as a Way to Enhance Training for New Auditors.

E&Y set up a virtual warehouse where they could train employees on Inventory counting.  The article and the video highlight the benefits of using Second Life for doing such training.  Some of the lessons learned from the article are:

    * Ernst & Young found 3-D learning better prepared new auditors by giving them real-world experience. It compared the results with new auditors who took a traditional instructor-led class.
    * 3-D learning is a cost-effective alternative to on-site training sessions because it can deliver the two goals of the meeting: training the employees and creating camaraderie and collaboration.
    * 3-D learning captures learning digitally, providing a record of what has been informal, on-the-job training. It is a good tool to capture the knowledge of retiring employees.
    * 3-D learning is a good way for adults to learn because they can retain more knowledge.
    * Don't underestimate the time and effort needed to introduce learners to this new platform. Plan to help your learners through the initial set-up and orientation. Once they've been properly introduced, most enjoy the experience.
    * Consult with others working in this space. Old instructional design approaches simply don't work in the virtual world.

The link to full article (make sure to watch the video) is at:

Dr. Steven Hornik
University of Central Florida
Dixon School of Accounting
Second Life: Robins Hermano
yahoo ID: shornik

Bob Jensen's threads Second Life are at

Something Bad About the IASB
There was markedly less harmony between the two panelists when it came to International Financial Reporting Standards. Hewitt said there's no doubt that creating a single worldwide set of accounting rules is the correct thing to do. It reflects the reality that nations depend on one another for imports and exports, and that U.S. companies would have greater access to overseas capital. Turner, though, cuffed the International Accounting Standards Board for bowing to pressure from France president Nicolas Sarkozy and other European Union leaders to relax fair-value accounting rules. Since last October, IASB has come under fire for sidestepping due process to rush out a rule allowing financial institutions to reclassify some loans as a way of avoiding marking those assets to market and avoid losses generated by a drop in asset value. "IASB has not shown that it can develop high-quality standards without political interference," Turner said. "Until it can, IFRS is not ready for prime time."
David McCann, "Former SEC Chief Accountant Blames FASB for Meltdown He credits auditors and financial statement preparers for successfully fighting fraud,", March 5, 2009 ---
Thank you to Glen Gray for this link.

Something Good About the FASB
"IASB has not shown that it can develop high-quality standards without political interference," Turner said. "Until it can, IFRS is not ready for prime time." Turner indicated that even then he would not support IFRS for U.S. companies, rejecting Hewitt's notion that the nature of international business today demands it. In fact, IFRS would make American companies less competitive, he insisted. "If we make our markets look like everyone else's, and they're only as transparent as everyone else's, there's no reason for [investors] to allocate their money to U.S. markets," he said. "But if our markets have, as they always have had, greater transparency, and investors get the information to make better decisions, then there is a reason."
David McCann, "Former SEC Chief Accountant Blames FASB for Meltdown He credits auditors and financial statement preparers for successfully fighting fraud,", March 5, 2009 ---
Bob Jensen's threads on the FASB vs. IASB issue are at
Jensen Comment
The implication here has to be that Lynn Turner does not that IASB standards in the U.S. will provide the same level of transparency as FASB standards, at least not until we see some dramatic improvements in IASB standards.

Something Bad About the FASB
Actually, Turner said he gives credit to "practicing accountants" — financial-statement preparers and auditors — for overseeing a dramatic falloff in financial fraud cases compared to the years immediately following the Enron and WorldCom scandals. "There's a change from 10 years ago, and accountants do deserve some credit," he said. "Certainly some of the audit firms get a lot of credit for what they've done in standing behind fair value and trying to get the numbers right." He had no such praise for FASB. Although the board is currently rewriting FAS 140 to eliminate QSPEs, it has "done an absolutely miserable, abysmal job, especially in the balance sheet area."
David McCann, "Former SEC Chief Accountant Blames FASB for Meltdown He credits auditors and financial statement preparers for successfully fighting fraud,", March 5, 2009 ---
Jensen Comment
Whereas the FASB at least tackled the SPE problem and lost, the IASB on the international front has had its head completely in the sand.

Bob Jensen's threads on QSPEs, VIEs, SPEs, etc. ---

Did the FASB's amended fair value guidelines give the players (banks), umpires (regulators), and fans (notably shareholders like Steve Forbes and Warren Buffett seeking a new stock market bubble) the overvalued wine they were seeking? Will the new guidelines mostly increase client pressures on auditors to sign off on fantasy financial statements?

Although the new FASB Guidelines for estimating fair value under FAS 157 and FAS 115 in "broken markets" expands client/auditor discretion for some types of assets having long-term value such as real estate, it's asking a lot to have auditors agree once again to rosy valuation of sorry-looking toxic investments such as the value of a mortgage that's about to wither on the vine. You can't squeeze sweet grape juice from shriveled homeowners, let alone fine wine. It may, however, be that higher value on foreclosed properties in bank inventories will lead to some partying over banks' financial statements.

The wonderful December 30, 2008 research report of the SEC shows that fair value accounting is neither the cause nor the cure for the banking crisis. The liquidity problem of the holders of the toxic investments is caused by trillions of dollars invested in underperforming (often zero performing) of bad investments mortgages or mortgaged-backed bonds that have to be written down unless auditors agree to simply lie about values. That is not likely to happen, but client pressures on auditors to value on the high side for many properties will be heavy handed.
The wonderful full SEC report that bankers and regulators do not want to read can be freely downloaded at

The FASB probably did its best to maintain integrity in the face of massive political pressures. I hope the IASB is able to resist the same pressures in the international arena. To me the new FASB Guidelines are mostly old wine in new bottles since FAS 157 previously gave considerable discretion in valuing items in broken markets.

"Expedited fair value guidance may ease pressure on banks," AccountingWeb, March 17, 2009 ---

Following a hearing at a House Financial Services subcommittee last week, the Financial Accounting Standards Board (FASB) agreed to expedite release of their proposed guidance for the application of FAS 157 "Fair Value Measurement." The proposed guidance was published for public comment on March 17th and will be voted on by the Board on April 2. If approved, the FASB recommends that the guidance be effective for interim and annual periods ending after March 15, 2009. According to, FASB chairman, Robert H. Herz, chairman of the Financial Accounting Standards Board (FASB), told legislators, "We can have the guidance in three weeks, but whether that will fix everything is another [issue]."

SB's proposal give more detailed guidance for valuing assets that would be classified as Level 3 under FAS 157, where values are assigned in the absence of an active market or where a sale has occurred in distressed circumstances when prices are temporarily weighed down. The new guidance allows companies to use their own models and estimates and exercise "significant judgment" to determine whether a market exists or whether the input is from a distressed sale. Under FAS 157, financial instruments' fair values cannot be based on distressed sales.

FASB had planned to issue the proposed guidance by the end of the second quarter. A study on mark-to-market accounting standards conducted by the Securities and Exchange Commission (SEC), which was mandated by the Emergency Economic Stabilization Act of 2008, concluded that more application guidance to determine fair values was needed in current market conditions. On February 18, Herz announced that FASB agreed with the SEC study and would develop additional guidance.

Thomas Linsmeier, FASB board member, said that they hoped that the new guidance could lead to more accurate and possibly higher values, reports. "What we are voting on will hopefully elevate fair values to a more reasonable price so investors are more comfortable investing in the banking system," he said.

Edward Yingling, president of the American Bankers Association, said in a statement he welcomed the proposal but expressed caution about the ways it might be used by auditors, MarketWatch says. "While we welcome today's news, it will be important to look at the details of the written proposal to see how fully it improves the guidance. It will also be imperative to examine the practical effect the proposal will have based on the various ways it is interpreted."

The FASB proposal recommends that companies take two steps to determine whether there an active market exists and whether a recent sale is distressed before applying their own models and judgment:

Step 1: Determine whether there are factors present that indicate that the market for the asset is not active at the measurement date. Factors include:

If after evaluating all the factors the sum of the evidence indicates that the market is not active, the reporting entity shall apply step 2.

Step 2: Evaluate the quoted price (that is, a recent transaction or broker price quotation) to determine whether the quoted price is not associated with a distressed transaction. The reporting entity shall presume that the quoted price is associated with a distressed transaction unless the reporting entity has evidence that indicates that both of the following factors are present for a given quoted price:

The proposed guidance also provides examples of measurement approaches in the event that the observable input is from a distressed sale.

At Monday's meeting, Herz deflated any beliefs that FASB's new guidance will be a panacea for the many ills of the U.S. economy. "There's not much accounting can do other than help people get the facts and use their best judgment," he said.

The International Accounting Standards Board, which sets accounting rules followed by more than 100 countries, plans to publish a draft rule to replace and simplify fair-value accounting rules. Critics say the rules have exacerbated the credit crunch by forcing write-downs. "We plan to replace it, the whole thing. We want to stop patching up the standard and we want to write a new one. We are aware that the current model is too complex. We need to simplify.... We will move to exposure draft hopefully within the next six months," said Philippe Danjou, a member of the IASB board.

Professor Schiller at Yale asserts housing prices are still overvalued and need to come down to reality
The median value of a U.S. home in 2000 was $119,600. It peaked at $221,900 in 2006. Historically, home prices have risen annually in line with CPI. If they had followed the long-term trend, they would have increased by 17% to $140,000. Instead, they skyrocketed by 86% due to Alan Greenspan’s irrational lowering of interest rates to 1%, the criminal pushing of loans by lowlife mortgage brokers, the greed and hubris of investment bankers and the foolishness and stupidity of home buyers. It is now 2009 and the median value should be $150,000 based on historical precedent. The median value at the end of 2008 was $180,100. Therefore, home prices are still 20% overvalued. Long-term averages are created by periods of overvaluation followed by periods of undervaluation. Prices need to fall 20% and could fall 30%.....
Watch the video on Yahoo Finance --- Click Here
See the chart at
Also see Jim Mahar's blog at
Jensen Comment
In the worldwide move toward fair value accounting that replaces cost allocation accounting, the above analysis by Professor Schiller is sobering. It suggests how much policy and widespread fraud can generate misleading "fair values" in deep markets with many buyers and sellers, although the housing market is a bit more like the used car market than the stock market. Each house and each used car are unique, non-fungible items that are many times more difficult to update with fair value accounting relative to fungible market securities and new car markets.


Bob Jensen's threads on fair value accounting are at

Don't Blame Fair Value Accounting Standards (Except in Terms of Executive Bonus Payments) ---

"IASB Enhances Financial Instruments Disclosures," SmartPros, March 5, 2009 ---

The International Accounting Standards Board (IASB) today issued amendments that improve the disclosure requirements about fair value measurements and reinforce existing principles for disclosures about the liquidity risk associated with financial instruments.

The amendments form part of the IASB’s focused response to the financial crisis and addresses the G20 conclusions aimed at improved transparency and enhanced accounting guidance. The improvements also reflect discussions by the IASB’s Expert Advisory Panel on measuring and disclosing fair values of financial instruments when markets are no longer active.

Responding to the calls of policymakers, many investor groups and other interested parties, the IASB is bringing the disclosure requirements of International Financial Reporting Standards (IFRSs) more closely into line with US standards. The amendments to IFRS 7 Financial Instruments: Disclosures introduce a three-level hierarchy for fair value measurement disclosures and require entities to provide additional disclosures about the relative reliability of fair value measurements. These disclosures will help to improve comparability between entities about the effects of fair value measurements. In addition, the amendments clarify and enhance the existing requirements for the disclosure of liquidity risk. This is aimed at ensuring that the information disclosed enables users of an entity’s financial statements to evaluate the nature and extent of liquidity risk arising from financial instruments and how the entity manages that risk.

The amendments to IFRS 7 apply for annual periods beginning on or after 1 January 2009. However, an entity will not be required to provide comparative disclosures in the first year of application.

Introducing the amendments, Sir David Tweedie, Chairman of the IASB, said: The financial crisis has shown that a clear understanding of how entities determine the fair value of financial instruments, particularly when only limited information is available, is crucial to maintaining confidence in the financial markets. The additional disclosure requirements and the three-level hierarchy will help to increase the clarity of the information. The amendments will also enhance the disclosures about the liquidity risks associated with financial instruments. The proposals build on the advice we have received from the IASB’s Expert Advisory Panel. For more information about measures undertaken by the IASB in response to the financial crisis, visit


Bull Crap About Fair Value Accounting

Congress is also be readying legislation to suspend doctors' cancer diagnoses for the next two years to "help" with the health care crisis.
Ed Scribner (paraphrased)

Here are three bull crap teaching cases on this matter. At least two prominent billionaires (Warren Buffet and Steve Forbes) are totally ignoring the wonderful December 30, 2008 SEC research report that concludes that suspension of fair value accounting for banks will hurt rather than help solve the banking crisis. But nobody seems to be listening to anything from the SEC these days. The outstanding SEC research report is at
Especially note the review of 22 bank failures beginning around Page 100.

It appears that Warren Buffett and Steve Forbes are still holding billions of shares of equity stock that tanked. They will stoop to almost any bull crap accounting rules that will help lure investors back into the stock market. For example, Warren Buffet lost $25 billion in share value. He wants you and millions of others to help create a new stock market bubble. Coloring book fantasy accounting might help them regain their lost billions.

Bull Crap Teaching Case 3
From The Wall Street Journal Accounting Weekly Review on March 13, 2009

Buffett's Unmentionable Bank Solution
by Holman W. Jenkins Jr.
Mar 11, 2009
Click here to view the full article on

TOPICS: Disclosure Requirements, Fair Value Accounting, Mark-to-Market, Mark-to-Market Accounting, Banking, Disclosure

SUMMARY: In a CNBC program on Monday, Warren Buffet called for suspension of mark-to-market accounting for regulatory capital purposes. This article emphasize that "market-to-market accounting is fine for disclosure purposes". It also notes that "CNBC, sadly, has been playing a loop of Mr. Buffet that...leaves out his most important point. Nobody cares about the merits of mark-to-market in the abstract, but how it impacts our current banking crisis."

CLASSROOM APPLICATION: Understanding mark-to-market accounting, bank regulatory processes, and the purposes of financial reporting can be covered extremely well using this opinion page editorial.

1. (Introductory) What is mark-to-market accounting?

2. (Advanced) How can banks' capital ratios be insufficient and banks be reported as insolvent under mark-to-market accounting, even if "their assets continue to perform"? In your answer, define insolvency and compare the notions of impairment of an asset versus the market value of an asset.

3. (Introductory) What is the difference between using financial reports for regulatory purposes and using them for disclosure purposes? In your answer, comment on the definition of "general purpose financial statements".

4. (Advanced) Why does regulatory reporting "require actions that might make no sense in the circumstances"? In your answer, comment on how regulatory reporting results in requirements to raise capital.

5. (Advanced) Refer again to your answer to question 3 above. Explain the implications of raising capital for current shareholders.

6. (Advanced) Define the concept of moral hazard. According to these Opinion page editors, how must regulators change their approach to handling our current banking crisis to avoid the problem of moral hazard? How does that differ from using a system of regulatory capital requirements for banks?

Reviewed By: Judy Beckman, University of Rhode Island


Bull Crap Teaching Case 2
Forbes serves up barf --- No it's worse than barf!
It's clear that Forbes never read the excellent December 2008 SEC research report on this topic.
"Obama Repeats Bush's Worst Market Mistakes:  Bad accounting rules are the cause of the banking crisis," by Steve Forbes, The Wall Street Journal, March 6, 2009 ---

What is most astounding about President Barack Obama's radical economic recovery program isn't its breadth, but its continuation of the most destructive policies of the Bush administration. These Bush policies were in themselves repudiations of Franklin Delano Roosevelt, Mr. Obama's hero.

The most disastrous Bush policy that Mr. Obama is perpetuating is mark-to-market or "fair value" accounting for banks, insurance companies and other financial institutions. The idea seems harmless: Financial institutions should adjust their balance sheets and their capital accounts when the market value of the financial assets they hold goes up or down.

That works when you have very liquid securities, such as Treasurys, or the common stock of IBM or GE. But when the credit crisis hit in 2007, there was no market for subprime securities and other suspect assets. Yet regulators and auditors kept pressing banks and other financial firms to knock down the book value of this paper, even in cases where these obligations were being fully serviced in the payment of principal and interest. Thus, under mark-to-market, even non-suspect assets are being artificially knocked down in value for regulatory capital (the amount of capital required by regulators for industries like banks and life insurance).

Banks and life insurance companies that have positive cash flows now find themselves in a death spiral. Of the more than $700 billion that financial institutions have written off, almost all of it has been book write-downs, not actual cash losses. When banks or insurers write down the value of their assets they have to get new capital. And the need for new capital is a signal to ratings agencies that these outfits might deserve a credit-rating reduction.

So although banks have twice the amount of cash on hand that they did a year ago, they lend only under duress, or apply onerous conditions that would warm Tony Soprano's heart. This is because they know that every time they make a loan or an investment there is a risk of a book write-down, even if the loan is unimpaired.

If this rigid mark-to-market accounting had been in effect during the banking trouble in the early 1990s, almost every major commercial bank in the U.S. would have collapsed because of shaky Latin American and commercial real estate loans. We would have had a second Great Depression.

But put aside for a moment the absurdity of trying to price assets in a disrupted or non-existent market, of not distinguishing between distress prices and "normal" prices. Regulatory capital by its definition should take the long view when it comes to valuation; day-to-day fluctuations shouldn't matter. Assets should be kept on the books at the price they were obtained, as long as the assets haven't actually been impaired.

Continued in article

Jensen Comment
By now investors know which large banks are stuck with trillions of dollars in non-performing loans. Wrapping them gold ribbons by reporting them way above market value is hardly going to induce investors to go out an buy enormous amounts of common shares of CitiBank, Bank of America, Wells Fargo, and JP Morgan. This artificial gilding of capital ratios does nothing to solve the problem of detoxifying the poison of non-performing loans and poisonous collateralized bonds.

This type of naive and dangerous reasoning was started on September 19, 2008 by former FDIC director Bill Isaac ---

It's certain that FAS 157 needs some amending for broken markets, but what Isaac and Forbes are proposing serve as no basis for improvements on FAS 157. After Isaac proposed elimination of fair value accounting for troubled banks, Congress ordered, in no uncertain terms, the SEC to do a research study on what was causing so many bank failures like the huge failures of WaMu and Indy Mac. Although the SEC has been disgraced for a lot of reasons as of late, the particular study that emerged in a very short period of time (December 2008) is an excellent study of why banks were failing.

In particular, beginning on Page 100 of the study the SEC reports on why 22 large-size, medium-size, and small-size banks failed. It turns out that most assets and liabilities of banks are not marked to market in the first place. Secondly, fair value adjustments downward has not been the problem of recent bank failures. The problem is non-performing loans, dangerous management of financial risk, fraud in property valuations (which was especially bad at WaMu), and performance-based reward systems that induced bank employees to screw their companies and their shareholders.

If you want to blame accountants, blame the auditors for not raising going concern questions about the failed banks ---
Blame them for badly understating bad debt reserves.
But don't blame them or the FASB/IASB standard setters for fair value accounting.
And this is from an old accounting professor who favors fair value accounting for financial and derivative financial instruments but fights against fair value accountign for non-financial investments ---

I'll bet you 99-1 odds that Steve Forbes never read this excellent SEC study:
"Report and Recommendations Pursuant to Section 133 of the Emergency Economic Stabilization Act of 2008: Study on Mark-To-Market Accounting"
The full report can be freely downloaded at (pdf)

March 6, 2009 reply from Dennis Beresford [dberesfo@TERRY.UGA.EDU]


Congress is holding a hearing on market value accounting next week - 
I understand that one Congressman is readying legislation to suspend market value accounting for two years in order to "help" with the economic crisis.

On a somewhat related point, see the recent speech by the Comptroller of the Currency who would like to use the allowance for loan losses of banks to squirrel away amounts in good times that can then be drawn on in bad times like these - 

Along with GM's going concern qualification, accounting is truly front page news again - after fading into the background a little a couple of years after SOX. We are indeed living in interesting times although with the value of my portfolio being what it is "living" may be putting too positive a spin on it!


March 6, 2009 reply from Ed Scribner [escribne@NMSU.EDU]


That same Congressman may also be readying legislation to suspend doctors' cancer diagnoses for the next two years to "help" with the health care crisis.


March 6, 2009 reply from Richard C. Sansing [Richard.C.Sansing@TUCK.DARTMOUTH.EDU]

Thanks for a Friday afternoon chuckle. I see many potential applications of the same idea. Can we help address global warming by suspending the use of thermometers?

Richard Sansing


Bull Crap Teaching Case 1
From The Wall Street Journal Accounting Weekly Review on

Bank Capital Gets Stress Test
by Deborah Solomon and Jon Hilsenrath
Feb 26, 2009
Click here to view the full article on

TOPICS: Bad Debts, Banking, Financial Analysis, Financial Statement Analysis

SUMMARY: The Obama administration is proposing new bank capital requirement tests that will be designed to assess whether "...banks can survive even if the unemployment rate rises above 10% and home prices fall by another 25%....worse than most economists and the Federal Reserve currently expect." If banks fail to demonstrate sufficient capital to weather those circumstances, they may either raise additional funds privately or accept further investment from the U.S. government. "The government's investment would come in the form of convertible preferred shares, which institutions could choose to convert into common equity at any time....Officials said they expect banks would convert the shares to common equity as needed to help protect against losses."

CLASSROOM APPLICATION: Questions help students to understand the meaning of capital beyond the balance sheet definition of assets - liabilities = equity and to understand the relationship between economic forecasting and bank capital requirements. The article also discusses the use of preferred shares versus common stock and the use of convertible preferred shares.

1. (Introductory) Define bank capital in terms of the balance sheet equation.

2. (Advanced) What tests are used to assess a bank's health based on the level of its capital or equity? (Hint: for background information and an international perspective, you may investigate the Basel and Basel II Accords of the Basel Committee on Banking Supervision of the Group of Ten nations. See the related articles.)

3. (Introductory) How can economic and financial advisors relate the potential unemployment rate and mortgage default rate in the U.S. economy to banks' capital needs?

4. (Advanced) If financial institutions fail capital requirement tests based on new thresholds as outlined by the Obama administration, the U.S. government may invest in "...convertible preferred shares, which institutions could choose to convert into common equity at any time." Define and describe the differences between preferred and common shares. Also define convertibility features.

5. (Introductory) Why might financial institutions not want to issue common shares of stock but be allowed to do so by converting preferred shares whenever they so choose?

6. (Introductory) What is the difference between financial institutions issuing stock to the U.S. government in the ways described in this article and nationalizing our financial institutions?

Reviewed By: Judy Beckman, University of Rhode Island

Rules on Capital Roil U.S. Bankers
by Damian Paletta
Nov 01, 2006
Page: C3
by Damian Paletta and Alistair MacDonald
Mar 04, 2008
Page: 03/04

"Bank Capital Gets Stress Test," by Deborah Solomon and Jon Hilsenrath, The Wall Street Journal, Feb 26, 2009

The Obama administration, in unveiling details of its financial-rescue plan, laid out a dark economic scenario it expects banks to be able to withstand, the starting point for what could become a significant new infusion of government cash into the banking system.

To ensure banks can survive even if the unemployment rate rises above 10% and home prices fall by another 25%, the administration will require some institutions to either raise private money or accept a bigger investment from the U.S. government. U.S. officials don't expect the economy to deteriorate that sharply, but they want to be sure banks are prepared nonetheless.

The first step in the latest effort to shore up the banking sector will be a series of "stress tests" to assess whether the largest U.S. banks can survive a protracted slump. The tests aren't expected to be finished until April. Banks will then have up to six months to address any shortfall.

Unlike the Bush administration's effort to pump $250 billion into banks, the Obama team didn't commit a set amount of money to the effort and President Barack Obama said Tuesday it is likely that banks will need additional funds beyond the $700 billion rescue package approved by Congress last fall.

The government's investment would come in the form of convertible preferred shares, which institutions could choose to convert into common equity at any time. Regulators and investors have become more concerned about the amount of common stock banks hold, since that is a bank's first line of defense against losses.

To ensure their balance sheets are strong, the biggest banks will be required to undergo a tough assessment, including whether they have the right type of capital. Officials said they expect banks would convert the shares to common equity as needed to help protect against losses.

A bank's capital is its cushion against losses, a buffer that ensures its depositors and other lenders will get paid even if the bank runs into trouble.

Economists said most of the nation's largest banks will likely have to raise capital under the economic assumptions that regulators plan to use. The stress test assumes an unemployment rate averaging 8.9% in 2009 and 10.3% in 2010. Because that is an average for a whole year, the test envisions the jobless rate reaching higher than those levels on a monthly basis during these stretches. It was 7.6% in January

Under some circumstances, the government might end up owning majority stakes in banks.

"I think you'll find most firms need more capital and that Bank of America and Citigroup are going to need a boatful of new capital," said Douglas Elliott, a fellow at the Brookings Institution.

Discuss Would nationalizing banks improve or worsen the crisis? Share your thoughts at Journal Community.Banks that get a government investment will have to comply with strict executive-compensation restrictions, including curtailed bonuses for top executives and earners. The securities will pay a 9% dividend -- higher than the 5% banks are required to pay under the Bush-era program -- and banks would be restricted in paying dividends and from buying back their own stock. The securities would automatically convert to common stock after seven years.

Banks that have already sold preferred shares to the government as part of the $250 billion program would also be able to swap the preferred shares for convertible securities that can convert to common shares.

Administration officials said the effort is an attempt to avoid nationalizing banks and to make sure institutions can lend money. While officials said most banks are considered well capitalized, uncertainty about economic conditions is hindering their ability to lend money or attract private capital.

Treasury Secretary Timothy Geithner sought to knock down speculation that the government may nationalize banks, saying such a move is "the wrong strategy for the country and I don't think it's the necessary strategy." Mr. Geithner, speaking on The NewsHour with Jim Lehrer, said there may be situations where the government provides "exceptional support" but that the best outcome is if the banks "are managed and remain in private hands."

U.S. officials will demand that financial institutions test the resilience of their portfolios and capital against a grim, though not catastrophic, economic landscape. The test assumes a 3.3% contraction in gross domestic product in 2009, which would be the worst performance since 1946. And it assumes home-price declines of another 22% in 2009 and 7% in 2010.

That would be worse than most economists and the Federal Reserve currently expect. Private economists on average forecast a 2% contraction in economic output this year and a 2% rebound next year, with the jobless rate remaining below 10%.

Some private forecasters said they can imagine worse.

"I don't have any problem believing the unemployment rate is going to move to 12% or that vicinity," said Laurence Meyer, vice chairman of Macroeconomic Advisers LLC, a forecasting firm whose models are widely used in Washington and New York.

Mr. Meyer said regulators had to strike a delicate balance in designing their test. If they painted a truly grim scenario -- the economy contracted by 9% in 1930, 6% in 1931 and 13% in 1932 -- it could force banks to raise more capital than they are capable of raising, driving them further into the government's arms.

"You don't want to know the answer to some of the questions you might ask," Mr. Meyer said.

Bob Jensen's threads on accounting theory are at

Bob Jensen's threads on the bailout mess ---

A Small But Important Step in Breaking the Accountics Stranglehold on Accountancy Doctoral Programs

"A Profession's Response to a Looming Storage (sic, I think they meant shortage): Closing the Gap in the Supply of Accounting Faculty," by Michael Ruff, Jay C. Thibodeau, and Jean C. Bedard, Journal of Accountancy, March 2009 --- 

A looming shortage exists in the academic world of accounting as many accounting professors retire and new instructors are needed. The AICPA, along with other groups and professional services firms, offers assistance to accountants interested in future careers in academia.

The Accounting Doctoral Scholars Program (ADS), administered by the AICPA Foundation, was recently established by 67 of the largest accounting firms, along with the support of state societies. Designed to encourage audit and tax professionals to pursue a career as a professor, the ADS Program intends to award 30 four-year scholarships during each of the next four years.

Other financial assistance is available to Ph.D. students in accounting to supplement stipends provided by universities. While these stipends are low relative to accounting salaries, universities generally waive tuition for doctoral study, since most students serve as graduate assistants. Accounting faculty earn competitive salaries, providing a reasonable payback period of the investment for the CPA. More opportunities are also expected to open up for professionally qualified instructors. Professionally qualified instructors are not Ph.D.s but have extensive professional accounting experience. An AICPA/ American Accounting Association program offers assistance in making such a career change.

March 10, 2009 reply from Roger Debreceny [roger@DEBRECENY.COM]

The website for the ADS program is . The list of participating institutions is at
 Doyle Williams is chairing this effort. He has been strong in holding the line, saying, for example, that if a student starts in auditing and tax and then decides to switch to financial accounting, they must give up their scholarship. Of course, the reality is that capital markets research can be applied to many decision frames and the centrifugal forces are so strong that we will see:

1) Students using capital markets approaches to study auditing (think audit fees) or tax
2) Switching to largely financial accounting, capital markets research after graduation

Having said that, I think this will apply to only a minority (albeit a significant minority) of students. It was a great experience to interact with other faculty and potential students in December last year. I think we can see this effort as an important first step in righting the listing ship of accounting academia.


Bob Jensen's threads on the doctoral program mess are at

From The Wall Street Journal Accounting Week in Review on April 3, 2009

New Tax Breaks to Be Aware Of
by Tom Herman
The Wall Street Journal

Apr 01, 2009
Click here to view the full article on ---

TOPICS: Insurance Stocks, IRA Contributions, Job-Search Costs, Ponzi Schemes, Social Security Taxes, Taxation

SUMMARY: Procrastinators scrambling to finish tax returns should be aware of new and old twists that could limit what they pay to Uncle Sam. Unfortunately, even when Congress tries to offer Americans tax relief, the result is often so complex that it requires the assistance of high-priced experts trained in the translation of tax-law gibberish. The related article discusses the differences between taxation of singles and married couples.

CLASSROOM APPLICATION: In the spirit of the April tax season, some tax tips are offered to readers. The topics in the article are a few of many covered in an individual taxation class, and can be used to discuss those points. The related article adds some information regarding the difference between married and single taxpayers. But it would be good to show students how some seemingly minor deductions or credits can make a big difference to individual taxpayers, especially in a recession.

1. (Introductory) What are the deductions related to losses from Ponzi schemes? What are the requirements for investors to take the deduction? How much is allowed?

2. (Introductory) What was the recent decision regarding the tax treatment of the sale of some insurance stocks? To what years does the decision apply? What could be the impact of the government's appeal? What should taxpayers do in this situation?

3. (Introductory) How are job-search costs treated for tax purposes? Why did the writer mention this deduction in the article? What lesson does this show to tax preparers and taxpayers?

4. (Introductory) What should taxpayers note about social security taxes if they have changed jobs last year? Why is this an issue?

5. (Advanced) The writer mentions several times that some of the tax rules are so complicated that taxpayers need to pay a professional for advice. Why do you think that tax rules are not drafted so that most taxpayers can understand them easily? What problems do the complicated rules create? How does this affect your personal tax situation?

6. (Advanced) What are the best tax tips offered in this article? How does this article change the way you think about taxes? How do you keep up with tax changes and information relevant to your tax returns?

Reviewed By: Linda Christiansen, Indiana University Southeast

Taxes for Newlyweds
by Anna Prior
Mar 28, 2009
Online Exclusive

Bob Jensen's taxation helpers are at

What do airline fares and Congressional budgets have in common?

There are a lot of surprises that are revealed only after you're struck with the deceptions (especially about baggage fees in both instances).
What you end up with is not necessarily what you'd planned on getting.

In 2009 the airline seat demand is expected to drop off a cliff for a variety of reasons, not the least of which is the economy.
Beware of increasingly deceptive ticket deals.

Travel companies say that by the end of this year, consumers will be able to comparison shop for airfares that for the first time will include the fees airlines have been tacking on to advertised fares only after you hit the "buy" button. Already and offer elementary tools for calculating fees, and advanced technology that can fold fees into fare quotes at travel agencies, online vendors and airline Web sites is likely to hit the market later this year.
"Airfare Quotes That Lay Bare Hidden Fees:  Sites Build Tools to Compare the Actual Costs of Flights; When Baggage Tips the Scale," by Scott Macartney, The Wall Street Journal, March 10, 2009 ---

Shop for airline tickets online or through a travel agent and the price quotes you get don't tell the whole story these days. But that's about to change.

Travel companies say that by the end of this year, consumers will be able to comparison shop for airfares that for the first time will include the fees airlines have been tacking on to advertised fares only after you hit the "buy" button. Already and offer elementary tools for calculating fees, and advanced technology that can fold fees into fare quotes at travel agencies, online vendors and airline Web sites is likely to hit the market later this year.

"This has tremendous potential to turn air-travel shopping on its end," said Kyle Moore, vice president of product marketing for Sabre Travel Network.

A $200 ticket on one airline may look like a good deal, but could ultimately be more expensive than a $250 ticket on another carrier if that first airline charges fees for checking baggage, transporting pets or unaccompanied minors. Even perks like seats with extra legroom, priority security-line privileges or one-day passes to an airport lounge can significantly boost the price of a ticket.

Airlines have found customers willing to pay more at the airport when fees are separate from fares. Folding fees into fares could limit airlines' ability to dig deeper into traveler wallets.
Sabre Holdings Corp. and Amadeus IT Group SA, two leading airline booking companies, say they'll have tools out to travel agents, Web sites and airlines beginning later this year that will add fees consumers plan to use into ticket prices, showing bottom-line prices much as car-rental companies were pressured into showing the total price of a rental with all fees, taxes and surcharges included.
Rough early attempts to fold fees into prices give travelers a better idea of the fees they may incur, but still leave a lot of the math to travelers. TripAdvisor, a company owned by Expedia Inc. that built a following collecting travelers' hotel and destination reviews, added airline ticket search capabilities to its site on Feb. 27 and unveiled a "fee estimator" that can re-rank prices based on how many bags you plan to check. The fee estimator, developed in-house by TripAdvisor, can also calculate expected fees for each flight for meals, drinks, snacks and 

"Customers are looking for clarity in pricing," says Bryan Saltzburg, general manager of new initiatives for TripAdvisor.

Without fees, a $193 round-trip fare between New York and Fort Lauderdale for travel later this month on US Airways Group Inc. looks cheaper than a $197 fare at JetBlue Airways Corp., for example. But if you're checking two bags, you'll pay $80 in fees on US Airways and only $40 on JetBlue.

The fee estimator takes into account whether you have elite status at an airline that may exempt you from some fees. But there are lots of limitations. TripAdvisor's estimator only works for domestic flights and does not price out the costs of overweight or oversized luggage, priority seating, pets, unaccompanied minors or other charges. TripAdvisor says it concentrated on the most frequently incurred fees; more fees may be coming.

Continued in article

Bob Jensen's threads on consumer fraud and reporting are at

Jensen Comment
Add-on fee collecting greatly complicates product costing since most of these fees are in essence for separate products and services. But the products are in no way independent since the all depend on the purchase of the main ticket. Also these products share many common fixed costs such as the cost of baggage handling. The airline needs a baggage system to serve both the "free baggage" that is part of the ticket price and the "fee baggage" that is charged baggage not covered in the price of a ticket. Cost accounting and pricing decisions are very complicated and offer an opportunity for new case studies in cost and managerial courses. Add this to the problem of frequent flier liabilities and you may write up a case that nobody can solve. Those incomprehensible telephone bills demonstrated that consumers really hate complicated billings with lots of hidden surprises in the fine print.


Why doesn't anybody ask the obvious question that, since the Federal government now owns 80% of AIG, the taxation of AIG is in a sense an intra-company transfer payment?

Setting AIG in the IRS's sights is not quite the same as aiming at General Electric's tax shelters.

I don't think Watts and Zimmerman ever envisioned such government ownership complications of positive accounting theory. Shooting at AIG with the right hand is a little like shooting off 80% of the left hand.

From The Wall Street Journal Accounting Weekly Review on March 27, 2009

AIG's Bonus Unit Now in IRS's Sights
by Jesse Drucker and Carrick Mollenkamp
The Wall Street Journal

Mar 24, 2009
Click here to view the full article on ---

TOPICS: Tax Avoidance, Taxation

SUMMARY: Watts and Zimmerman, in making arguments know under the general heading as "positive accounting theory," express the notion that large sized companies tend to choose certain accounting policies and practices because they become noticed by government regulators. Such seems to be the problem for AIG who may not have chosen conservatively in structuring deals with foreign entities to generate foreign tax credit benefits. The article describes an example of structuring an offshore AIG subsidiary, which obtains financing from a foreign bank and generates interest income by loaning the funds to another AIG subsidiary. AIG then can deduct the interest payments to reduce U.S. taxes. However, the foreign bank receives ownership in the first subsidiary as collateral for the loan and "overseas tax authorities treat the offshore AIG subsidiary as being owned by the foreign bank..." resulting in the interest payments from AIG being "treated as intracompany dividends...and exempt from foreign tax."

CLASSROOM APPLICATION: The business purpose test for structured transactions is the basis for challenging the AIG offshore entities developed by the unit that paid the bonuses generating taxpayer and lawmaker outrage. The article also refers to disclosure of challenges to tax positions required under FASB Interpretation No. 48.

1. (Introductory) Summarize one example transaction in which AIG structured an entity to generate a foreign tax credit.

2. (Introductory) What business benefit helped to generate profits from the foreign subsidiaries established by AIG?

3. (Advanced) Why may the IRS challenge these structured transactions? In your answer, comment on the business purpose for establishing these entities and explain the importance of that notion of business purpose.

4. (Advanced) "In a securities filing, AIG said it expects the IRS to challenge tax benefits from several other transactions." Why must such a disclosure be made in a securities filing?

Reviewed By: Judy Beckman, University of Rhode Island

"AIG's Bonus Unit Now in IRS's Sights," by Jesse Drucker, The Wall Street Journal, ---

Some of the same banks that got government-funded payouts to settle contracts with American International Group Inc. also turned to the insurer for help cutting their income taxes in the U.S. and Europe, according to court records and people familiar with the business.

The Internal Revenue Service is challenging some of the tax deals structured by AIG Financial Products Corp., the same unit of the New York company that has caused political ire over $165 million in employee bonuses.

The company paid $61 million last year in disputed taxes stemming from the deals but sued the U.S. government last month in federal court in New York, seeking a refund, according to filings in the case.

Banks that worked with AIG on tax deals include Crédit Agricole SA of France, Bank of Ireland and Bank of America Corp., according to AIG's lawsuit. The banks declined to comment.

In general, AIG's tax deals permitted U.S. companies and foreign banks to effectively claim credit in their home country for a single tax payment, partly through the use of an offshore AIG subsidiary. In its lawsuit against the government, the insurer said it was told by the IRS that AIG hadn't shown that the transactions "had sufficient economic substance and business purpose" to justify tax benefits. The IRS declined to comment.

The tax-structuring operation started by AIG in the 1990s was even bigger than AIG's credit-default-swaps business, according to a person familiar with the matter.

An AIG spokesman declined to discuss the tax-cutting transactions in detail but asserted that the tax benefits were proper and justified. AIG wants to "ensure that it is not required to pay more than its fair share of taxes," a company spokeswoman said.

More AIG Workers to Return $50 Million of BonusesWealth: Bus Tours of the Rich and InfamousSoros: Credit Default Swaps Need Stricter RegulationDefenders of these arrangements say that taking advantage of differences between tax laws in the U.S. and overseas is simply smart business, arguing that the deals weren't explicitly prohibited by IRS regulations at the time.

New versions of these foreign-tax-credit deals effectively stopped in 2007 after the IRS proposed regulations to end them. The agency has formed a special team of agents and attorneys to examine such transactions. AIG wound down its tax unit last year following the proposed regulations.

Cross-border tax transactions are drawing increased scrutiny from U.S. and European tax officials, who are seeking to limit deals that help firms to play one nation's tax laws against another. This month, U.K. tax authorities said they were reviewing documents that show how Barclays PLC structured offshore deals for clients.

Last week, IRS Commissioner Douglas Shulman told the Senate Finance Committee that the agency is "aggressively pursuing" so-called "foreign tax-credit generators." Those are the sort of deals that the IRS is challenging at AIG, court records in two cases show.

Mr. Shulman didn't identify specific companies, though such a transaction "really perverts the foreign tax credit," he said.

The foreign-tax-credit transactions took numerous forms. In one version, an offshore AIG subsidiary would borrow money from an overseas bank and also earn investment income overseas. The AIG unit would pay foreign taxes on that investment income and earn a foreign tax credit in the U.S., according to court records involving companies using these deals that have been challenged by the IRS and people who have worked on such deals.

Another AIG unit would then pay interest to the foreign bank, deducting those payments from its U.S. taxes. Meanwhile, the foreign bank was exempt from tax on that interest because overseas tax authorities treated the bank as simultaneously owning the AIG subsidiary. That effectively gave the foreign bank credit for taxes paid by the AIG subsidiary.

Because the foreign bank got a tax exemption overseas, it could charge lower interest costs on the cash loaned to AIG, according to people familiar with the transactions.

AIG helped set up a complex transaction for France's Crédit Agricole in the late 1990s that generated roughly $17.8 million in tax savings for AIG and unspecified tax savings for Crédit Agricole, according to court filings by AIG in its suit against the IRS. The bank declined to comment.

Last year, Crédit Agricole's Calyon investment-banking unit got $3.3 billion in payouts as part of the U.S. government's rescue of AIG.

"If people are going to get taxpayer money, then there definitely should be a measure of corporate social responsibility, to put it bluntly," said Reuven S. Avi-Yonah, a former corporate tax attorney who is director of the international tax program at the University of Michigan's law school.

Continued in article


"Former BDO Seidman vice chair pleads guilty to tax fraud," AccountingWeb, March 20, 2009 --- 

Adrian Dicker, a United Kingdom chartered accountant and former vice chairman and board member at a major international accounting firm, has pleaded guilty to conspiring with certain tax shelter promoters to defraud the United States in connection with tax shelter transactions involving clients of the accounting firm and the law firm Jenkens & Gilchrist (J&G), the Justice Department and Internal Revenue Service (IRS) announced. In the hearing before U.S. Magistrate Judge Theodore H. Katz in the Southern District of New York, Dicker, who is a resident of Princeton Junction, NJ, also pleaded guilty to tax evasion in connection with a multi-million dollar tax shelter that Dicker helped sell to a client of the accounting firm.

According to the information and the guilty plea, between 1995 and 2000, Dicker was a partner in the New York office of the accounting firm which he identified during his guilty plea as BDO Seidman. From early 1999 through October 2000, Dicker was on the firm's Board of Directors, and through October 2003 he served as a retired partner director. From 1998 until 2000, Dicker was one of the leaders of the firm's "Tax Solutions Group" (TSG), a group led by the firm's chief executive officer, Dicker, and another New York-based tax partner. The activities of the TSG were devoted to designing, marketing, and implementing high-fee tax strategies for wealthy clients, including tax shelter transactions.

According to the information and the guilty plea, Dicker and the other two TSG managers used a bonus structure that handsomely rewarded the accounting firm personnel involved in the design, marketing, and implementation of the TSG's transactions, including: the individual who referred the client to TSG personnel; the TSG member who pitched and closed the sale; other TSG members; and TSG management. From July 1999, Dicker, the CEO, and the other TSG manager earned and shared equally 30 percent of the net profits of the TSG. Dicker earned approximately $6.7 million in net TSG profits, as well as salary and bonuses between 1998 and 2000. In addition, the CEO of the firm doled out additional bonuses from the profits earned as a result of the sale of the tax shelter products. Moreover, the firm made the sale of the tax shelter products a focal point of its aggressive "value added" product promotion activities, using a "Tax $ells" logo and other marketing hype to induce employees to generate additional tax shelter sales.

According to the information and the guilty plea, while serving as a manager of the TSG, Dicker, along with other TSG partners, engaged in the design, marketing, and implementation of two different tax shelter transactions with the Chicago office of the law firm of Jenkens & Gilchrist, as well as an international bank with its U.S. headquarters in New York. As a member of TSG and the accounting firm's tax opinion committee - which reviewed the tax opinions issued in connection with tax shelter transactions sold by the accounting firm and J&G - Dicker knew that the tax shelter transactions he helped vet and sell would be respected and allowed by the IRS only if the client had a substantial non-tax business purpose for entering the transaction, and the client had a reasonable possibility of making a profit through the transaction. Dicker and his co-conspirators knew and understood that the clients entering into the tax shelter transactions being marketed and sold with J&G had neither a substantial non-tax business purpose nor a reasonable possibility of earning a profit, given the large amount of fees being charged by the accounting firm and J&G to enter the transaction. Those fees were set by the co-conspirators as a percentage of the tax loss being sought by the tax shelter clients. Dicker also knew that the clients who purchased the tax shelter had no non-tax business reasons for entering into the transactions and their pre-planned steps.

According to the information and the guilty plea, in order to make it appear that the tax shelter clients of Dicker, other TSG members, and J&G had the requisite business purpose and possibility of profit, Dicker and his co-conspirators reviewed and approved the use of a legal opinion letter issued by J&G that contained false and fraudulent representations purportedly made by the clients about their motivations for entering into the transactions. In addition, Dicker and his co-conspirators created and used, or approved of the creation and use of, other documents in the transactions that were false, fraudulent, and misleading in order to paint a picture for the IRS that was patently untrue - that is, that the clients had a legitimate non-tax business purpose for entering the transaction and executing the preplanned steps of the transaction. Dicker also admitted during his plea that TSG members created and placed into client files certain paperwork that falsely conveyed fabricated business purposes and rationales for clients entering into the shelters. The false paperwork was created to mislead and defraud the IRS.

Continued in article

Bob Jensen's threads on accounting firms are at

IFRSs from a financial analyst's viewpoint
The cover story of the Winter 2009 issue of The Investment Professional presents a range of viewpoints – primarily those of professional investors and analysts – on the benefits and shortcomings of requiring IFRSs for all US SEC registrants. The Investment Professional is the quarterly journal of The New York Society of Security Analysts, Inc (NYSSA). The article, The Hard Sell – SEC in a Quandary over Its Push for IFRS (PDF 551k), is copyright 2009 by NYSSA and is posted on IAS Plus with their kind permission. Here is a brief excerpt:
Deloitte's IAS Plus, March 9, 2009 ---

Bob Jensen's threads on the controversial abandonment of U.S. GAAP in favor of international GAAP ---

The Politics of IFRS versus U.S. GAAP

March 8, 2009 message from David Albrecht [albrecht@PROFALBRECHT.COM]

Last night, I blogged two essays ( dealing with the push for global financial markets and the free flow of the capital across national borders.  The push for GFS (a global financial system) started in the early 1960s and has gained widespread acceptance.

It is the push for GFS that has resulted in:
        (1) the rise of IFRS, adopted by over 100 countries.  The pressure from Europe for the U.S. to adopt IFRS is immense.  A recent Accountancy Age editorial asserted that if the U.S. does not immediately accept and implement IFRS, then GFS will be derailed and there is no hope of the world emerging from its current economic downturn.

        (2) push for the U.S. to accept foreign auditor opinions in financial statements of companies that are listed in the U.S.  The Sarbanes Oxley Act of 2002 explicitly requires the PCAOB to inspect such audit firms.  Christopher Cox, who chaired the SEC until one month ago, overlooked these provisions and publicly stated that the SEC would accept foreign government inspection and certification of these auditors.  In her confirmation hearings, members of the Senate Banking Committee expressed frustration with Cox's stand on this issue and asked Schapiro what she would do.  She replied that she would enforce the law and saw no need for a change in the law.  Foreign Minister Charley McCreevey stated that enforcement of this provision of SOX will have a significant negative impact on the implentation of GFS.

        (3) a push for coordinated regulation of primary and secondary securities markets in the U.S. and Europe.  Just prior to his stepping down, Christopher Cox seemed to back off from this (Denny Beresford alerted us to Cox's speech on this).

Anyway, it has just been reported
( ) that:
         "Britain and America are heading for an embarrassing showdown at next month's G20 financial summit in London as Mary Schapiro, the recently appointed head of the
Securities and Exchange Commission, has signaled she will abandon efforts to seek a convergence of financial regulation between the US and Europe. "

There is a tremendous amount of tension that is affecting international relations between the U.S. and the E.U., all centered around Global Financial Markets and its goal of free flow of capital and various issues related to implementation, such as IFRS, auditor regulation and even securities regulation by individual governments.  We can see that various European governments are lobbying Mary Schapiro not to appoint Charlie Niemeier as Chief Accountant of the SEC (and when has appointment of chief accountant ever mattered so much to Europe?)

It is my opinion that the issues of the debate over GAAP v. IFRS can best be understood after a thorough study of the history and issues related to GFS and the free flow of capital.

I wish my doctoral studies in the late 80s had included at least some exposure to the push for GFS, which apparently had gained a goodly measure of orthodoxy by that time.

A book that is a key part of my education about GFS is Capital Rules, by Rawi Abdelal.  Rawi Abdelal is the Joseph C. Wilson Professor of Business Administration at Harvard Business School.  It is, as they say, a real page turner.  I wish I read it two years ago when it was published.

David Albrecht

Bob Jensen's threads on IFRS versus U.S. GAAP are at

Capital Requirement in Bank Regulation ---

The capital requirement is a bank regulation, which sets a framework on how banks and depository institutions must handle their capital. The categorization of assets and capital is highly standardized so that it can be risk weighted[clarification needed]. Internationally, the Basel Committee on Banking Supervision housed at the Bank for International Settlements influence each country's banking capital requirements. In 1988, the Committee decided to introduce a capital measurement system commonly referred to as the Basel Accord. This framework is now being replaced by a new and significantly more complex capital adequacy framework commonly known as Basel II. While Basel II significantly alters the calculation of the risk weights, it leaves alone the calculation of the capital. The capital ratio is the percentage of a bank's capital to its risk-weighted assets. Weights are defined by risk-sensitivity ratios whose calculation is dictated under the relevant Accord.

Each national regulator normally has a very slightly different way of calculating bank capital, designed to meet the common requirements within their individual national legal framework.

Most developed countries and Basel I and II, stipulate lending limits as a multiple of a banks capital eroded by the yearly inflation rate.

The 5 C's of Credit, Character, Cash Flow, Collateral, Conditions and Capital, have been replaced by one single criterion. While the international standards of bank capital were laid down in the 1988 Basel I accord, Basel II makes significant alterations to the interpretation, if not the calculation, of the capital requirement.

Examples of national regulators implementing Basel II include the FSA in the UK, BAFIN in Germany, and OSFI in Canada.

An example of a national regulator implementing Basel I, but not Basel II, is in the United States.[verification needed] Depository institutions are subject to risk-based capital guidelines issued by the Board of Governors of the Federal Reserve System (FRB). These guidelines are used to evaluate capital adequacy based primarily on the perceived credit risk associated with balance sheet assets, as well as certain off-balance sheet exposures such as unfunded loan commitments, letters of credit, and derivatives and foreign exchange contracts. The risk-based capital guidelines are supplemented by a leverage ratio requirement. To be adequately capitalized under federal bank regulatory agency definitions, a bank holding company must have a Tier 1 capital ratio of at least 4%, a combined Tier 1 and Tier 2 capital ratio of at least 8%, and a leverage ratio of at least 4%, and not be subject to a directive, order, or written agreement to meet and maintain specific capital levels. To be well-capitalized under federal bank regulatory agency definitions, a bank holding company must have a Tier 1 capital ratio of at least 6%, a combined Tier 1 and Tier 2 capital ratio of at least 10%, and a leverage ratio of at least 5%, and not be subject to a directive, order, or written agreement to meet and maintain specific capital levels. These capital ratios are reported quarterly on the Call Report or Thrift Financial Report.

Different International Implementations

Regulators in each country have some discretion on how they implement capital requirements in their jurisdiction.

For example, it has been reported that Australia's Commonwealth Bank is measured as having 7.6% Tier 1 capital under the rules of the Australian Prudential Regulation Authority, but this would be measured as 10.1% if the bank was under the jurisdiction of the UK's Financial Services Authority. This demonstrates that international differences in implementation of the rule can vary considerably in their level of strictness.

Common capital ratios

  • Tier 1 capital ratio = Tier 1 capital / Risk-adjusted assets >=6%
  • Total capital (Tier 1 and Tier 2) ratio = Total capital (Tier 1 and Tier 2) / Risk-adjusted assets >=10%
  • Leverage ratio = Tier 1 capital / Average total consolidated assets >=5%
  • Common stockholders’ equity ratio = Common stockholders’ equity / Balance sheet assets

Listed below are the capital ratios in Citigroup at the end of 2003

At year-end 2003
Tier 1 capital 8.91%
Total capital (Tier 1 and Tier 2) 12.00%
Leverage (1) 5.56%
Common stockholders’ equity 7.67%
(1) Tier 1 capital divided by adjusted average assets.
Components of Capital Under Regulatory Guidelines
In millions of dollars at year-end 2003
Tier 1 capital
Common stockholders’ equity $ 96,889
Qualifying perpetual preferred stock 1,125
Qualifying mandatorily redeemable securities of subsidiary trusts 6,257
Minority interest 1,158
Less: Net unrealized gains on securities available-for-sale (1) (2,908)
Accumulated net gains on cash flow hedges, net of tax (751) (1,242) (751)
Intangible assets: (2)
Goodwill (27,581)
Other disallowed intangible assets (6,725)
50% investment in certain subsidiaries (3) (45)
Other (548)
Total Tier 1 capital 66,871
Tier 2 capital
Allowance for credit losses (4) 9,545
Qualifying debt (5) 13,573
Unrealized marketable equity securities gains (1) 399
Less: 50% investment in certain subsidiaries (3) (45)
Total Tier 2 capital 23,472
Total capital (Tier 1 and Tier 2) $ 90,343
Risk-adjusted assets (6) $750,293


"How Stressed is Your Bank?" by Stephen Gandel, Time Magazine, March 2, 2009 ---,8599,1880499-1,00.html

.038 = Assets/Equity = $150,000,000,000/
Loan losses: Even after making a government deal, the bank is still on the hook for the first $40 billion in loan losses in the pool it has insured. Citi also has $277 billion in other, nonhousing consumer loans, such as credit cards and student debt. Roubini estimates that about 17% of consumer loans will go unpaid nationwide. That translates into a $47 billion river of red ink. Add in everything else (commercial real estate, corporate loans), and Citigroup will have to swallow $106 billion in loan losses by the end of 2010.

Capital cushion: Thanks to the Troubled Asset Relief Program (TARP), Citigroup now has $151 billion in equity, up from $113 billion a year ago. Alas, it will have a $76 billion hit from bad loans. Along with a projected bottom-line loss of $3.5 billion, that drops the bank's capital to $70.5 billion.

Prognosis: On the way to the ICU. Citigroup has a projected leverage ratio of just 3.8% — far lower than what it would need to be considered well capitalized. How much would the U.S. have to give the bank to nurse it back to good health? About $22 billion.


JPMorgan Chase
.078 = Assets/Equity = $166,000,000,000/$2,100,000,000,000
Loan losses: JPMorgan largely avoided the troubled subprime-lending game. Not so Washington Mutual, which JPMorgan acquired in 2008 in an FDIC-brokered deal. With housing prices still falling, many of those WaMu loans are going unpaid. JPMorgan has $105 billion in credit card loans, which could cost the company some $18 billion. And there is an additional $262 billion in corporate and commercial loans, which, according to Roubini, could tally $26 billion more in red ink. All told, it's a $97 billion loss for JPMorgan.

Capital cushion: JPMorgan has $23 billion in its rainy-day fund for such losses. Not enough. Shareholders' equity will drop to $121 billion, from the current $167 billion.

Prognosis: Looking good. JPMorgan is in better shape than other big banks are. Its post-test leverage ratio drops to 6.4%, from nearly 8% — still a picture of financial health. 


Bank of America
.046 = Assets/Equity =$176,000,000,000/ $2,000,000,000,000
Loan losses: BofA's buyout of mortgage broker Countrywide means the bank has $400 billion in home loans outstanding — more than its competitors. Worse, Countrywide, by nearly all accounts, had shockingly low lending standards. Chalk up a higher-than-average $40 billion in losses there. On top of that, BofA has made $87 billion in loans to commercial real estate developers. Roubini predicts 17% of those loans will go bad as developers hit the skids. For BofA, that's $15 billion more in losses. Toss in $55 billion in commercial- and consumer-loan losses, and you get $121 billion in lending deficits by the end of 2010.

Capital cushion: BofA has put away $23 billion to cover future losses, and it has more equity — $177 billion — than JPMorgan or Citigroup. But that might not be enough to preserve it without government help.

Prognosis: Prepare the transfusion. BofA is still on the monitor, but it's not far from being healthy again. It has a stressed leverage ratio of 4.6%. Just $7.3 billion in new capital would put BofA back on its feet. And with Uncle Sam finalizing its deal to guarantee $118 billion of BofA debt, the bank may already be on the mend. (See the top 10 financial-crisis buzzwords.)


Wells Fargo
.076 = Assets/Equity = $99,000,000,000/$1,300,000,000,000/
Loan losses: When Wells Fargo acquired Wachovia late last year, it more than doubled its loan book. In good times, that would be a major coup. These days, it's major trouble. Home buyers owe the bank $360 billion, up from about $150 billion just three months ago. Next, Wells has $154 billion in commercial real estate loans, as well as $200 billion in other types of commercial debt. Apply Roubini's overall 13% loss projection, and the conclusion is that Wells may be sitting on a $117 billion loss.

Capital cushion: The good news for Wells is that it has been aggressive in identifying problem loans — $37 billion from Wachovia alone. Wells officials argue that will lead to lower losses than its competitors'. But if not, the bank could be in trouble.

Even after the $25 billion Wells got from the government last year, it has just under $100 billion in equity, trailing other major banks by more than 50%.

Prognosis: Defibrillator. Stat! Wells Fargo is generally considered one of the banks that are least likely to fail. But our stress test says otherwise. Even with its $58 billion loan-loss buffer, Wells is still in the hole for $59 billion, or 60% of its capital. With $40 billion remaining and an expected $5 billion in income, the bank could sink to a less-than-rosy leverage ratio of 3.7%.

Bob Jensen's threads on the bailout mess are at

Should companies be allowed to outsource internal auditing to their external auditors?
An Enron Message

Shari Thompson in the early 1990s was an African American internal auditor in Enron trying her best to be a good auditor.

She gave me permission to forward two of her messages that I received out of the blue from her. For those of you that still hold deep abiding sympathies for Andersen's top management, I suggest that you read both of these messages, especially Message 2.

Message 1 appears below. Note that this message contains a lot more messaging than just her message to me. That messaging is very critical of some BYU professors and arguments that internal auditing might be outsourced to external auditors.

My main Enron and WorldCom fraud document (especially note Enron's Timeline) ---
This Timeline will soon be updated for Shari's assertion that Enron outsourced internal auditing to Andersen in 1994.

My Enron Quiz will soon be updated for Shari's messages ---  

Bob Jensen's threads on professionalism and auditor independence are at (scroll down) ---


Message 1 from Shari Thompson to Bob Jensen

-----Original Message-----
From: Thompson, Shari [
Sent: Friday, February 27, 2009 2:33 PM
'' ;
Subject: Please update your Enron blog (from former Enron Internal Auditor)

Why is it that everyone who chronologizes Enron's fall misses a hugely significant, contributing factor to Enron's demise?  That is, that Enron's entire internal audit department was systematically eliminated by Andersen, when the internal audit function was outsourced to Andersen.  This outsourcing was instrumental in allowing Lay/Skilling/Fastow to commit accounting fraud undetected for a long period of time.

 The outsourcing of Enron's internal audit function is one of the most festering flaws in the debacle, yet no one has sufficiently reported it.  As a former Enron senior internal auditor, I have brought this flaw to the attention of reporters and bloggers over the years since 2001.  To no avail, however.  Some of them respond "interesting, I never knew that."  But that's it.  No one follows up and reports on the incestuous relationship Enron had with Andersen as the "internal" audit department.

Now we have three professors concluding that companies should outsource internal audit to external auditors.  Please be cognizant enough to add the rest of the story, so that the Finance world can clearly connect the dots between outsourcing internal audit and accounting fraud.

Shari Thompson CIA
Direct 402.829.5248 Mobile 402.740.4012


From: Thompson, Shari

Sent: Friday, February 27, 2009 1:28 PM
To: '' ; ' '; ' '; ' '; ''
Subject: Thank you to IIA President Richard Chambers

 Good afternoon Mr. Chambers,

I just read an article about professors at Brigham Young and Texas A&M claiming that companies gain from having external auditors perform their internal audits.  I was a senior internal auditor for Enron and subsidiaries (before outsourcing to Andersen) for 24 years (1981 to 2004).  I can attest that having companies use their external auditor as internal auditor is a toxic and deceptive practice.

Thank you so much for voicing your disagreement with this conclusion.  Please keep up the fight to not have this practice become acceptable again.


 Mr. Nusbaum:

You've changed your tune much from your 2006 letter to the SEC when you advocated " Equally without question is that these early experiences with implementation have been costly, but we cannot and should not go back."


 Messieurs Prawitt, Wood, and Sharp:

I am shocked and appalled at your "findings."  Has someone at KPMG, PWC, E&Y or D&T paid you enormous sums of money in return for your publishing such a ludicrous recommendation to outsource internal audit to external auditors?  How could you even preliminarily come to such an incestuous conclusion?

I invite you to talk to me about real world consequences of the unintelligence of outsourcing internal audit to externals.  Blending the two functions is purely a management's self-serving act.  The very phrase "outsourcing internal audit" is an oxymoron, and the terms "outsource" and "internal audit" should be forever mutually exclusive.

I'm 50 years old, an expert internal auditor that worked for Enron and its subsidiaries for 24 of my 28 years in the auditing industry.  And yet I-as well as hundreds of my former Enron colleagues, and untold others around the world-have no 401k nor ESOP savings to show for all my years of hard work.  Why?  Because of the very thing you recommend-outsourcing internal audit.

 When I was a college student years ago, I enjoyed engaging in theoretical debates with my professors.  However, they were wise enough to caveat their opinions with warnings that they'd never worked-or hadn't worked for some time-in corporate America.  Unfortunately, you lack the sageness to recognize the limitations of your insulated confines of collegiate life.

 You state: "Our results indicate that, prior to SOX, outsourcing the work of the IAF to the external auditor is associated with lower accounting risk as compared to keeping the IAF in-house or outsourcing the work of the IAF to a third party other than the external auditor."

*       Must I remind you that the lack of accounting controls is precisely what tanked Enron?

*       Must I remind you of why were there were no controls?  Because Lay, Fastow and Skilling hired Andersen to perform both internal and external audits.  Lay, Fastow, and Skilling knew that Andersen's heads would willingly participate in accounting fraud cover-up as long as Enron paid them well.  And they also knew that any Andersen soul brave enough to dissent would be summarily removed from the Enron account, or from Andersen altogether.

*       Do you know that a few months before the outsourcing to Andersen, one of my former internal audit colleagues discovered irregularities in Enron's accounting transactions related to a bank in New York?  A few months later, after the internal auditors discussed the matter with Lay, Lay outsourced the entire audit function.  This outsourcing came after several yearly sales pitches by Andersen, where Andersen requested the internal auditing job.  It's clear that Lay felt the internal auditors were getting too close to uncovering fraud.  So he outsourced the function to a bunch of yes-men.

 I can only conclude that you obviously have been recently cut in on Lay's, Skilling's or Fastow's Enron bounty.


Shari Thompson CIA
Direct 402.829.5248
Mobile 402.740.4012


Message 2 from Shari Thompson to Bob Jensen

Hi Bob,

Thanks for your reply. I should mention that I really like your website, and have referred to it many times over the years. It was very helpful when studying for the CIA exam—some of the exam study guides don’t do near a good job as your site in explaining accounting theory, especially the complexities introduced changed since I was in college…

But, to your question, the internal auditors came from a number of the (back then anyway) big 8, and also many of us were from industry. Like for instance, I’ve never worked for a public accounting firm. (Could have something to do with when I graduated in 1980 many of publics wouldn’t hear of hiring a female, let alone a African American female. But that’s another story.) So anyway, the internal audit department in Enron Houston was initially formed in 1986 as a combining of all the audit departments of Enron subsidiaries around the nation. So we came from all over. I came in from Omaha, others from Enron subsidiaries on the East Coast, Texas and Oklahoma. The goal after the “merger” of HNG & InterNorth was to centralize the audit function. So, there weren’t an inordinate amount of internal auditors from Andersen as from any other public accounting firm. I’ve not read Eichenwald’s book. I’ll check it out.

Actually the department was eliminated as far as being an effective, functional department. That is, it was eliminated by Enron’s replacing us “real” internal auditors with fake Andersen “internal” auditors. So technically the department still existed in name only, but was functionally ineffective since it was outsourced to Andersen. This outsourcing happened in 1994. I had, at that time, worked for an Enron subsidiary in Omaha for about a year, so I wasn’t at risk of losing my job. Everyone else in the Houston office, however, was told by Andersen that they had 12 months to get their CPA’s or they were out. Many of them that had CPA’s quit anyway, because they didn’t like the environment of the Andersen-run department. We didn’t know what was going on, we just knew something wasn’t right, and didn’t like it. So most of the real auditors quit, or were run out by Andersen leaning on them to get their CPA. The CPA requirement was just a ploy to get the real auditors out as fast as possible.

An interesting development: While writing this email, one of the author’s (Doug Prawitt) of the article that prompted my email called. He explained to me that the reporter omitted key pieces of his interview. Namely, that he did not recommend outsourcing to externals, and that this finding is one of thousands of points of information in their study. I apologized for the email-trigger finger, but he said he enjoyed the opportunity to meet me. And hopes to talk to me again about my experience at Enron, which I welcome. I am definitely enjoying the opportunity to communicate with you as well.



Note from Bob Jensen

My main Enron and WorldCom fraud document (especially note Enron's Timeline) ---
This Timeline will soon be updated for Shari's assertion that Enron outsourced internal auditing to Andersen in 1994.

My Enron Quiz will soon be updated for Shari's messages ---  

Bob Jensen's threads on professionalism and auditor independence are at (scroll down) ---

Fair Value Estimate Subjectivity in Price Swaps
At least in theory, yield curves should be constructed with yields that rely on common conventions. Put another way, the yield curve built, assuming standard settlement assumptions, would be different from the yield curve built with fixed rate quotes that reflect, say, monthly settlements or quarterly settlements. While intuition might lead us to expect these differences to be inconsequential, in fact, these differences have started to become more substantial . . . The real lesson here is that we need to understand the limitations of fair value estimates. They are just that — estimates. And it may be worth pointing out that value may just be in the eye of the beholder. Different analysts will likely employ somewhat different methodologies. We should appreciate that different valuation estimates do not necessarily mean that one result is wrong and the other is right. They are just different.

Ira Kawaller, "Pricing Swaps: Once Upon a Time…," Bank Asset/Liability Management, March 2009 ---

Bob Jensen's threads on interest rate swap valuation are at

Bob Jensen's threads on fair value accounting are at

"New York CPAs Slam IFRS Roadmap:  The international standards are of dubious quality, the SEC is vague on how it will judge them, and the benefits of adoption are contradictory, the accountants charge," by David McCann,, March 6, 2009 ---
Pat Walters forwarded the above link.

A prominent accountants group filed a comment letter with the Securities and Exchange Commission yesterday displaying deep skepticism about the workability of the current roadmap for requiring U.S. public companies to use International Financial Reporting Standards.

The New York State Society of Certified Public Accountants registered a broad range of concerns, addressing the quality of the international standards; conversion costs; an alleged contradiction between the two main benefits of adopting IFRS put forth by the SEC; eligibility criteria for early adopters; and a forthcoming version of the standards for use by private companies.

The roadmap calls for the SEC to vote in 2011 whether to move forward with mandatory adoption, which under the existing plan would be phased in from 2012 to 2014. It also allows a limited number of large U.S. companies to adopt the international standards as early as this year.

The quality issue is foremost to the New York accountants. "The SEC Roadmap does not present, in sufficient detail, the methodology and criteria expected to be applied ... in assessing the adequacy of IFRS," they wrote in their comment letter.

Apples and Oranges?

In their letter, the New York accountants seemed to question whether the SEC is doing enough to make sure financial reports that use IFRS will be comparable with one another.

Any assessment of the international standards, the NYSSCPA wrote, should consider whether they are consistent with the Financial Accounting Standards Board's Concepts Statements. They singled out Statement No. 1, which says that financial reports should provide information investors and creditors can use to make informed decisions, and Statement No. 2, which says comparability and consistency are important characteristics of financial statements.

The New York accountants also questioned whether the decision-making process of the International Accounting Standards Board, which promulgates IFRS, "is conducive to setting future high-quality standards."

They criticized the IASB for its move last fall to let companies retroactively reclassify assets so they could "cherry pick" ones with significant losses and remove them from net-income calculations. In doing so, the international board gave in to pressure from the European Commission, the accountants suggested, saying they are concerned about "the influence of various national regulators, users, and others who promote the interests of their specific constituencies, as opposed to the needs of the worldwide community."

Further, the NYSSCPA said the supposed main benefits of adopting IFRS — comparability with non-U.S. reporting entities and allowing management greater judgment in preparing financial information — may both be desirable but appear inherently contradictory.

"The comparability of financial statements prepared in conformity with IFRS may be overstated," the comment letter said. "IFRS does not seem to be consistently applied from country to country, as the number of allowable options is conducive for the regulatory agencies in each country to interpret IFRS pursuant to their respective needs and business environments."

Comparability is further reduced, the letter added, by the tendency of preparers and auditors, "because of their habits of mind," to apply IFRS in a manner that is as similar to their current or former national accounting standards as possible. "When using principles-based standards, reasonable people arrive at materially different results after applying their judgments to a given set of facts and cirucmstances," the New York accountants wrote.

When and Who?

The letter also questioned the prudence of the conversion to IFRS when the depth and duration of the financial crisis are hard to predict. "It would be reasonable to conclude that the monetary and human capital costs of the transition could be burdensome to entities with limited resources and prohibitive for some smaller entities, even over a period of many years."

An alternative, the NYSSCPA suggested, would be for FASB and IASB to vigorously pursue efforts to converge the American and international standards, which it said would produce the best-quality global standards and help minimize conversion costs for U.S. companies when IFRS adoption does finally become mandatory.

At the same time, though, the society said it fully supports allowing early adoption of IFRS, and in fact the eligibility criteria should be expanded.

The roadmap suggests that the proposal to limit early use of IFRS to the 20 largest companies in so-called "IFRS industries" is grounded in an assumption that larger companies will be more likely to have sufficient expertise and resources to carry out the adoption.

"We disagree," the accounting society members wrote. "In fact, IFRS adoption experience in Europe has shown that smaller entities may need less time to complete the IFRS transition, while large companies with numerous subsidiaries in different countries may take as long as five years."

U.S. companies that are among the 20 largest worldwide in "IFRS industries" — ones like oil and gas and some retail sectors in which IFRS is the most-often-used financial reporting system — are eligible to adopt the international standards as early as this year. The SEC has estimated there are at least 110 such companies.

Continued in article

AICPA Supports SEC Proposed Roadmap for Transitioning to IFRS for Public Companies --- Click Here
However, no mention is made of any survey of the membership on this issue.

Bob Jensen's threads on standard setting controversies are at

New Teaching Cases in Corporate Responsibility and Compensation

Topic: Corporate Responsibility

The markets are down and the economy is in a recession. The causes are complex and varied, but many people are focusing the blame on a breakdown in corporate responsibility. How much corporate directors and executives are to blame remains debatable, but most would agree that the investing public has lost confidence in the corporate governance and ethics of boards and executives.

The following articles present some of the reactions and consequences resulting from the leadership lapses reported recently. Current and future business professionals need to be aware of the consequences that will impact all businesses and industries, regardless of whether those businesses have acted improperly. Additionally, all in the business world must deal with negative perceptions the investing public now has of boards and corporate activity. On a positive note, with the widespread lack of confidence in the markets, fiscally and ethically-responsible companies can use that reputation to develop a distinct advantage in the marketplace. This month's articles highlight some of the recent ethical and leadership lapses, as well as the public outcry and emerging rules and regulations resulting from those decisions. Regardless of your position or industry, there are important lessons to be learned and shared so that you and your organizations are not punished, but instead thrive.

FOCUS ARTICLE>>  Legislation, Shareholder Rights

Policy Makers Work to Give Shareholders More Boardroom Clout
by: Kara Scannell
Date: Mar 26, 2009 

SUMMARY: Policy makers are advancing plans to give shareholders more power in boardrooms at a time when decisions about executive pay have ignited a public furor.


  1. What measures are policy makers considering that would provide shareholders with additional rights in corporate governance? What authority and interests do each of these policy-making groups have in the governance arena? Why are corporations regulated by many different bodies?
  2. What are proxies and why are they a point of contention between corporations and shareholders? What are the pros and cons of shareholder access to proxies? Why are shareholder rights so important? Up to this point, what parties have had most of the control over a corporation? What are some reasons that these types of rules were not enacted sooner?
  3. What could be some unintended negative consequences of these new laws and rules? What are the costs involved? Would small and medium-sized businesses impacted by these rules? How does this information impact your attitudes and concerns regarding your current and future investment decisions? What are some of the cumulative effects of those concerns when held by millions of shareholders?


FOCUS ARTICLE>>  Government Oversight

The U.S.'s Fly on the Wall at AIG
by: Peter Lattman
Date: Mar 27, 2009 

SUMMARY: Government-appointed lawyer James Cole has been on site and inside AIG board-committee meetings for the past four years, but his reports to regulators aren't public.


  1. What is a deferred-prosecution agreement? Why would companies agree to this? What are the costs involved versus the corresponding benefits? Why would the government agree to one of these agreements? Why do these agreements seem to be more common today than they have been in the past?
  2. What AIG activities led to its deferred-prosecution agreement? What have been the duties of the government-appointed attorney? How were day-to-day operations affected by the agreement? Have these activities corrected the problems that triggered the government actions at AIG? Were they meant to prevent further problems as well?
  3. Are deferred-prosecution agreements effective tools for punishing and preventing negative corporate activity? Should similar plans be implemented for currently troubled companies? Please give reasons for your answers.


FOCUS ARTICLE>>  Corporate Governance, Director Responsibility

Corporate Directors' Group Gives Repair Plan to Boards
by: Joann S. Lublin
The Wall Street Journal
Date: Mar 24, 2009 

SUMMARY: A directors' trade group in a new report urges boards to do a better job of governing corporate America.


  1. What is the NACD and what is its purpose? What is the reasoning for its new report and why was the report issued? What specific suggestions does it contain? What is your opinion of the ideas presented in the report? Do you think that these ideas will restore investor confidence? Why or why not?
  2. What is the purpose of a corporate board of directors? What are its duties and responsibilities? Why is the board so important? Why do business professionals serve on boards?
  3. Have any of these ideas been implemented at one of your past or current employers? What other ideas could be implemented to increase corporate governance at your current employer or other companies?


FOCUS ARTICLE>>  Executive Compensation, Nonprofits

Pay at Nonprofits Gets a Closer Look
by: Mike Spector and Shelly Banjo
The Wall Street Journal
Date: Mar 27, 2009 

SUMMARY: Furor over big AIG bonuses and other Wall Street firms is prompting nonprofits to brace for more scrutiny of their executive pay practices.


  1. What nonprofit industries and organizations are being impacted by the increase in scrutiny? What are some of the positive outcomes that could result from this closer examination of nonprofits? What would be some negative outcomes from these current pressures?
  2. Corporations are facing increased scrutiny as a result of the market meltdown. Why are nonprofits also feeling pressure from additional scrutiny for compensation and other expenses? How are nonprofits different from profit-seeking entities? Should they be held to the same standards? Why or why not?
  3. How might this additional scrutiny impact nonprofits? How might your career, business, or industry be affected by increased scrutiny of nonprofits? How will you be affected personally, either through services you receive or donations that you make?


FOCUS ARTICLE>>  Risk Management, Market Regulation

Geithner Calls for Tougher Standards on Risk
by: Damian Paletta, Maya Jackson Randall, and Michael Crittenden
The Wall Street Journal
Date: Mar 26, 2009 

SUMMARY: Geithner will call for changes in how the government oversees risk-taking in financial markets, pushing for tougher rules on how big companies manage their finances.


  1. What changes is Geithner proposing? What ideals would this new regulation support? Do you think that the newly proposed rules would achieve these goals? Are there other ways to achieve those same goals?
  2. Why is Geithner calling for changes in the regulation of risk management? What will be the costs to industry for this new government oversight? Who will pay these costs, both directly and ultimately?
  3. How will these rules change your current or future industry and career? How could these rules impact you as an investor?


"Executives Took, but the Directors Gave," by Heather Landy, The New York Times, April 4, 2009 --- 

Little of the ire against outsize C.E.O. paychecks has been aimed at the people who signed off on them: corporate directors.

Instead, the anger has been concentrated on the executives themselves, particularly those running companies at the heart of the financial crisis. And boards — thrust into the limelight only rarely, as when the directors of the New York Stock Exchange were in a legal battle over the pay collected by Richard A. Grasso — have managed to stay in the background.

The exchange’s board “really took a lot of heat for that controversy,” says Sarah Anderson, an analyst on executive pay at the Institute for Policy Studies in Washington. “But so far, with this crisis, I don’t feel like boards have been getting as much attention as they should be.”

Last spring, the House Committee on Oversight and Government Reform examined pay practices at Countrywide Financial, Merrill Lynch and Citigroup, but those issues eventually took a back seat to broader concerns about the viability of the country’s financial system. As investors frustrated by the continuing crisis start seeking ways to avoid the next one, advocates of change in corporate governance expect boards to come under renewed scrutiny that could yield big changes.

Emboldened shareholder activists are pressing more companies to hold annual nonbinding votes on executive pay packages. They’re also pursuing, and appear increasingly likely to win, rules to make it easier for investors to nominate or replace board members.

And as more people start connecting the dots between pay incentives that boards laid out for executives and the risk-taking at the heart of the financial crisis, some lawmakers have been eager to step in, and many directors themselves are re-examining their approach to compensation.

“When you look at cases where compensation of senior management was out of line, or where people arguably were overpaid, it’s definitely the fault of the compensation committee of the board,” says Thomas Cooley, dean of the Stern School of Business at New York University and a director of Thornburg Mortgage. “Congress has gotten into the business of dictating executive pay now, and they shouldn’t be in that business. What they should be doing is turning the light on the committees.”

Activist shareholders have been criticizing executive pay practices for well over a decade, accusing directors of being too cozy with C.E.O.’s, too eager to lavish pay on them and too ambiguous about the formulas they use for setting compensation.

Improved standards for determining director independence and disclosing the procedures of board compensation committees were supposed to help solve those problems. And activist shareholders played a major role in spreading the notion of pay-for-performance, by which executives would be compensated based on their ability to meet board-devised financial targets.

But amid all the changes, a crucial piece of the equation — the unintended risks that could arise from these pay-for-performance incentives — went unnoticed, said James P. Hawley, co-director of the Elfenworks Center for the Study of Fiduciary Capitalism at St. Mary’s College of California.

“The problem isn’t just when people in a particular firm are getting rewarded in ways that take away from the shareholder. That’s been well recognized,” Mr. Hawley says. “What’s not been recognized is that the misalignment of incentives has resulted in firm, sector and systemic risks. None of the corporate governance activists ever made the connection.”

It took the disastrous results of 2008 to expose such links, and to make compensation a central issue for politicians and corporate America.

TWO factors contributed to the pay scales that now have C.E.O.’s earning more than 300 times the pay of the average American worker.

First was the advent of giant stock option grants, a form of compensation made all the more attractive by a 1993 change to the tax law that maintained corporate tax deductions for executive pay over $1 million, but only if the pay was tied to performance.

Second was the widespread practice of linking pay to the levels at companies of similar size or scope. Every time a board tries to keep an executive happy by offering above-average pay, the net effect is to raise the average that everyone else will use as a baseline.

In the absence of fraud or self-dealing, it’s hard for shareholders to make a legal argument that boards have failed at their job. State law in Delaware, where most big public entities are incorporated, simply requires companies to have boards that direct or manage their affairs, and it affords broad legal protection to board members so long as they act in good faith and in a manner “believed to be in or not opposed to the best interests of the corporation.”

That was the basis for the recent ruling of a Delaware judge who threw out most of the claims in a shareholder lawsuit seeking to hold Citigroup directors and officers liable for big losses tied to subprime mortgages. But the judge did allow the plaintiffs to pursue one of their claims, which alleged corporate waste stemming from a multimillion-dollar parting pay package that Citigroup’s board awarded Charles O. Prince III, the former C.E.O., in 2007.

Continued in article

Bob Jensen's threads on corporate governance are at



Outrageous Executive and Director Compensation Schemes That Reward Failure and Fraud ---

Corporate Governance is in a Crisis ---

Rotten to the Core ---



    Humor Between February 1 and February 28, 2009 ---   

    Humor Between January 1 and January 31, 2009 ---


    Humor Between March 1 and March 31, 2009

    Bumper Stickers
    Honk if you're paying my mortgage

    God will provide unless Obama gets there first

    You voted for him, You pay!

    America didn't vote for a rush to failure

    Don't blame me, I voted for McCain

    Diners Can 'Have a Ball' at Testicle Festival"--headline, Associated Press, March 27 ,2009

    Bailout Rap (link forwarded by David Albrecht) ---

    PJ O’Rourke’s Parliament of Whores ---   

    Forwarded by my good neighbors

    The economy is so bad:

    CEO's are now playing miniature golf.

    Even people who have nothing to do with the Obama administration aren't paying their taxes.

    Hotwheels and Matchbox stocks are trading higher than GM.

    Obama met with small businesses to discuss the Stimulus Package: GE, Pfeizer and Citigroup.

    PETA serves chicken wings at their meetings

    McDonalds is selling the 1/4- ouncer.

    People in Beverly Hills fired their nannies and learned their children's names.

    A truck of Americans got caught sneaking into Mexico ...

    The most highly-paid job is now jury duty.

    Dick Cheney took his stockbroker hunting.

    People in Africa are donating money to Americans.

    Mothers in Ethiopia are telling their kids, "finish your plate, do you know how many kids are starving in the US ?"

    Motel Six won't leave the light on.

    The Mafia is laying off judges.


    Congress says they are looking into this Bernard Madoff scandal. So, the guy that made $64 billion disappear is being investigated by the people who made $750 billion disappear.


    Forwarded by Paula

    St. Patrick's Day is getting close--

    *The Errand*
    McQuillan walked into a bar and ordered martini after martini,
    each time removing the olives and placing them in a jar.
    When the jar was filled with olives and all the drinks consumed,
    the Irishman started to leave.
    "S'cuse me", said a customer,
    who was puzzled over what McQuillan had done,
    "what was that all about?"
    "Nothin', said the Irishman,
    "me wife just sent me out for a jar of olives!"


    *_The Lost Luggage_*
    An Irishman arrived at J.F.K. Airport and wandered
    around the terminal with tears streaming down his cheeks.
    An airline employee asked him if he was already homesick.
    "No," replied the Irishman.
    "I've lost all me luggage!"
    "How'd that happen?"
    "The cork fell out!" said the Irishman.

    *_Water to wine_*
    An Irish priest is driving down to New York
    and gets stopped for speeding.
    The state trooper smells alcohol on the priest's breath
    and then sees an empty wine bottle on the floor of the car.
    He says, "Sir, have you been drinking?"
    "Just water," says the priest.
    The trooper says, "Then why do I smell wine?"
    The priest looks at the bottle and says,
    "Good Lord! He's done it again!"
    *_The Brothel_*
    Two Irishmen were sitting in a pub having beer
    and watching the brothel across the street.
    They saw a Baptist minister walk into the brothel,
    and one of them said,
    "Aye, 'tis a shame to see a man of the cloth goin' bad."
    Then they saw a Rabbi enter the brothel,
    and the other Irishman said,
    "Aye, 'tis a shame to see that the Jews
    are falling' victim to temptation."
    Then they saw a Catholic priest enter the brothel,
    and one of the Irishmen said,
    "What a terrible pity...
    one of the girls must be quite ill."

    *_Lost at Sea_*
    Two Irishmen, Patrick & Michael,
    were adrift in a lifeboat following a dramatic escape
    from a burning freighter.
    While rummaging through the boat's provisions,
    Patrick stumbled across an old lamp.
    Secretly hoping that a genie would appear,
    he rubbed the lamp vigorously.
    To the amazement of Patrick, a genie came forth.
    This particular genie, however,
    stated that he could only deliver one wish,
    not the standard three.
    Without giving much thought to the matter,
    Patrick blurted out,
    "Make the entire ocean into Guinness Beer!"
    The genie clapped his hands with a deafening crash,
    and immediately the entire sea turned into
    the finest brew ever sampled by mortals.
    Simultaneously, the genie vanished.
    Only the gentle lapping of Guinness on the hull
    broke the stillness as the two men considered their circumstances.
    Michael looked disgustedly at Patrick
    whose wish had been granted.
    After a long, tension-filled moment, he spoke:
    **"Nice going Patrick!**
    **Now we're going to have to pee in the boat!**

    *_The Fall_*
    Murphy was staggering home with a pint of booze
    in his back pocket when he slipped and fell heavily.
    Struggling to his feet,
    he felt something wet running down his leg.
    "Please Lord," he implored,
    "let it be blood!!"


    Darwin awards are given to dimwits ---
    I kick myself for not going to this site on a more frequent basis. On occasion my wife threatens to nominate me for one of these for my resume.

    Forwarded by my good neighbors

    A young cowboy from Wyoming goes off to college. Half way through the semester, he has foolishly squandered all his money. He calls home. "Dad," he says, "You won't believe what modern education is developing! They actually have a program here in Laramie that will teach our dog, Ol' Blue how to talk!"

    "That's amazing," his Dad says. "How do I get Ol' Blue in that program?"

    "Just send him down here with $1,000" the young cowboy says. "I'll get him in the course."

    So, his father sends the dog and $1,000. About two-thirds of the way through the semester, the money again runs out. The boy calls home. "So how's Ol' Blue doing son?" his father asks.

    "Awesome, Dad, he's talking up a storm," he says, "but you just won't believe this -- they've had such good results they have started to teach the animals how to read!"

    "Read!?" says his father, "No kidding! How do we get Blue in that program?"

    "Just send $2,500, I'll get him in the class."

    The money promptly arrives, but our hero has a problem. At the end of the year, his father will find out the dog can neither talk, nor read. So he shoots the dog. When he arrives home at the end of the year, his father is all excited. "Where's Ol' Blue? I just can't wait to see him read something and talk!"

    "Dad," the boy says, "I have some grim news. Yesterday morning, just before we left to drive home, Ol' Blue was in the living room, kicked back in the recliner, reading the Wall Street Journal, like he usually does. Then he turned to me and asked, "So, is your daddy still messing' around with that little redhead who lives in town?"

    The father exclaimed, "I hope you shot that son of a bitch before he talks to your Mother!"

    "I sure did, Dad!"

    "That's my boy!"

    The kid went on to be a successful lawyer, and then he went on to become a Congressman.

    Possible Urban Legends forwarded by Paula

    If you yelled for 8 years, 7 months and 6 days you would have produced enough sound energy to heat one cup of coffee. (Hardly seems worth it.)

    The human heart creates enough pressure when it pumps out to the body to squirt blood 30 feet. (O..M.G..!)

    A pig's orgasm lasts 30 minutes.. (In my next life, I want to be a pig.)

    A cockroach will live nine days without its head before it starves to death. (Creepy.) (I'm still not over the pig.)

    Banging your head against a wall uses 150 calories a hour (Don't try this at home, maybe at work)

    The male praying mantis cannot copulate while its head is attached to its body. The female initiates sex by ripping the male's head off. (Honey, I'm home. What the...?!)

    The flea can jump 350 times its body length. It's like a human jumping the length of a football field . (30 minutes.. Lucky pig! Can you imagine?)

    The catfish has over 27,000 taste buds . (What could be so tasty on the bottom of a pond?)

    Some lions mate over 50 times a day. (I still want to be a pig in my next life....quality over quantity)

    Butterflies taste with their feet. (Something I always wanted to know.)

    The strongest muscle in the body is the tongue. (Hmmmmmm......)

    Right-handed people live, on average, nine years longer than left-handed people.

    (If you're ambidextrous, do you split the difference?)

    Elephants are the only animals that cannot jump. (Okay, so that would be a good thing)

    A cat's urine glows under a black light . (I wonder who was paid to figure that out?)

    An ostrich's eye is bigger than its brain. ( I know some people like that.)

    Starfish have no brains (I know some people like that too..)

    Polar bears are left-handed. (If they switch, they'll live a lot longer)

    Humans and dolphins are the only species that have sex for pleasure. (What about that pig??)


    Forwarded by Debbie

    Dear IRS,

    I am sorry to inform you that I will not be able to pay taxes owed April 15, but all is not lost.

    I have paid these taxes: accounts receivable tax, building permit tax, CDL tax, cigarette tax, corporate income tax, dog license tax, federal income tax, unemployment tax, gasoline tax, hunting license tax, fishing license tax, waterfowl stamp tax, inheritance tax, inventory tax, liquor tax, luxury tax, Medicare tax, city, school and county property tax (up 33 percent last 4 years), real estate tax, social security tax, road usage tax, toll road tax, state and city sales tax, recreational vehicle tax, state franchise tax, state unemployment tax, telephone federal excise tax, telephone federal state and local surcharge tax, telephone minimum usage surcharge tax, telephone state and local tax, utility tax, vehicle licence registration tax, capitol gains tax, lease severance tax, oil and gas assessment tax, Colorado property tax, Texas, Colorado, Wyoming, Oklahoma and New Mexico sales tax, and many more that I can't recall but I have run out of space and money.

    When you do not receive my check April 15, just know that it is an honest mistake. Please treat me the same way you treated Congressmen Charles Rangle, Chris Dodd, Barney Frank and ex-Congressman Tom Dashelle and, of course, your boss Timothy Geithner. No penalties and no interest.

    P.S. I will make at least a partial payment as soon as I get my stimulus check.

    Ed Barnett
    Wichita Falls

    Forwarded by Linda

    Subject: Where to retire




    You can retire to  Phoenix , Arizona where.....

    1. You are willing to park 3 blocks away because you found shade.

    2. You've experienced condensation on your butt from the hot water in the toilet bowl.
    3. You can drive for 4 hours in one direction and never leave town.

    4. You have over 100 recipes for Mexican food.

    5. You know that "dry heat" is comparable to what hits you in the face when you open your oven door.

    6. The 4 seasons are: tolerable, hot, really hot, and ARE YOU KIDDING ME??!!


    You can retire to  California where...

    1. You make over $250,000 and you still can't afford to buy a house.

    2. The fastest part of your commute is going down your driveway.

    3. You know how to eat an artichoke.

    4. You drive your rented Mercedes to your neighborhood block party.

    5. When someone asks you how far something is, you tell them how long it will take to get there rather than how many miles away it is.

    6. The 4 seasons are: Fire, Flood, Mud, and Drought.


    You can retire to  New York City where...

    1. You say "the city" and expect everyone to know you mean Manhattan ..

    2. You can get into a four-hour argument about how to get from Columbus Circle to Battery Park, but can't find Wisconsin on a map.

    3. You think Central Park is "nature."

    4. You believe that being able to swear at people in their own language makes you multi-lingual.

    5. You've worn out a car horn. ( ed note: if you have a car)

    6. You think eye contact is an act of aggression..


    You can retire to  Maine where...

    1. You only have four spices: salt, pepper, ketchup, and Tabasco ..

    2. Halloween costumes fit over parkas.

    3. You have more than one recipe for moose.

    4. Sexy lingerie is anything flannel with less than eight buttons.

    5. The four seasons are: winter, still winter, almost winter, and construction.


    You can retire to the Deep South where...

    1. You can rent a movie and buy bait in the same store.

    2. "Y'all" is singular and "all y'all" is plural.

    3. "He needed killin'" is a valid defense.

    4. Everyone has 2 first names: Billy Bob, Jimmy Bob, Mary Sue, Betty Jean, Mary Beth, etc.

    5. Everything is either "in yonder," "over yonder" or "out yonder." It's important to know the difference, too.


    You can retire to  Colorado where...

    1. You carry your $3,000 mountain bike atop your $500 car

    2. You tell your husband to pick up Granola on his way home and so he stops at the day care center.

    3. A pass does not involve a football or dating.

    4. The top of your head is bald, but you still have a pony tail.


    You can retire to the Midwest where...

    1. You've never met any celebrities, but the mayor knows your name.

    2. Your idea of a traffic jam is ten cars waiting to pass a tractor.

    3. You have had to switch from "heat" to "A/C" on the same day.

    4. You end sentences with a preposition: "Where's my coat at? "

    5. When asked how your trip was to any exotic place, you say, "It was different!"


    AND You can retire to Florida where..

    1. You eat dinner at 3:15 in the afternoon.

    2. All purchases include a coupon of some kind -- even houses and cars.

    3. Everyone can recommend an excellent dermatologist.

    4. Road construction never ends anywhere in the state.

    5. Cars in front of you often appear to be driven by headless people.
    "A bad day of golf is better than a good day at work"


    Forwarded by Team Carper

    A sixteen year-old boy came home with a new Chevrolet Avalanche--his parents began to yell and scream, 'Where did you get that truck???!!!'

    He calmly told them, 'I bought it today.'

    'With what money?' demanded his parents. They knew what a Chevrolet Avalanche cost.

    'Well,' said the boy, 'this one cost me just fifteen dollars.' So the parents began to yell even louder. 'Who would sell a truck like that for fifteen dollars?' they said.

    'It was the lady up the street,' said the boy. I don't know her name--they just moved in. She saw me ride past on my bike and asked me if I wanted to buy a Chevrolet Avalanche for fifteen dollars.'

    'Oh my Goodness!,' moaned the mother, 'she must be a child abuser. Who knows what she will do next? John, you go right up there and see what's going on.' So the boy's father walked up the street to the house where the lady lived and found her out in the yard calmly planting petunias!

    He introduced himself as the father of the boy to whom she had sold a new Chevrolet Avalanche for fifteen dollars and demanded to know why she did it.

    'Well,' she said, 'this morning I got a phone call from my husband. I thought he was on a business trip but learned from a friend he had run off to Hawaii with his mistress and really doesn't intend to come back.

    He claimed he was stranded and needed cash and asked me to sell his new Chevrolet Avalanche and send him the money. So I did.'

    Forwarded by Paula


    Excerpts from a Dog's Diary

    8:00 am - Dog food! My favorite thing!
    9:30 am - A car ride! My favorite thing!
    9:40 am - A walk in the park! My favorite thing!
    10:30 am - Got rubbed and petted! My favorite thing!
    12:00 pm - Lunch! My favorite thing!
    1:00 pm - Played in the yard! My favorite thing!
    3:00 pm - Wagged my tail! My favorite thing!
    5:00 pm - Milk Bones! My favorite thing!
    7:00 pm - Got to play ball! My favorite thing! 8:00 pm - Wow! Watched TV with the people! My favorite thing!
    11:00 pm - Sleeping on the bed! My favorite thing!

    Excerpts from a Cat's Daily Diary

    Day 983 of my captivity...

    My captors continue to taunt me with bizarre little dangling objects. They dine lavishly on fresh meat, while the other inmates and I are fed hash or some sort of dry nugget.

    Although I make my contempt for the rations perfectly clear, I nevertheless must eat something in order to keep up my strength.

    The only thing that keeps me going is my dream of escape. In an attempt to disgust them, I once again vomit on the carpet.

    Today I decapitated a mouse and dropped its headless body at their feet. I had hoped this would strike fear into their hearts, since it clearly demonstrates what I am capable of. However, they merely made condescending comments about what a 'good little hunter' I am.

    There was some sort of assembly of their accomplices tonight. I was placed in solitary confinement for the duration of the event. However, I could hear the noises and smell the food. I overheard that my confinement was due to the power of 'allergies.' I must learn what this means and how to use it to my advantage.

    Today I was almost successful in an attempt to assassinate one of my tormentors by weaving around his feet as he was walking. I must try this again tomorrow -- but at the top of the stairs.

    I am convinced that the other prisoners here are flunkies and snitches. The dog receives special privileges. He is regularly released - and seems to be more than willing to return. He is obviously retarded.

    The bird has got to be an informant. I observe him communicating with the guards regularly. I am certain that he reports my every move. My captors have arranged protective custody for him in an elevated cell, so he is safe. For now................

    Forwarded by Gene and Joan

    24 Hours to Live

    Morris returns from the doctor and tells his wife that the doctor has told him that he has only 24 hours to live. Given the prognosis, Morris asks his wife for sex.

    Naturally, she agrees, so they make love.

    About 6 hours later, the husband goes to his wife and says, 'Honey, you know I now have only 18 hours to live. Could we please do it one more time?'

    Of course, the wife agrees, and they do it again.

    Later, as the man gets into bed, he looks at his watch and realizes that he now has only 8 hours left. He touches his wife's shoulder and asks, 'Honey, please... just one more time before I die.'

    She says, 'Of course, Dear,' and they make love for the third time.

    After this session, the wife rolls over and falls to sleep.

    Morris, however, worried about his impending, tosses and turns, until he's down to 4 more hours. He taps his wife, who rouses. 'Honey, I have only 4 more hours. Do you think we could...'

    At this point the wife sits up and says, 'Listen Morris, I have to get up in the morning... you don't.'


    Dolly Parton and Queen Elizabeth Outside the Pearly Gates

    Both die on the same day and they both go before an St. Peter to find out if they'll be admitted to Heaven.

    Unfortunately, there's only one space left that day, so the angel must decide which of them gets in. The Angel asks Dolly if there's some particular reason why she should get into Heaven.

    Dolly takes off her top and says, 'Look at these, they're the most perfect breasts God ever created, and I'm sure the angels will be pleased to see them every day, for eternity.'

    The Angel thanks Dolly, and asks Her Majesty the same question.

    The Queen takes a bottle of Perrier out of her purse, shakes it up, and gargles. Then, she spits into a toilet and pulls the lever.

    The angel chuckles and says, 'Okay, Your Majesty, you may go in.'

    Dolly is outraged and asks, 'What was that all about? I show you two of God's own perfect creations and you turn me down. She spits into a commode and gets in! Would you explain that to me?'

    'Sorry, Dolly,' says the angel, 'but, even in Heaven, a royal flush beats a pair - no matter how big they are.'


    And that's the way it was on March 31, 2009 with a little help from my friends.


    Bob Jensen's Threads ---


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

    Deloitte's International Accounting News ---

    Association of International Accountants --- 

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

    Bob Jensen's accounting history summary ---

    Bob Jensen's accounting theory summary ---


    AccountingWeb ---
    AccountingWeb Student Zone ---


    Introducing the New  (free) ---


    SmartPros ---


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


    Financial Rounds (from the Unknown Professor) ---



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



  • February 28, 2009

  • Bob Jensen's New Bookmarks on  February 28, 2009
    Bob Jensen at Trinity University 

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

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

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

    Many useful accounting sites (scroll down) ---

    Accounting program news items for colleges are posted at
    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

    Federal Revenue and Spending Book of Charts (Great Charts on Bad Budgeting) ---

    Humor Between February 1 and February 28, 2009 ---   

    Humor Between January 1 and January 31, 2009 ---  

    Happy Birthday to the AECM ---
    On the occasion of its 15th birthday, I replied as follows on February 28, 2009 to the birthday greetings of Barry Rice and Amy Haas.

    Hi Amy Haas and Barry Rice,

    Let me add to the thank you, thank you, thank you Barry that Jagdish already stated. Over and over I thank you Barry for cranking up the AECM 15 years ago.

    My thank you to Barry still stands at

    My views on open sharing are highlighted at
    The main thing to remember about sharing is that whatever is given generally comes back tenfold in one way or another.

    And as your will see below, I generally do not like networking behind passwords. Passwords in general seem to me to be obstructions to open sharing. Social network messaging hides behind passwords, whereas listserv messaging and blogs often do not hide behind passwords.
    My wife often shakes her head and says I’m lousy at keeping secrets.

    To learn about social networking, Amy,  the best place to begin is at
    Then you can click on any of the many alternative networks to view their advantages and disadvantages. The main disadvantage for me would be information overload. Interactive communications on a listserv like the AECM has a lot of value added for reasons that I spell out at
    But I would be overwhelmed by social networking and LinkedIn type networking as well.

     I personally have no interest in using Facebook, MySpace, or any of these social networks although out of the purported 175 million users of Facebook there must be many that find some value added in having special networks of friends, colleagues, etc. Unless I’m in a collaborative project, I don’t have any interest in joining a hive on the AAA Commons even though I like the AAA Commons for communications between members of the American Accounting Association who use the Commons as a whole. But hiving in smaller cohorts could overwhelm me.

     I receive invitations all the time from former students, friends I’ve not seen in years, and professors whom I admire and respect that ask me to join their private networks, particularly the LinkedIn network.  I don’t join any of them because if I did the networking would become overwhelming. I currently receive over 100 email messages a day as it stands now and cannot possibly handle social networking as well as the other networking messages that I receive. And generally if I went to a lot of trouble to research a problem for a LinkedIn friend I would want to share may research findings with the world in a file that can be found by Google.

    One thing I like about the AECM is that Web crawlers like Google can find messaging content in the AECM since there are no password barriers at
    For the AAA Commons there is a password barrier and for most practical purposes users must first be dues-paying members of the AAA. Google cannot crawl into the Commons messages like it can crawl into the AECM messages. The same is true for most social networking messaging that hides behind passwords. I’m a much more public kind of guy who likes Google crawling. When I crawl I learn from others who are willing to share. When others find what I’ve written it’s my way of not only paying them back but there’s a chance that they will respond directly to me with added information that teach me something new.

     I’m especially active on the AECM, CPA-L, the TigerNet at Trinity University, and to a lesser extent the AAA Commons. I restrain myself when it comes to the Commons because there I don’t want to look like a messaging hog any more than I already look like a messaging hog. Virtually everything that I do share on the AAA Commons is something that I’ve already shared in a more public space. Putting it on the Commons, however, does reach some AAA members who I cannot otherwise reach if they are not subscribed to the AECM.

     I have two huge Websites (over 20,000 documents) such that when people really want to find me it does not take much imagination to find my email address using Google. There are about 25,000 visitors to these Websites each month. But I only get twenty messages each day on average from people who want help with something that I’ve written about, the most common topic being derivative financial instruments accounting and valuation of interest rate swaps for some reason. Sometimes the questions are from students and professors in Africa and Asia. Sometimes the questions are from employees of accounting firms, corporations, and government. The frequency of questions could be overwhelming if it wasn’t that more often than not the answer already lies somewhere in my Websites. I’m just better at navigating my own Websites that most people who send me questions about a topic.

     I hesitate to brag that I myself have written all the answers to questions that people send me. Much of the time the answers were written by people like yourself Amy who have written them on the AECM (a public medium) so I could archive them somewhere in my Websites. Also there are a lot of quotations from the media and from abstracts of journal articles that I’ve archived on documents at my Website.

     I’ve been refereeing a very interesting research paper about why subscribers join and stay with the AECM even if they are lurkers who never send out messages. I really cannot ethically reveal much about the findings of that study at this point --- I sure wish it would get published soon. But there is one finding I will share with you. Since I am the most active broadcaster on AECM, I discovered that a lot of subscribers sort of hate me. But at the same time they find so many messages, including my messages, to be “too interesting” to miss out on.

     What Jensen, Jagdish, Albrecht, Williams, Dunbar, Walters, Scribner, Beresford, Bonacker, and the other broadcasters do on the AECM is save other subscribers a lot of time and trouble in discovering new or old (history) information that is “too interesting” to miss out on. I know I find many, many  interesting bits of information on the AECM that are value added things in my life.

     And I’m thrilled when previous lurkers decide to add to the AECM conversations. They often add something that us old timers just never thought of before.

     I’m thrilled that subscribers to the AECM do not appear to take criticism personally. I think a necessary condition to be a part of the academic academy is to accept criticism professionally without making it personal.

     It is possible to abuse the AECM, but in the first 15 years I’ve not seen much abuse. One abuse is to send out research surveys simply because it is so easy to reach all of us. But this type of use is almost as irritating as telemarketing. Another abuse is to advertise a commercial product such as a new textbook. This type of advertising would get very intrusive like television commercials are intrusive. Another abuse would be for accounting firms and corporations to try to preach to accounting professors on the AECM. To my knowledge this type of abuse has never taken place on the AECM. The firms have been very restrained even though I know at times they would like to wring Jensen’s neck.

    Another abuse would be to keep broadcasting over and over about one topic. Although Jensen broadcasts over and over each day, his message topics are across the board in a concerted effort not to get too boring on one theme. If I feel that I’m becoming too focused on any one theme, I generally try to call attention to my Web documents rather than continually harp on such matters in my AECM messaging.

     In closing, I want to thank Barry for the medium since the medium is so often the message. I would like to thank the active broadcasters on the AECM since it is your messaging that corrected my mistakes and gave me new insights that I would’ve never discovered on my own. And I thank you for the knowledge that I so often pass along to others in my Web pages. I hope you appreciate my Web pages since you contributed millions of the words that appear on those pages.

    I think all of us have benefitted greatly from the AECM, and many of our students have benefitted because we took the time and trouble to join into the AECM. Thanks for the learning times Barry.

    And I really feel sorry for professors and students who have unsubscribed to the AECM. I plan to stay subscribed after death.

     Robert E. (Bob) Jensen
    Trinity University Accounting Professor (Emeritus)
    190 Sunset Hill Road
    Sugar Hill, NH 03586
    Tel. 603-823-8482

    March 2, 2009 reply from Linda A Kidwell, University of Wyoming [lkidwell@UWYO.EDU]

  • First, congratulations and happy anniversary to both Barry and Bob on 15 years of wonderful information sharing.

    Wouldn't you say that AECM is, to some degree, a social network? Like some have said, we get to know the frequent posters pretty well, whether or not we see them at annual meetings to shake their hands. But no one has touched on the direct evidence I've found of the social networking component of AECM. When I was last on the job market, I'd say a dozen interviews were either granted because someone knew my name from my participation in the list or required no ice-breaking time because AECM had already facilitated that. I am quite certain that one of the schools would not have interviewed someone with my research interests at all had I not been known to a search committee member. Another social networking aspect has taken place off the list but because of the list. I have needed advice and/or support at various points in my career over the last 15 years, and I have felt quite comfortable going to acquaintences from AECM for that advice. This has come in form of advice about dealing with an authoritarian dean, letters of reference during a job search, and support for a tenure application. Another great benefit has been seeking someone to review a manuscript before I submitted it to a journal. I've also found one prominent AECMer, and he knows who he is, to be quite forgiving of professional lapses of courtesy. And I believe another frequent member got helpful support in the face of an over-reacting employer in the case of information loss in the last few years.

    So have I joined facebook? Yes, because I have teenage children and require them to accept me as friends, and my college's 125th anniversary of the Glee Club is being facilitated through facebook as well. But I consider AECM to be my most important professional social network!

    Linda Kidwell


  • The AICPA's Economic Crisis Resource Center ---

    Bob Jensen's essay on the financial crisis bailout's aftermath and an alphabet soup of appendices can be found at

    2009 AICPA Video on Career Opportunities for CPAs ---

    Accounting firms dominate BusinessWeek's second annual ranking of the "Best Places to Launch a Career."
    From SmartPros, September 14, 2007 ---

    Deloitte & Touche is No. 1, followed by PricewaterhouseCoopers and Ernst & Young. The last of the Big Four, KPMG, moved up four spots to No. 11.

    Accountants used to be spoofed as bean counters -- dutiful, middle-aged, gray-suited men with considerable analytical expertise but little charisma. This year accountants became sexy, BusinessWeek said in a statement.

    Why did the accounting firms do so well? Enormous demand. Across industries, there is a mad scramble to recruit the best and brightest of a new generation, the much-maligned, heavily scrutinized Gen Y. Nowhere is the pressure more intense than in the Big Four. The Sarbanes-Oxley Act has so greatly increased the need for their services that the firms are facing an epic talent shortage.

    BusinessWeek's "Best Places to Launch a Career" ranking is based on three extensive surveys: of career services directors at U.S. colleges, the employers they identify as the best for new graduates, and college students themselves.

    Some great information about the organization of major accounting firms, their finances (including average partner comp) and litigation ---

    Bob Jensen's threads on careers are at

    "Task Force Identifies 21 Practical Pointers for Public Company Auditors," SmartPros, February 16, 2009 ---

    Here are two professors who really works to reduce dropout rates.
    Actually they really work period!

    February 27, 2009 message from Mark Meuwissen [MarkM@ALEXTECH.EDU]

    In response to my previous post, two of you asked how I accomplished good student retention this year.

    Now you put me on the spot. It was more of an observation from a contrarian than a claim to have the secret, but here are some thoughts.

    First, we are a small outstate tech school that doesn't always recruit the cream of the crop. Our AAS 2 year accounting degree typically start 30 students a year, and graduate less than 20. We also have 4 to 6 AS transfer degree students.

    There have been years when we lost 1/3 of the students in the first year. Sometimes it is because they just aren't ready or willing to get ready for college. Other times it is because life problems drove them to pursue a college degree and those life problems didn't go away. One year, I remember 2 of my 29 new students were diagnosed with an incurable cancer and then later that year a spring start died unexpectedly in her apartment. I suspect suicide, but never found out. So, we haven't always had good luck with retention.

    Here are few things my co-instructor, Carole, and I do different from past years:

    - We incorporate more team projects and working together in class. We have daily exercises completed in pairs. We do a lot of active learning techniques. This includes an occasional table test where the whole table shares their answers and tries to outdo the other table. The concept is to quickly build a support network with the other students. We also find that working together gives better retention.

    - Both Carole and I take two days each semester to advise meet with each student two on one. It takes two full days but sometimes it provides that first opportunity to meet with a troubled student. I find it very effective to ask them what they will do if they don't finish school. Most are adamant that they won't live at home, but when I ask them how they will pay for their own car and their own rent, they get very nervous. For most however, we really pump them up and make them feel good about their school.

    - We are able to find some funding for second year students to tutor the first year students. This helps maybe 1 or 2 per year.

    - We aggressively pursue attendance contracts and often send students to academic affairs for a good chewing out. When I started school here, I thought this was ridiculous. I graduated from a private college where attendance was completely your option. I thought the students would be grown up enough to come to class, but they weren't. I have been converted into taking attendance and acting like it is still high school. Unfortunately, this seems to be important and we have saved at least one student each year by getting them on an attendance contract.

    - We changed the sequence of courses around so that any student in our program has to take Payroll in the Fall. Some come in with Principles already from another school or from high school, so we use to have students neither Carole or I had in class their first semester. Now, we always make sure that a new student has either Carole or I at least once in their first semester so we get to know them and they get to know us. This was huge!

    - In principle 1, I started doing a life plan project where each student has to lay out their life listing every major event that affects who they are. I am the only one that sees it other than the student. I very clearly tell them that every event has to be on their project no matter how painful. If their brother committed suicide, it has to be on there. If they got into drugs, it has to be on there. I explain that completion of this project will give them a much better idea where they are and how they got there. Without this idea, they can't do a good job making a plan for their future. I then make them do 5, 10 and 15 year plans. One other requirement is they have to use pictures, real, hand drawn or something similar found on the internet. It has to be visual. They usually do this either in PowerPoint or on an oversized sheet of paper. Some use a scrap book approach. One other part of this project that adds to the effect is that I tell them my life story, which has some not so great events. I have made several cry in class at how pitiful I was before turning my life around. This project has been very effective at building relationships and opening the students to change. It has also opened my eyes to the number of these students who have been raped, or have tried to commit suicide. It opened my eyes and my heart.

    - Both Carole and I give many, many chances for make-up, rework, independent studies, maybe even special treatment. We probably violate almost every rule out there on assessment and fairness. Our thought is that we need to get the weaker students through as many semesters as we can even if they have no hope of graduating. Each semester completed improves the student. You can see them grow. Some have taken 4 years to graduate from a 2 year program, but we think these are our biggest success. It is really only until the final semester that we buckle down and hold them accountable. In the end, we know that our reputation is stamped on their head when they leave, so we make the final semester pretty dang hard. But by making the others much easier, we get more of them to the final semester.

    I wish I could tell you it was about using some special educational methodology like "self-directed hybrid course work" but it isn't. In just my 4th year here, I have already taught 14 different courses. I rarely have the same course twice in a semester. For example, this semester I have 5 preps and will spend 24 contact hours each week in class or in lab. That doesn't count the time I spend administrating a VITA tax service here at the college. I don't think the quality of our delivery is that great, which is why I read this list serve so attentively. I want to improve delivery methods.

    I believe the key is the relationship we develop with our students. I don't have any other answer.

    Mark Meuwissen

    Professor Schiller at Yale assets housing prices are still overvalued and need to come down to reality
    The median value of a U.S. home in 2000 was $119,600. It peaked at $221,900 in 2006. Historically, home prices have risen annually in line with CPI. If they had followed the long-term trend, they would have increased by 17% to $140,000. Instead, they skyrocketed by 86% due to Alan Greenspan’s irrational lowering of interest rates to 1%, the criminal pushing of loans by lowlife mortgage brokers, the greed and hubris of investment bankers and the foolishness and stupidity of home buyers. It is now 2009 and the median value should be $150,000 based on historical precedent. The median value at the end of 2008 was $180,100. Therefore, home prices are still 20% overvalued. Long-term averages are created by periods of overvaluation followed by periods of undervaluation. Prices need to fall 20% and could fall 30%.....
    Watch the video on Yahoo Finance --- Click Here
    See the chart at
    Also see Jim Mahar's blog at
    Jensen Comment
    In the worldwide move toward fair value accounting that replaces cost allocation accounting, the above analysis by Professor Schiller is sobering. It suggests how much policy and widespread fraud can generate misleading "fair values" in deep markets with many buyers and sellers, although the housing market is a bit more like the used car market than the stock market. Each house and each used car are unique, non-fungible items that are many times more difficult to update with fair value accounting relative to fungible market securities and new car markets.

    Note how Days Inns presented both traditional and real estate exit value balance sheets when anticipating an IPO --- 

    "SEC ISSUES DETAILED STUDY ON MARK-TO-MARKET ACCOUNTING," by Gia Chevis, Accounting, February 19, 2009 ---
    The report was issued on December 31, 2008

    At the direction of the U.S. Congress, the SEC prepared and released on 30 December 2008 a study on mark-to-market accounting and its role in the recent financial crises. Though it concluded that mark-to-market accounting was not responsible for the crisis, it did make eight recommendations.

    The 259-page document, a result of the Emergency Economic Stabilization Act of 2008, details an in-depth study of six issues identified by the Act: effects of fair value accounting standards on financial institutions' balance sheets; impact of fair value accounting on bank failures in 2008; impact of fair value accounting on the quality of financial information available to investors; process used by the FASB in developing accounting standards; alternatives to fair value accounting standards; and advisability and feasibility of modifications to fair value accounting standards. Its eight recommendations are:

    1) SFAS No. 157 should be improved, but not suspended.

    2) Existing fair value and mark-to-market requirements should not be suspended.

    3) While the Staff does not recommend a suspension of existing fair value standards, additional measures should be taken to improve the application and practice related to existing fair value requirements (particularly as they relate to both Level 2 and Level 3 estimates).

    4) The accounting for financial asset impairments should be readdressed.

    5) Implement further guidance to foster the use of sound judgment.

    6) Accounting standards should continue to be established to meet the needs of investors.

    7) Additional formal measures to address the operation of existing accounting standards in practice should be established.

    8) Address the need to simplify the accounting for investments in financial assets.

    On February 18, the FASB announced the addition of two short-timetable projects to its agenda concerning fair value measurement and disclosure. The first project aims to improve application guidance for measurement of fair value, with issuance projected for the second quarter. The second will address issues related to input sensitivity analysis and changes in levels; the FASB anticipates completing that project in time for calendar-year-end filing deadlines. Both projects were undertaken in response to the SEC's recent study on mark-to-market accounting and input from the FASB's Valuation Resource Group.

    The full report can be freely downloaded at (pdf)

    SFAS No. 157’s fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets (Level 1) and the lowest priority to unobservable inputs (Level 3). With respect to IFRS, the report states the following on Page 33:

    Currently, under IFRS, “guidance on measuring fair value is dispersed throughout [IFRS] and is not always consistent.”52 However, as discussed in Section VII.B, the IASB is developing an exposure draft on fair value measurement guidance.

    IFRS generally defines fair value as “the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction” (with some slight variations in wording in different standards).53 While this definition is generallyconsistent with SFAS No. 157, it is not fully converged in the following respects:

    The definition in SFAS No. 157 is explicitly an exit price, whereas the definition in IFRS is neither explicitly an exit price nor an entry price.

    SFAS No. 157 explicitly refers to market participants, which is defined by the standard, whereas IFRS simply refers to knowledgeable, willing parties in an arm’s length transaction.

    For liabilities, the definition of fair value in SFAS No. 157 rests on the notion that the liability is transferred (the liability to the counterparty continues), whereas the definition in IFRS refers to the amount at which a liability could be settled.


    Related Items
      The Relationship between Fair Value, Market Value, and Efficient Markets
      Accounting in and for the Subprime Crisis
      Inco Ltd.: Market Value, Fair Value, and Management Discretion
  • "SEC Advises No Break in 'Mark' (Fair Value Accounting) Rules," by Michael R. Crittenden, The Wall Street Journal, December 31, 2008 --- 

    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 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.

    "Robert H. Herz, Chairman of the Financial Accounting Standards Board, today announced the addition of new FASB agenda projects intended to improve
    (1) the application guidance used to determine fair values and
    (2) disclosure of fair value estimates.
    "FASB Initiates Projects to Improve Measurement and Disclosure of Fair Value Estimates," SmartPros, February 18, 2009 ---

  • The projects were added in response to recommendations contained in the Securities and Exchange Commission's (SEC) recent study on mark-to-market accounting, as well as input provided by the FASB's Valuation Resource Group, a group of valuation and accounting professionals who provide the FASB staff and Board with information on implementation issues surrounding fair value measurements used for financial statement reporting purposes.

    "The SEC expressed continued support of fair value accounting in its study, but recommended consideration of potential improvements in the guidance surrounding the application of fair value principles," stated Chairman Herz. "We agree with the SEC and with our Valuation Resource Group that more application guidance to determine fair values is needed in current market conditions. Additionally, investors have asked for more information and disclosure about fair value estimates. Therefore, the FASB is immediately embarking on projects that directly address areas that constituents have told us are challenging in the current environment, and which will improve disclosures in financial reports."

    The fair value projects address both application and disclosure guidance:

    -- The projects on application guidance will address determining when a market for an asset or a liability is active or inactive; determining when a transaction is distressed; and applying fair value to interests in alternative investments, such as hedge funds and private equity funds.

    -- The project on improving disclosures about fair value measurements will consider requiring additional disclosures on such matters as sensitivities of measurements to key inputs and transfers of securities between categories.

    The FASB anticipates completing projects on application guidance by the end of the second quarter of 2009, and the project on improving disclosures in time for year-end financial reporting. The FASB has also recently proposed enhanced disclosures in interim reports relating to the fair values of financial instruments. (Proposed FASB Staff Position (FSP) FAS 107-b and APB 28-a is available at ).

    As previously announced, the FASB has also commenced work with the International Accounting Standards Board (IASB) on a more comprehensive project to improve, simplify, and converge the accounting for financial instruments. The Boards are obtaining input on that project from a number of sources, including the senior-level Financial Crisis Advisory Group that has been formed to assist the FASB and the IASB in evaluating financial reporting issues emanating from the global financial crisis.

    The SEC study, entitled Report and Recommendations Pursuant to Section 133 of the Emergency Economic Stabilization Act of 2008: Study on Mark-To-Market Accounting,, was issued to Congress by the SEC's Office of the Chief Accountant and Division of Corporate Finance on December 30, 2008, as mandated by the Emergency Economic Stabilization Act of 2008. The 211-page report recommended against suspension of fair value accounting standards, and instead recommended specific improvements to existing practice. The report reaffirms that investors generally believe fair value accounting increases financial reporting transparency, and that the information it provides helps result in better investment decision-making. (The report is available at .)

    The FASB Valuation Resource Group met on February 5, 2009 to provide input on fair value issues to the Board. The group was formed in June 2007, as a result of feedback received from constituents calling for the Board to address issues relating to valuation for financial reporting. More information about the VRG and its members is available at

    Continued in article

  • Banking industry pressures to abandon fair value accounting are summarized at

    Bob Jensen's threads on fair value accounting are at

    IASB = International Accounting Standards Board
    "IASB's Responses to the Global Financial Crisis," IAS Plus, February 25, 2009 ---

    The SAC discussed the current global financial crisis and the IASB's responses to it. The IASB Chairman and the IASB's Director of Capital Markets outlined the activities of the IASB and the staff since the Financial Stability Forum's action plan was issued in April 2008. Among others, the following matters were raised or discussed:

    The IASB Chairman suggested that the IASB had three real alternative approaches to accounting for financial instruments generally:

    (It was assumed that certain financial instruments, such as all derivative financial instruments, would be measured at fair value.)

    Bob Jensen's threads on the global financial crisis are at

    Leading Academic Research Centers of Business

    There are various competing rankings of business schools most of which are published by media giants like US News, Business Week, and The Wall Street Journal. These vary by criteria used and by who does the rankings. For example, the WSJ rankings are done by recruiters of graduates and hence are heavily influenced by quality of students admitted as well as quality of student eventually graduated by the business schools. The US News rankings are done by business school deans who are influenced by various criteria, not the least of which is the halo reputation of the entire university in which a business school is embedded, which in my viewpoint gives the Ivy League along with Stanford and some leading universities a bias toward the reputation of the entire university vis-a-vis its business school if it has a business school. The rankings themselves can vary somewhat significantly between US News, Business Week, and The Wall Street Journal. You can read more about these popular and highly controversial rankings at

    In comparison there are also rankings of business schools according to research journal publications of faculty. One such ranking can be found in the University of Texas at Dallas (UTD) database at
    It would seem that since UTD does not come out particularly well in the US News, Business Week, and The Wall Street Journal that this UTD ranking database is an attempt to inform prospective students and faculty that UTD is one of the leading research centers in management. Indeed, using the criteria chosen by UTD for this database, UTD shows up at Rank 18 among the leading business schools Rank 18 (worldwide) among the world's leading schools of business.

    The criteria used for these rankings include publications of faculty in 20 leading accounting, finance, marketing, management, and management science research journals. The journals chosen are indeed leading research journals in those disciplines, but since there are so many different disciplines there are many research journals that are excluded. In accounting, the only chosen journals are TAR, JAR, and JAE.

    The criteria include an adjustment for joint authorship such that if there are four authors on a paper, a given author only gets 0.25 credit rather than the 1.00 credit given to solo authors.

    Advantages of the UTD Database

    Disadvantages of the UTD Database

    I do not want to imply that the UTD database should not be studied and evaluated. Like any database or other ranking reference, it has its advantages and disadvantages. Readers who view these rankings superficially are apt to be misled without fully understanding the limitations caused by both the criteria used and the possible subjectivity of the persons doing the ranking. As pointed out earlier, the only subjectivity in the UTD database is the choice of the 20 academic research journals used as inputs to the UTD ranking outcomes. This eliminates some, but certainly not all, the subjectivity found in many other ranking systems.

    The obvious risk in using any ranking system is the risk that it will become a huge factor in the choice of a program by a doctoral student or a faculty prospect. For example, an accounting PhD prospect might be terribly impressed that Duke University is the Rank 1 management research center in North America and the Rank 2 business program in the entire world. Duke certainly has a great business school, but its UTD high ranking for research should not, in my viewpoint, become the major criterion for choosing Duke for doctoral studies relative to such programs as Cornell (Rank 33), University of Virginia (Rank 98), Notre Dame (Rank 49), and the University of Southern California (Rank 13) in terms of worldwide rankings.

    Similarly I doubt that most accounting faculty in Texas would rate the University of Texas at Dallas (Rank 18 worldwide) higher than the Texas A&M (Rank 37 worldwide) accounting researchers. But this is the outcome in the UTD multi-discipline ranking outcomes.

    The rankings of business research centers in the UTD database is most certainly at odds with the rankings of accounting research programs in the Coyne, Summers, Williams, and Wood ranking of accounting research programs under varying criteria. This controversial paper can be downloaded for free from SSRN and is worth your time to read. Note especially that the study is not limited to accounting research centers in the United States. Names like Melbourne, Manchester, and Waterloo appear in the rankings ---

    Leading Academic Research Centers of Accountancy

    Four accounting researchers (Professors Coyne, Summers, Williams, and Wood) at Brigham Young University have written a paper that ranks accounting research programs in the academy according to varying criteria. This controversial paper can be downloaded for free from SSRN and is worth your time to read. Note especially that the study is not limited to accounting research centers in the United States. Names like Melbourne, Manchester, and Waterloo appear in the rankings ---

    To its credit, this study’s findings are based on current affiliations of leading researchers and attempts not to give ranking credits for an institution’s ghosts. This may, in part, explain some of the unexpected rankings of some institutions. I think in some cases a doctoral student might be a little misled by the outcomes. In other instances, however, there is richness in these outcomes that can lead a doctoral program applicant to ask the right questions. For example, why is Bentley College so highly ranked in AIS? There is a reason! Why does Florida International rank so very high in international accounting research?

    The study possibly should’ve noted which accounting research centers have no doctoral programs. For example, BYU and Rice and Dartmouth have no doctoral programs in accountancy. A doctoral program listing is available in the Hasselback Directory, although Hasselback has some errors such as the failure to list Yale’s doctoral program and the listing of Penn State as not having graduated any doctoral students since 1998 (actually Penn State has graduated more than five a year in recent years).

    There are other noteworthy innovations in this (Professors Coyne, Summers, Williams, and Wood) study. However, I think the analysis falls short of what is possible from this and related data. The analysis is weak on history and possible explanations of trends. A table of trends in doctoral student graduation numbers would help along with a table of faculty size of leading accounting programs. The analysis also does not discuss how poorly academic accounting research is perceived in academe relative to finance, marketing, and management research ---

    My first reaction is that size matters in these rankings, especially in terms of the number of accounting researchers in a given area. This is probably why the University of Chicago and Yale come out so poorly in this study relative to the huge accounting programs of Texas, Texas A&M, OSU, Michigan State, Illinois, and USC. The University of Rochester does not even get mentioned. This may also be due, at least in part, by not counting ghosts who left for greener pastures.  And what happened to that former research powerhouse on the eastern side of the Bay Bridge leading out of San Francisco?

    Carnegie-Mellon, Michigan, UC Berkeley, Rochester, and Chicago were at certain points in history the leading centers of accounting research. They do not do well in this later study. Times are changing. Even mighty Stanford slipped down a lot of notches in some categories.

    The non-mention of the University of Rochester and Lancaster (England) might be due to small numbers of accounting researchers, albeit influential researchers. The relatively poor showings larger research centers at MIT and NYU are more surprising. Harvard is also less than stellar in these outcomes to say the least.

    Some of the larger doctoral programs in accountancy get a zero in this study. Examples include the non-mention of Kent State University and the University of Nebraska.

    An unexpected outcome is that the huge accounting research center at the University of Florida does not rank highly in comparison to lesser-known Florida International University, the University of Southern Florida, and Florida State University just to name a few of its closest rivals. The same can be said for the huge research center at the University of Georgia vis-à-vis its geographical rivals Georgia State, Georgia Tech, and Emory. The same can also be said for the University of Arizona (except for its Number 2 ranking in tax research).

    I think the general conclusion is that the centers for academic research in accounting have shifted in recent years. In many respects this reflects how graduates of former leading research centers commenced to populate the larger accounting programs that, until then, were not especially known for accounting research. Examples include Arizona State University, the University of Washington, BYU, and Texas A&M. The University of Iowa dropped in terms of its ranking in financial accounting research but graduated some leading researchers that now are at other universities. Similarly, Michigan State University graduated some of the leading AIS researchers in the U.S. but only ranks Number 12 in the listing of AIS research centers. Some of Bill McCarthy’s gifted alumni are at higher-ranked AIS research centers.

    The study also indicates how some of the historically leading accounting research centers such as the University of Illinois and the University of Texas did not change with the times in emerging areas of research. For example, except for Missouri the top ten AIS research centers were not particularly noted as accounting research centers in the past before AIS emerged as a research discipline in accounting.

    One criticism I have of this study is the bibliography. It’s missing most of the previous studies related to historical trends in accounting research people and universities. Many of the missing references, for example, are cited and quoted in the following paper:
    Evolution of Research Contributions by The Accounting Review (TAR): 1926-2005,” by Jean L. Heck and Robert E. Jensen, Accounting Historians Journal, Volume 34, No. 2, December 2007

    Former studies along these lines enable readers to reflect on trends in academic accounting research centers.

    One limitation of the study is the failure to note how common it is for accounting researchers to be more productive in the early years before becoming full professors. Jensen and Heck note the fall off of leading-researcher publications after their assistant professorships. Hence there may be an assistant-professor bias in some of the rankings in this new Coyne, Summers, Williams, and Wood study. A few institutions that have some of the leading doctoral program advisors may not rank high because those leading advisors just do not publish much as senior professors. Also it may be common of some of these institutions to have a leading researcher and publisher who just does not have many colleagues that help to raise the ranking in the CSWW study. I can name a few such universities but will not do so since this is anecdotal on my part.

    Remember that there are Accounting Hall of Fame doctoral studies advisors not noted for any publication records. Tom Burns at Ohio State and Carl Nelson at Minnesota produced some of the best accounting researchers in history, but I don’t think Tom and Carl were ever noted for their bibliographic listings of research publications. My point here is that faculty advisors recommend doctoral programs to prospective doctoral students for reasons other than the publication records of faculty in doctoral programs.

    Hence when an aspiring accounting professor is trying to decide on where to get a doctoral degree, I would sometimes advise looking more closely for the particular woman or man at an institution relative to an institutional ranking. Some people go to Florida just to study under Joel Demski. Others go to Duke just because of Katherine Schipper or Southern California because of Zoe-Vonna Palmrose. Ken Peasnell attracts doctoral students to Lancaster across the pond. Others want UCONN now that Amy Dunbar heads up the doctoral program or Stanford because of the IASB’s Mary Barth. Some people choose Yale just to be near Shyam Sunder. Some people go to Chicago just to learn from Ray Ball for reasons other than his knowledge of fine wines.

    An aspiring doctoral program applicant might’ve never heard the names above, but that applicant usually relies heavily on the prejudices of his or her undergraduate and masters program mentors who often love to drop names. Name dropping can be misleading in some instances such as in the case for getting a doctoral degree from Bentley College where the ranking in this SCWW study is very relevant relative to name dropping. For this we owe Professors Coyne, Summers, Williams, and Wood a debt of gratitude.

    Also see ---

    Bob Jensen's critique of accountancy doctoral programs can be found at

    I received the following message from a staff member of the FASB. I altered it slightly to keep it anonymous.

    Hi Bob,

    As you know, after 16 years in the corporate world, I spent over (XX) years teaching as a non-tenure track, non PhD in accounting. Several times during my stay in academia, i investigated PhD programs in accounting. Each time i found the mathematical requirements to be distasteful. Precious few programs actually included courses in accounting or current FASB/IASB practice issues and those who did still did so sparingly. I could not see myself, at advanced age and experience, subjecting myself to several year of extremely low pay and distasteful (to me) study. What joy is there in producing "research" that includes heavy statistical analysis that nobody outside a very small circle of researchers looking for citations will ever read? There certainly would have been no time or encouragement to pursue relevant topics like XBRL.

    While I at the FASB, I see first hand the low esteem members of academia held inside FASB. Not once did I hear a staff member indicate that they would be calling a professor to ask an opinion on an accounting issue. I'm sure some did, but they were quiet about it. I also did not see any academic journals in the bookcases of FASB staff members. The library held copies of the top level journals but it was as rare occasion indeed when the library sent a notice to staff alerting them to a new accounting journal article. In contrast, Accounting Today, CFO magazine, Wall Street Journal, The Times, New York Times and the news services that produced digests of current accounting issues were in daily their reads.


    Why might you want to teach a modified IRR?

    Is the reinvestment-at-the-same-rate assumption true?
    It may not be, when interim cash inflows occur far in the future, or if there is limited available capital to fund competing projects.

    Is timing important?
    Yes, it is vital. A change in the expected receipt of future cash inflows by as little as 30 days has a significant impact on the computed IRR.

    "Spreadsheets at Work: Rating Your Own IRR Some tips for doing these key calculations; and introducing "modified" internal rate of return," by Richard Block and Jan Bell,, February 20, 2009 ---
    Link forwarded by Jim Mahar.

    It is budgeting season again. Financial analysts are completing their analyses of the R&D or capital spending projects being proposed. And financial executives are either anxiously awaiting those analyses, or already getting started on their reviews. No doubt the analyses include investment costs, anticipated future savings, discounted cash flows, computed internal rates of return, and a ranking of which projects make the "cut," and which do not.

    Almost certainly, a spreadsheet was used for each project — to compute the discounted cash flows, the internal rates of return, and the presentation of the overall rankings.

    You will take comfort, of course, because these analyses, and your decision on which projects to accept or fund, were based on a sound financial principle: namely, the better the internal rate of return, the better the project.

    But is that comfort warranted? Or might you be vulnerable to the weaknesses long pointed out — if too often ignored — by researchers who have warned that IRR calculations often contain built-in reinvestment assumptions that improperly improve the appearance of bad projects, or make the good ones look too good .

    IRR, of course, is the actual compounded annual rate of return from an investment, often used as a key metric in evaluating capital projects to determine whether an investment should be made. IRR also is used in conjunction with the Net Present Value (NPV) function, determining the current value of the sum of a future series of negative and positive cash flows; namely investments and savings. The prescribed discount factor to be used in computing NPV is the company's weighted average cost of capital, or WACC. The internal rate of return is the annual rate of return, also known as the discount factor, which makes the NPV zero.

    The rub in justifying long-term project funding decisions by using IRR is two-fold. First, IRR assumes that interim cash inflows, or savings, will be "reinvested," and will produce a return — the reinvestment rate — equal to the "finance rate" used to fund the cash outflows (the investment.) Second, the anticipated investment cash outflows required for the project, and for the anticipated cash inflows from savings once the project is complete, are so far in the future that their timing is difficult to determine with reasonable accuracy.

    Is the reinvestment-at-the-same-rate assumption true? It may not be, when interim cash inflows occur far in the future, or if there is limited available capital to fund competing projects. Is timing important? Yes, it is vital. A change in the expected receipt of future cash inflows by as little as 30 days has a significant impact on the computed IRR.

    But by knowing and using the subtleties of the various IRR functions available in an electronic spreadsheet, we can safeguard ourselves against miscalculations based on faulty assumptions, and minimize the range of error by early detection of faulty assumptions.

    In this article, part one of a two-part series, we will study the reinvestment issue. The second article will address how to reduce inaccuracies — minimizing the range of error — based on timing concerns.

    Continued in article

    Finance Test Questions ---

    Bob Jensen's threads on rate of return theory ---

    The American Accounting Association holds the active copyright to one of the most classic books in accounting history:
    W.A. Paton and A.C. Littleton's 1940 monograph, An Introduction to Corporate Accounting Standards
    I don’t think the AAA has ever paid royalties to authors based upon book sales. Both Paton and Littleton are long dead.

    I noticed that there is one used copy of this very short book available from Amazon at $416.39 ---

    This makes me think that the American Accounting Association should digitize this classic history book and sell it as an electronic download at a much more reasonable price. Since most college libraries have one copy at best it would be very difficult to make this book available to all students in an accounting course. Also at used book prices like that it seems to be a theft hazard for libraries.

    If they can borrow a copy, students can scan this book for free or photocopy two small pages per sheet for less than $8 since there are only 156 pages to this book, including the bibliography. But I'm not sure this is legal even though the AAA has a copyright policy that some of its publications (e.g., journals) can be distributed free for educational purposes to students in a course. Certainly it is not legal at this point in time to digitize a copy and distribute to the public in general without written permission from the AAA.

    If I didn't prize my old copy so much I would sell it for $400 on Amazon and top off my heating oil tank. Fortunately we're having a heat wave at the moment with temperatures less than 30 degrees below freezing. Earlier in the week it roared up to above freezing for a couple of days --- hated it!

    "The SEC Rules Historical Cost Accounting: 1934 to the 1970s," by Stephen A. Zeff, SSRN, January 2007 ---

    From its founding in 1934 until the early 1970s, the SEC and especially its Chief Accountant disapproved of most upward revaluations in property, plant and equipment as well as depreciation charges based on such revaluations. This article is a historical study of the evolution of the SEC's policy on such upward revaluations. It includes episodes when the private-sector body that established accounting principles sought to gain a degree of acceptance for them and was usually rebuffed. In the decade of the 1970s, the SEC altered its policy. Throughout the article, the author endeavors to explain the factors that influenced the positions taken by the parties.

    How close to the edge would an accounting firm be if it performed this consulting service for an audit client?
    I did not investigate whether E&Y refuses to perform such services for audit clients.

    Ernst & Young, a major accountancy firm, markets its services with the statement that (see page 81 of this report) "successfully managing business and tax issues related to transfer pricing involves much more than documentation compliance. Transfer pricing affects almost every aspect of an MNE and can significantly impact its worldwide tax burden. Our ... professionals help MNEs address this burden ... with leading solutions. Our multidisciplinary team helps MNEs develop transfer pricing strategies, tax effective solutions, and controversy management approaches that best fit their objectives."
    Prem Sikka, "Shifting profits across borders'Transfer pricing' is the biggest tax avoidance scheme of all. The government must insist on companies being more transparent," The Guardian, February 12, 2009 ---

    Bob Jensen's threads on auditor professionalism and independence ---

    Bob Jensen's threads on Ernst & Young ---

    Who needs the accounting lesson here?
    All the accounting professors, like me, I know are just shaking their heads or are bent over in laughter at the Accounting 101 stupidity here.
    To my knowledge there's no "Accumulated Retained Earnings Cash/Investment Account" on the asset side of these troubled banks that is reserved for dividends. Seems like some banks are robbing Peter (oops I meant to say TARP) to pay Paul a bit like Madoff paid his wife 15 million dollars just before he opened the door to guys holding out handcuffs. Without TARP funds some banks couldn't meet the payroll let alone pay dividends and hefty executive bonuses. The Madoff Fund is not the only Ponzi game on Wall Street.

    And just having an accumulated balance in the Retained Earnings account from prior years of happiness still leaves common shareholders at the bottom of the priority list in terms of claims on bank assets. Current creditors and preferred shareholders have higher order claims that must be paid before shareholders get a penny if the bank indeed fails. Of course the bankruptcy lawyers have first dibs on any assets of a failed bank before the creditors even get paid. If the FDIC pays off depositors, it too is a priority claimant.

    "Accounting for (Congressional Jerry Bower) Dummies,"  by Jerry Bowyer, Townhall, February 14, 2009 --- 

    Kudlow was right, and Sherman needs a little accounting refresher. Dividends are paid out of retained earnings, which is the accumulated net income of the business. They are not paid out of direct investment accounts such as preferred stock. The TARP money was in the form purchase of preferred stock, which is a completely separate account than retained earnings.

    It’s actually even a little bit worse for his case: companies pay dividends out of the retained earnings account, which means even companies that don’t have any net earnings can pay dividends without touching TARP money, because retained earnings are the accumulated wealth of prior years of net income. If I lose money this year, but made money last year, and I pay a dividend this year, the money is not coming from preferred stock accounts, or common stock accounts, it’s coming from the net income of prior profitable years. Bank of America, for example, is sitting on over $70 billion in retained earnings, all available to distribute to the shareholders to whom it rightly belongs.

    Continued in article

    Jensen Comment
    In truth the really ignorant people here, other than Jerry Bower, are members of Congress who did not place restrictions on how TARP money could be spent. I guess we can blame that one on their lousy teachers --- Barney Frank, Nancy Pelosi, Harry Reid, Hank Paulsen and Ben Bernanke

    I suggest that they learn by playing The Bailout Game (its fun and educational) ---

    Bob Jensen's threads on the bailout mess ---



    NASBA Wants SEC to Withdraw IFRS Roadmap
    NASBA said in a comment letter to the SEC that it believes that moving to convergence with IFRS, rather than simply adopting the international standards, is the right path for the SEC to follow. NASBA wrote a letter to the SEC asking it to withdraw the proposed roadmap and instead support the joint efforts of the Financial Accounting Standards Board and the IASB to converge standards by 2011.
    Michael Cohn, "NASBA Wants SEC to Withdraw IFRS Roadmap," WebCPA, February 20, 2009 ---

    The Securities and Exchange Commission of Pakistan (SECP) has granted a 'relaxation' of the requirements of IAS 39

    IAS Plus, February 15, 2009 ---

    The Securities and Exchange Commission of Pakistan (SECP) has granted a 'relaxation' of the requirements of IAS 39 by allowing impairment losses on available-for-sale (AFS) equity securities to be charged against equity, rather than against profit or loss as IAS 39 requires. Click for SECP Announcement (PDF 79k). The 'relaxation' is valid till 31 December 2009. The 'relaxation' was granted in response to requests from various financial institutions in Pakistan, including mutual funds, insurance companies, leasing companies, banks, and the corporate sector in general. The SECP said it granted the relaxation because recognising impairment losses on AFS equity securities through profit or loss 'will not reflect the correct financial performance of the corporate entities'. Nonetheless, the SECP's announcement said that 'those companies who are willing to follow the full requirements of IAS 39 are encouraged to do so'. The current and former presidents of the Institute of Chartered Accountants of Pakistan (ICAP) expressed support for the 'relaxation'. Asad Ali Shah, current ICAP President, said that 'such deviations from IFRSs have been witnessed in extraordinary situations in the world'. The Competition Commission of Pakistan, however, expressed concern that failure to recognise losses could be viewed as deceptive marketing of securities.

    Bob Jensen's theads on IAS 39 are at

    My Latest Fish Catch

    "The Two Languages of Academic Freedom," by Stanley Fish, The New York Times, February 8, 2009 --- 

    Last week we came to the section on academic freedom in my course on the law of higher education and I posed this hypothetical to the students: Suppose you were a member of a law firm or a mid-level executive in a corporation and you skipped meetings or came late, blew off assignments or altered them according to your whims, abused your colleagues and were habitually rude to clients. What would happen to you?

    The chorus of answers cascaded immediately: “I’d be fired.” Now, I continued, imagine the same scenario and the same set of behaviors, but this time you’re a tenured professor in a North American university. What then?

    I answered this one myself: “You’d be celebrated as a brave nonconformist, a tilter against orthodoxies, a pedagogical visionary and an exemplar of academic freedom.”

    My assessment of the way in which some academics contrive to turn serial irresponsibility into a form of heroism under the banner of academic freedom has now been at once confirmed and challenged by events at the University of Ottawa, where the administration announced on Feb. 6 that it has “recommended to the Board of Governors the dismissal with cause of Professor Denis Rancourt from his faculty position.” Earlier, Rancourt, a tenured professor of physics, had been suspended from teaching and banned from campus. When he defied the ban he was taken away in handcuffs and charged with trespassing.

    What had Rancourt done to merit such treatment? According to the Globe and Mail, Rancourt’s sin was to have informed his students on the first day of class that “he had already decided their marks : Everybody was getting an A+.”

    But that, as the saying goes, is only the tip of the iceberg. Underneath it is the mass of reasons Rancourt gives for his grading policy and for many of the other actions that have infuriated his dean, distressed his colleagues (a third of whom signed a petition against him) and delighted his partisans.

    Rancourt is a self-described anarchist and an advocate of “critical pedagogy,” a style of teaching derived from the assumption (these are Rancourt’s words) “that our societal structures . . . represent the most formidable instrument of oppression and exploitation ever to occupy the planet” (Activist, April 13, 2007).

    Among those structures is the university in which Rancourt works and by which he is paid. But the fact of his position and compensation does not insulate the institution from his strictures and assaults; for, he insists, “schools and universities supply the obedient workers and managers and professionals that adopt and apply [the] system’s doctrine — knowingly or unknowingly.”

    It is this belief that higher education as we know it is simply a delivery system for a regime of oppressors and exploiters that underlies Rancourt’s refusal to grade his students. Grading, he says, “is a tool of coercion in order to make obedient people” (, Jan. 12, 2009).

    It turns out that another tool of coercion is the requirement that professors actually teach the course described in the college catalogue, the course students think they are signing up for. Rancourt battles against this form of coercion by employing a strategy he calls “squatting” – “where one openly takes an existing course and does with it something different.” That is, you take a currently unoccupied structure, move in and make it the home for whatever activities you wish to engage in. “Academic squatting is needed,” he says, “because universities are dictatorships . . . run by self-appointed executives who serve capital interests.”

    Rancourt first practiced squatting when he decided that he “had to do something more than give a ‘better’ physics course.” Accordingly, he took the Physics and Environment course that had been assigned to him and transformed it into a course on political activism, not a course about political activism, but a course in which political activism is urged — “an activism course about confronting authority and hierarchical structures directly or through defiant or non-subordinate assertion in order to democratize power in the workplace, at school, and in society.”

    Clearly squatting itself is just such a “defiant or non-subordinate assertion.” Rancourt does not merely preach his philosophy. He practices it.

    This sounds vaguely admirable until you remember what Rancourt is, in effect, saying to those who employ him: I refuse to do what I have contracted to do, but I will do everything in my power to subvert the enterprise you administer. Besides, you’re just dictators, and it is my obligation to undermine you even as I demand that you pay me and confer on me the honorific title of professor. And, by the way, I am entitled to do so by the doctrine of academic freedom, which I define as “the ideal under which professors and students are autonomous and design their own development and interactions.”

    Of course, as Rancourt recognizes, if this is how academic freedom is defined, its scope is infinite and one can’t stop with squatting: “The next step is academic hijacking, where students tell a professor that she can stay or leave but that this is what they are going to do and these are the speakers they are going to invite.” O, brave new world!

    The record shows exchanges of letters between Rancourt and Dean Andre E. Lalonde and letters from each of them to Marc Jolicoeur, chairman of the Board of Governors. There is something comical about some of these exchanges when the dean asks Rancourt to tell him why he is not guilty of insubordination and Rancourt replies that insubordination is his job, and that, rather than ceasing his insubordinate activities, he plans to expand them. Lalonde complains that Rancourt “does not acknowledge any impropriety regarding his conduct.” Rancourt tells Jolicoeur that “Socrates did not give grades to students,” and boasts that everything he has done was done “with the purpose of making the University of Ottawa a better place,” a place “of greater democracy.” In other words, I am the bearer of a saving message and those who need it most will not hear it and respond by persecuting me. It is the cry of every would-be messiah.

    Rancourt’s views are the opposite of those announced by a court in an Arizona case where the issue was also whether a teaching method could be the basis of dismissal. Noting that the university had concluded that the plaintiff’s “methodology was not successful,” the court declared “Academic freedom is not a doctrine to insulate a teacher from evaluation by the institution that employs him” (Carley v. Arizona, 1987).

    The Arizona court thinks of academic freedom as a doctrine whose scope is defined by the purposes and protocols of the institution and its limited purposes. Rancourt thinks of academic freedom as a local instance of a global project whose goal is nothing less than the freeing of revolutionary energies, not only in the schools but everywhere.

    It is the difference between being concerned with the establishing and implementing of workplace-specific procedures and being concerned with the wholesale transformation of society. It is the difference between wanting to teach a better physics course and wanting to save the world. Given such divergent views, not only is reconciliation between the parties impossible; conversation itself is impossible. The dispute can only be resolved by an essentially political decision, and in this case the narrower concept of academic freedom has won. But only till next time.

    Stanley Fish is the Davidson-Kahn Distinguished University Professor and a professor of law at Florida International University, in Miami, and dean emeritus of the College of Liberal Arts and Sciences at the University of Illinois at Chicago. He has also taught at the University of California at Berkeley, Johns Hopkins and Duke University. He is the author of 10 books. His new book on higher education, "Save the World On Your Own Time," has just been published.

    "An Authoritative Word on Academic Freedom," by Stanley Fish, The New York Times, November 23, 2008 ---

    More than a few times in these columns I have tried to deflate the balloon of academic freedom by arguing that it was not an absolute right or a hallowed principle, but a practical and limited response to the particular nature of intellectual work.

    Now, in a new book — “For the Common Good: Principles of American Academic Freedom,” to be published in 2009 — two distinguished scholars of constitutional law, Matthew W. Finkin and Robert C. Post, study the history and present shape of the concept and come to conclusions that support and deepen what I have been saying in these columns and elsewhere.

    The authors’ most important conclusion is presented early on in their introduction: “We argue that the concept of Academic freedom . . . differs fundamentally from the individual First Amendment rights that present themselves so vividly to the contemporary mind.” The difference is that while free speech rights are grounded in the constitution, academic freedom rights are “grounded . . . in a substantive account of the purposes of higher education and in the special conditions necessary for faculty to fulfill those purposes.”

    In short, academic freedom, rather than being a philosophical or moral imperative, is a piece of policy that makes practical sense in the context of the specific task academics are charged to perform. It follows that the scope of academic freedom is determined first by specifying what that task is and then by figuring out what degree of latitude those who are engaged in it require in order to do their jobs.

    If the mission of the enterprise is, as Finkin and Post say, “to promote new knowledge and model independent thought,” the “special conditions” necessary to the realization of that mission must include protection from the forces and influences that would subvert newness and independence by either anointing or demonizing avenues of inquiry in advance. Those forces and influences would include trustees, parents, donors, legislatures and the general run of “public opinion,” and the device that provides the necessary protection is called academic freedom. (It would be better if it had a name less resonant with large significances, but I can’t think of one.)

    It does not, however, protect faculty members from the censure or discipline that might follow upon the judgment of their peers that professional standards have either been ignored or violated. There is, Finkin and Post insist, “a fundamental distinction between holding faculty accountable to professional norms and holding them accountable to public opinion. The former exemplifies academic freedom: the latter undermines it.”

    Holding faculty accountable to public opinion undermines academic freedom because it restricts teaching and research to what is already known or generally accepted.

    Holding faculty accountable to professional norms exemplifies academic freedom because it highlights the narrow scope of that freedom, which does not include the right of faculty “to research and publish in any manner they personally see fit.”

    Indeed, to emphasize the “personal” is to mistake the nature of academic freedom, which belongs, Finkin and Post declare, to the enterprise, not to the individual. If academic freedom were “reconceptualized as an individual right,” it would make no sense — why should workers in this enterprise have enlarged rights denied to others? — and support for it “would vanish” because that support, insofar as it exists, is for the project and its promise (the production of new knowledge) and not for those who labor within it. Academics do not have a general liberty, only “the liberty to practice the scholarly profession” and that liberty is hedged about by professional norms and responsibilities.

    I find this all very congenial. Were Finkin and Post’s analysis internalized by all faculty members, the academic world would be a better place, if only because there would be fewer instances of irresponsible or overreaching teachers invoking academic freedom as a cover for their excesses.

    I do, however, have a quarrel with the authors when they turn to the question of what teachers are free or not free to do in the classroom.

    Finkin and Post are correct when they reject the neo-conservative criticism of professors who bring into a class materials from disciplines other than the ones they were trained in. The standard, they say, should be “whether material from a seemingly foreign field of study illuminates the subject matter under scrutiny.”

    Just so. If I’m teaching poetry and feel that economic or mathematical models might provide a helpful perspective on a poem or body of poems, there is no good pedagogical reason for limiting me to models that belong properly to literary criticism. (I could of course be criticized for not understanding the models I imported, but that would be another issue; a challenge to my competence, not to my morality.)

    But of course what the neo-conservative critics of the academy are worried about is not professors who stray from their narrowly defined areas of expertise; they are worried about professors who do so in order to sneak in their partisan preferences under the cover of providing students with supplementary materials. That, I think, is a genuine concern, and one Finkin and Post do not take seriously enough.

    Responding to an expressed concern that liberal faculty too often go on about the Iraq War in a course on an entirely unrelated subject, Finkin and Post maintain that there is nothing wrong, for example, with an instructor in English history “who seeks to interest students by suggesting parallels between King George III’s conduct of the Revolutionary War and Bush’s conduct of the war in Iraq.”

    But we only have to imagine the class discussion generated by this parallel to see what is in fact wrong with introducing it. Bush, rather than King George, would immediately become the primary reference point of the parallel, and the effort to understand the monarch’s conduct of his war would become subsidiary to the effort to find fault with Bush’s conduct of his war. Indeed, that would be immediately seen by the students as the whole point of the exercise. Why else introduce a contemporary political figure known to be anathema to most academics if you were not inviting students to pile it on, especially in the context of the knowledge that this particular king was out of his mind?

    Sure, getting students to be interested in the past is a good thing, but there are plenty of ways to do that without taking the risk (no doubt being courted) that intellectual inquiry will give way to partisan venting. Finkin and Post are right to say that “educational relevance is to be determined . . . by the heuristic purposes and consequences of a pedagogical intervention”; but this intervention has almost no chance of remaining pedagogical; its consequences are predictable, and its purposes are suspect

    Still, this is the only part of the book’s argument I am unable to buy. The rest of it is right on target. And you just have to love a book — O.K., I just have to love a book — that declares that while faculty must “respect students as persons,” they are under no obligation to respect the “ideas held by students.” Way to go!


    Jensen Comment
    The term "political correctness" and related phrases have a long history ---
    However, probably no U.S. scholar is more associated with "political correctness" since than Stanley Fish when he was at Duke University and the phrase "political correctness" with feminist language constraints and liberalism in campus politics ---

    Thomas Carlyle's (1896) Sartor Resartus ("Tailor Retailored")

    February 9, 2009 reply from Roger Collins [Rcollins@TRU.CA]

    Hmm...- wasn't it Yuji Ijiri who was reported as claiming in a not-too-recent paper in Accounting Horizons that, as a student, one of his most interesting courses (in Accounting Theory ? I can't remember exactly) had been devoted entirely to a novel by Thomas Carlyle entitled Sartor Resartus (The Tailor Retailored) ? And that of all the courses he had taken, it was this course which he had found most stimulating and thought-provoking? (The Accounting Horizons paper was a piece on the thoughts of several high profile accounting academics of which Ijiri was one).

    I think that Denis Rancourt crosses the line between academic freedom and idiosyncrasy for idiosyncracy's' sake. At the same time, the case may remind us that academic freedom generally gives us a fair amount of rope to play with if we so choose.

    The Wikipedia reference is 

    The opening paragraph of the reference is.../

    Thomas Carlyle's major work, Sartor Resartus (meaning 'The tailor re-tailored'), first published as a serial in 1833-34, purported to be a commentary on the thought and early life of a German philosopher called Diogenes Teufelsdröckh (which translates as 'god-born devil-dung'), author of a tome entitled "Clothes: their Origin and Influence." Teufelsdröckh's Transcendentalist musings are mulled over by a skeptical English editor who also provides fragmentary biographical material on the philosopher. The work is, in part, a parody of Hegel, and of German Idealism more generally.

    Roger Collins
    TRU School of Business


    February 10, 2009 reply from Bob Jensen

    Hi Roger,

    Ijiri brings up Sartor Resartus (free download) at
    I took a philosophical "accounting seminar" as an undergraduate in Japan, in which we spent the entire course on Thomas Carlyle's (1896) Sartor Resartus ("Tailor Retailored"). Here, we went over the philosophy of clothes and the indispensable role that clothes play in society, treating accounting also as indispensable clothes people wear, change and discard. Nearly a half-century later, it is still having impact on my thinking.”

    Professor Ijiri served on my doctoral studies committee when we were both at Stanford years ago. He never mentioned Sartor Resartus at the time.

    Some Thoughts on the Intellectual Foundations of Accounting

    Joel S. Demski
    University of Florida - Fisher School of Accounting

    Shyam Sunder
    Yale School of Management

    John C. Fellingham
    Ohio State University - Department of Accounting & Management Information Systems

    Yuji Ijiri
    Carnegie Mellon University

    Jonathan C. Glover
    Carnegie Mellon University

    Pierre Jinghong Liang
    Carnegie Mellon University - Tepper School of Business

    February 2002

    Yale ICF Working Paper No.

    We report on a panel discussion at the 2001 CMU Accounting Mini-conference under the title "Intellectual Foundations of Accounting." We provide a background and the motivation for the discussion and present the remarks by the four panelists. A number of perspectives are taken. Sunder emphasizes dualities in accounting. Demski stresses the endogeneity of accounting measurement activities. Fellingham examines the core and superstructure of accounting. Ijiri observes the microcosmos in accounting and its philosophical connection. We also argue that accounting's intellectual foundations are far from settled and an on-going discussion is likely to help reinvigorate accounting scholarship

    February 10, 2009 reply from Roger Collins [Rcollins@TRU.CA]

    Hello Bob,

    Many thanks for this. The paper you've so kindly attached was one that annoyed me somewhat when I first read it, as I thought that the major contributors (Demski, Sunder, Fellingham and Ijiri) were taking rather narrowly defined positions and perhaps rather resting on their laurels. I took the attached paper to a couple of minor conferences but never seriously thought of having it published. If you - or anyone else on AECM - feels inclined either to critique it or comment on its suitability for publication at this distance in time from the original paper, I'd welcome any responses.


    Roger Collins
    TRU School of Business

    February 11, 2009 reply from Bob Jensen

    Hi Roger,

    Your critique is great for openers. It just does not go far enough with regard to the destructiveness of the search for "intellectual foundations" in accountancy. Since the "Perfect Storm" of the late 1950s and 1960s, academic accountants from Mattesich to Demski to Zimmerman became prophets of destructive positivism. The leading academic accounting research centers literally ignored the warnings of Bob Sterling, Steve Zeff, and others about the destructive evolution of this so-called "intellectualism" of academic accounting research. You can read more about this "Perfect Storm" at ---

    By "destructive" I mean that the leading academic accounting research centers, journals, and doctoral programs virtually all adopted a mathematical model building paradigm without caring that the world of information, executive decision making, and portfolio investment behavior within and external to a business organization is far too complex for most models to have much utility to either decision makers or standard setting bodies around the world. The result was to divert our best and brightest accounting academic researchers into superficial worlds where they could get their intellectual highs while financial and managerial accounting professions themselves had to carry on without much of any contribution of merit from the accounting academy. A good example is Ijiri's promising cash flow equivalency model which on paper looked like it would revolutionize accounting information systems and financial analysis. But implicit inside the model is a hypersensitivity to parameter estimation error that washed out all relevance of the model. This is why very few people on the AECM listserv even heard about this model. Certainly it was never relevant to the FASB or General Electric.

    About the same time, the same thing commenced to take place in the search for intellectual foundations of science intended to raise the world of science to new heights in intellectualism. This so-called "philosophy of science" intended to bring about intellectual sophistication in scientific effort. Leading universities commenced to offer philosophy of science courses and even majors in philosophy of science. Unlike in leading academic accounting research centers, the science research centers learned quickly that this intellectualization of science was not adding much if any value to science. Instead it was sometimes getting in the way of science. Quietly, these centers dropped most of their philosophy of science courses, journals, and study itself. Scientists just got on with their work without allowing themselves to be destroyed by positivism. This is not to say that there was not some basic values that evolved in the philosophy of science. It's constraints on science just should not be taken too far.

    You might note the following quotation ---

    Paul Feyerabend argued that no description of scientific method could possibly be broad enough to encompass all the approaches and methods used by scientists. Feyerabend objected to prescriptive scientific method on the grounds that any such method would stifle and cramp scientific progress. Feyerabend claimed, "the only principle that does not inhibit progress is: anything goes."[28] However there have been many opponents to his theory. Alan Sokal and Jean Bricmont wrote the essay "Feyerabend: Anything Goes" about his belief that science is of little use to society.

    By way of example, since Joel Demski took charge of the accounting doctoral program at the University of Florida, every applicant to that doctoral program cannot even matriculate into the program before pre-requisites of advanced mathematics are satisfied.

    Students are required to demonstrate math competency prior to matriculating the doctoral program. Each student's background will be evaluated individually, and guidance provided on ways a student can ready themselves prior to beginning the doctoral course work. There are opportunities to complete preparatory course work at the University of Florida prior to matriculating our doctoral program. 
    University of Florida Accounting Concentration  ---

    Accordingly the University of Florida's doctoral program puts up a wall blocking doctoral program applicants with research skills other than mathematics. What Florida's biomedical research center put up the same barriers requiring advanced mathematics to be allowed into any of its doctoral programs?

    Probably the major shortcoming of our model builders in academic accounting research centers is their indifference to risk and risk management. What leading accounting research center has experts on derivative financial instruments and the complex contracting that evolved in derivative instrument practice and frauds? I would really like to know since I'm contacted almost weekly by business firms and news reporters seeking accounting professors who are experts in FAS 133 and its amendments.

    When coming to terms with this during the evolution of FAS 133, what accounting professor in the world made a noteworthy contribution to the FASB struggling to learn how to report these contracts? Where are the papers on derivative financial instruments and their massive frauds when you scour the literature of TAR, JAR, and JAE in the 1960s, 1970s, 1980s, and 1990s when all the derivative financial instruments frauds were taking place. I provide a timeline of these frauds and the evolution of FASB and IASB standards without citing a single noteworthy research paper appearing in our leading academic accounting research journals ---

    Joel Demski steers 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 ---

    Too many accountancy research programs have immunized themselves against the “vocational virus.” The resulting 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.

    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.

    Bob Jensen

    Some comparative nine-month academic year salaries recently released by the AACSB
    Note that major research university salaries considerably higher than average while salaries in many private universities are much lower as are salaries in state universities that are not flagship research universities. The results for accounting and taxation new assistant professors primarily reflects the downward trend of doctoral graduates in accounting, auditing, and taxation in the past two decades ---

    From the Financial Rounds Blog on February 16, 2009 ---

    The Annual AACSB salary survey is the definitive source for business school faculty salaries. Here's the most important table from the report - it shows the mean salaries for new doctorates for the major business disciplines

    The figures above are for 9-month salaries. At research schools, summer research support can add another 10-20% to that, and there are also opportunities to pick up additional $$ teaching over the summer. However, at teaching oriented schools, there typically isn't summer support, and summer teaching money is also much lower.

    For years, Finance professors got the highest salaries across all business disciplines. That's changed in the last few years, with accounting salaries pulling ahead. The increase in accounting new-hire salaries is likely due to smaller numbers of accounting PhD's being graduated and a lot of retirements in their field. But still, $120K isn't bad.

    Click here for the free executive summary (you can also get the full report, but it'll cost you).

    Bob Jensen's threads on salary compression, inversion, and controversy are at

    February 19, 2009 reply from Jagdish Gangolly [gangolly@CSC.ALBANY.EDU]

    Patricia, Zane, Bob,...

    My ex-President (a brilliant scholar of American constitutional law, he died in a swimming accident a few years ago) Kermit Hall once said that if you don't like teaching, you should be a banker or something else. As our President, he taught an undergraduate course in history each semester. He insisted that all the Deans teach a course every semester; didn't make him popular.

    We should not forget that, at the well-known English universities such as Oxford and Cambridge, in the not too distant past, faculty and dons were not to marry if they wished to retain their position, lest they acquire acquisitive (or comparative?) instinct.

    I would never encourage any student to take to academics to get rich. In fact, I think business schools have been thoroughly corrupted because of this constant talk of opportunity costs of alternative employment. Fortunately this economic virus is not as rampant at other units at most universities I know.

    On the other hand, as a profession, I think one should not be in teaching unless you also have practiced the profession. Any day, I would have a mid-career or retired professional teaching me than a PhD who has never seen real-world accounting and who has learnt the profession from faculty who have themselves never seen real-world accounting.

    The shortage of accounting faculty is contrived by us to protect our wages. If opportunity costs are high, why not ask faculty to produce evidence of such opportunities if they demand higher wages? Or still better, how about asking tenured faculty to produce evidence of such alternative practice opportunities to retain their tenure? For most faculty these days, such opportunities are ethereal more than real.

    I gave up a lucrative career in industry when I took the vow of poverty years ago, and have never regretted it. Early in my academic career, lack of material possessions irritated me, but have learnt not to compare me to any others, especially my good old friends in industry rolling in riches.

    Jagdish Gangolly ( )
    Department of Informatics,
    College of Computing & Information
    State University of New York at Albany
    1400 Washington Avenue, Albany NY 12222 Phone: 518-442-4949

    February 20, 2009 reply from Bob Jensen

    Hi Jagdish,

    You wrote:
    "The shortage of accounting faculty is contrived by us to protect our wages."

    I agree with most of what you said above. However, I don’t think the decline in accountancy doctoral graduates over the past two decades was contrived in any kind of conspiracy to create barriers to entry for purposes of higher salaries. The causes of accounting PhD shortages are many and complicated, but none of them were intended to make accounting professors the highest paid professors in the academy.

    Part of the cause of a shortage was the increase in demand for accounting professors. When the big firms commenced adding internships to senior accounting majors, accounting became much more popular as an undergraduate major. The professorial supply just did not increase with this demand.

    One of the main causes of a shortage of accountancy PhDs is the time-to-degree. A top economics undergraduate can get a PhD in economics in seven years of college. The same is possible in finance, marketing, and management. Law school typically takes three years after obtaining an undergraduate degree.

    In accounting we now require 150 credits to take the CPA examination, so most of our graduates now get a masters degree with almost no courses in for academic research. If a statistics course is required it generally has a coloring book for a textbook.

    In addition our doctoral programs prefer to admit candidates with work experience in accountancy. So now we’re talking six or more years before admitting a doctoral student. Then students week in mathematics, statistics, econometrics, and psychometrics take about two years of such courses. Students who manage to get admitted without much accounting, often foreign students, take about two years of undergraduate accounting. Then there’s the additional time for doctoral seminars in accounting research, financial research, and behavioral research. All told a doctoral program in accountancy takes at least five years and often six years. What is six years plus five years? That is just a minimum. Most of our accounting professors today probably did not complete their accountancy PhD degrees before they were almost 30 years old except for the oldsters who did not have to earn 150 credits to sit for the CPA examination along the way.

    BYU recognized this problem and created a masters degree program for students who are pretty certain that they want to eventually be admitted to a doctoral program. The BYU masters program won an AAA Innovation in Accounting Education annual award. This masters program is intended to provide students with the research course prerequisites for doctoral studies such that the time in a doctoral program should, in theory, be reduced to three years. You can read about BYU’s award winning PhD Prep Program at 
    If students has a sufficient amount of accountancy as undergraduates, that can also take the CPA examination with this masters degree.

    Another barrier to entry in accountancy doctoral programs is that the accountics research professors hijacked the prestigious doctoral programs and all the other doctoral programs in North America thought that it was necessary to clone the accountancy doctoral programs at Chicago, Stanford, Rochester, Cornell, Northwestern, Illinois, Texas, USC, UCLA, and Cal-Berkeley. Hence all accountancy programs became highly mathematical social science programs in mathematics, econometrics, and psychometrics. Practicing CPAs who contemplate returning to a university for an accountancy PhD are frequently turned off by having to get a social science PhD in the name of accountancy/accountics. I’ve already written much about this problem at 

    The bottom line is that I don’t think that the decline in the number of accountancy doctoral graduates in North America was contrived for purposes of keeping accounting professor salaries high. The decline was caused by lengthening the time to the CPA (150 credits), a desire for work experience for doctoral program admission, and upping the requirements for mathematics, statistics, econometrics, and psychometrics if virtually all North American doctoral programs in accountancy.

    There are of course other factors to be considered. Accounting careers in CPA firms and corporations became increasingly attractive. For example, all the Big Four accounting firms now place in the top ten organizations as desirable places to work. CPA firms in particular strived to become more accommodating to parents who seek more time to care for children. In the age of networking, more and more clients can be served from work at home. Hence, many accounting workers are less frustrated on the job and are less inclined to give up five or more years of their lives in a doctoral program.

    Business school graduates in non-accounting specialties often have more trouble getting jobs. Even in the Wall Street boom times, most graduates in finance could not get plumb jobs on Wall Street and had to settle for less-than-exciting local bank jobs or become stock brokers living on commission income. Those graduates were more inclined to come back to college for doctorates in economics, finance, marketing, management, and MIS. Some regretted later on that they had not been accounting majors.

    It’s tough late in life to come back and take all those accounting undergraduate courses to get back on track in accounting. But Finley Graves did it after becoming a PhD in German Literature. He then took the time and trouble to earn a second PhD in Accounting and is now a terrific accounting professor.

    Bob Jensen

    Video of an Accounting Researcher
    Accounting Professor John Hughes (Ernst & Young accounting professor at UCLA)
    Four Minute Video: Does Information Asymmetry Affect the Cost of Capital?
    Jensen Comment
    With some rather innocent sounding assumptions, Modigliani and Miller, in a famous ground breaking study, showed that the amount of leverage is cost-of-capital neutral when making decisions to issue debt versus equity. I think the current collapse of large and highly leveraged banks brings market efficiency assumptions into question. In particular the moderating effect of cash traders depends upon deep markets that often just do not exist when insiders are either bailing out big time or jumping in deep based upon information asymmetry in inefficient markets. As with all empirical model findings, the assumptions should be severely analyzed. Also in the present economic crisis cost-of-capital expectations are all messed up when and if Uncle Sam interferes in the private markets. The Treasury Department will most certainly demand less information asymmetry before deciding how much to help troubled banks.

    February 11, 2009 reply from Jagdish Gangolly [gangolly@CSC.ALBANY.EDU]

    I most certainly did not question Professor Hughes' standing as an academic. I was just questioning if this sort of research is really accounting or finance. I am not opposed to this sort of research at all, and in fact do read it occasionally.

    Neither am I saying this line of research should not be pursued by accountants. As some one from a campus-wide interdisciplinary PhD program, I view any such strictures as infringing on academic freedom. Almost all of my own research the past few years has been very much outside (yet extremely relevant to) accounting, but most accounting departments in the US thoroughly discourage any sort of research other than the likes of those in the video.

    However, why is it that this sort of research is glorified (and privileged) in academic accounting AT THE EXPENSE of many other kinds of research (especially when the space in the so-called quality journals in accounting is limited)?

    Also, since this is really research in finance, do the academics in finance read it? Does this sort of research in accounting get any sort of peer review from academic researchers in finance?

    Jagdish Gangolly (
    Department of Informatics,
    College of Computing & Information
    State University of New York at Albany
    1400 Washington Avenue, Albany NY 12222 Phone: 518-442-4949

    February 12, 2009 reply from Bob Jensen

    Hi Jagdish,

    I hate to keep harping on this, but if our “scientific” capital markets and behavioral studies published in leading accounting research journals had any genuine relevance, readers would demand replications. Readers don’t have any interest in replications and the leading accounting research journals won’t even publish replications ---
    That’s the main difference between real science and accounting’s so-called science (accountics).

    If you read an article in TAR, JAR, JAE, CAR, etc. you must make a leap of faith that the authors did not make a mistake in data collection and data analysis. Our leading research studies are assumed to be error free. It’s either that or the publications have so little relevance that nobody cares. Imagine that!

    You asked whether academics in finance (and accordingly economics) find much value added in finance/economics studies published in accounting research journals.

    In her Presidential Message at the AAA annual meeting in San Francisco in August, 2005, Judy Rayburn addressed the low citation rate of accounting research when compared to citation rates for research in other fields. Rayburn concluded that the low citation rate for accounting research was due to a lack of diversity in topics and research methods:

    Accounting research is different from other business disciplines in the area of citations: Top-tier accounting journals in total have fewer citations than top-tier journals in finance, management, and marketing. Our journals are not widely cited outside our discipline. Our top-tier journals as a group project too narrow a view of the breadth and diversity of (what should count as) accounting research.
    Rayburn [2006, p. 4] ---


    Rayburn drew from a citation study by Ed Swanson in 2002 (SSRN) ---


    Publication in top-tier journals is the primary criterion for promotion at many business schools and a strong influence on salary, teaching load, and research support. Business schools evaluate publication records by comparing the quality and quantity of top-tier research articles to those of peers within the same discipline (intradisciplinary) and to those of academics from other business disciplines (interdisciplinary). An analytical model of the research review process (the q-r model) predicts that interdisciplinary differences exist in the standards that top-tier journals use for accepting articles. If true, decision makers should consider these differences. I examine the period from 1980 to 1999 and, consistent with the model's predictions, find that significant differences exist in the number of articles and proportion of faculty who published in the "major" journals in accounting, finance, management, and marketing. Most notably, top-tier accounting journals publish substantially fewer major articles than journals in the other three business disciplines. In addition, I find the proportion of doctoral faculty publishing a major article has declined in all four disciplines over the 1980 to 1999 period.


    I think one key difference between accounting and the related disciplines of finance, marketing, and management is that practitioners in those professions (e.g., former investment bankers, bankers, marketing executives, and some management executives) actually make use of leading academic journals in their disciplines and cite them in their own writings in professional non-academic journals. The Journal of Finance became so esoteric that it was not serving the majority of instructors of finance. This gave rise to the exceedingly popular Financial Management Association (FMA) among finance faculty and the generally readable journals called Financial Management and the Journal of Applied Finance.

    Probably the main difference, however, is that the majority of instructors in accounting stopped even looking at the leading accounting research journals like TAR, JAR, and JAE. Once the practitioner-oriented and teaching-oriented articles were steered from TAR to AH and IAE, readership in TAR plummeted. You can read the following at

    Fleming et al. [2000, p. 48] report that education articles in TAR declined from 21 percent in 1946-1965 to 8 percent in 1966-1985. Issues in Accounting Education began to publish the education articles in 1983. Garcha, Harwood, and Hermanson [1983] reported on the readership of TAR before any new specialty journals commenced in the AAA. They found that among their AAA membership respondents, only 41.7 percent would subscribe to TAR if it became unbundled in terms of dollar savings from AAA membership dues. This suggests that TAR was not meeting the AAA membership’s needs. Based heavily upon the written comments of respondents, the authors’ conclusions were, in part, as follows by Garcha, Harwood, and Hermanson [1983, p. 37]:

    The findings of the survey reveal that opinions vary regarding TAR and that emotions run high. At one extreme some respondents seem to believe that TAR is performing its intended function very well. Those sharing this view may believe that its mission is to provide a high-quality outlet for those at the cutting-edge of accounting research. The pay-off for this approach may be recognition by peers, achieving tenure and promotion, and gaining mobility should one care to move. This group may also believe that trying to affect current practice is futile anyway, so why even try?

    At the other extreme are those who believe that TAR is not serving its intended purpose. This group may believe TAR should serve the readership interests of the audiences identified by the Moonitz Committee. Many in the intended audience cannot write for, cannot read, or are not interested in reading the Main Articles which have been published during approximately the last decade. As a result there is the suggestion that this group believes that a change in editorial policy is needed.

    We surmise that some professionals in accounting who have no aptitude or interest in becoming scientists refrain from enrolling in current accounting doctoral programs due to the narrowness of most accounting doctoral programs and the lack of other epistemological and ontological methods more to their liking. New evidence suggests that this problem also extends to topical concentrations of those who do enter doctoral programs. In a study of the critical shortage of doctoral students in accountancy, Plumlee et al. [2006] discovered that there were only 29 doctoral students in auditing and 23 in tax out of the 2004 total of 391 accounting doctoral students enrolled in years 1-5 in the United States. We might add that the authors of the article were all appointed in 2004 by American Accounting Association President Bill Felix to an ad hoc Committee to Assess the Supply and Demand for Accounting Ph.D.s. Plumlee et al. [2006, p. 125] wrote as follows (emphasis added as we think it relates to accountics):

    The Committee believes the dire shortages in tax and audit areas warrant particular focus. One possible solution to these specific shortages is for PhD. Programs to create new tracks targeted toward developing high-quality faculty specifically in these areas. These tracks should be considered part of a well-rounded Ph.D. program in which students develop specialized knowledge in one area of accounting, but gain substantive exposure to other accounting research areas . . .

    A possible explanation for the shortages in these areas is that PhD. Students perceive that publishing audit and tax research in top accounting journals is more difficult, which might have the unintended consequence of reducing the supply of PhD.-qualified faculty to teach in those specialties. Given that promotion and tenure requirements at major universities require publication in top-tier journals, students are likely drawn to financial accounting in hopes of getting the necessary publications for career success. While the Committee has no evidence that bears directly on this point, it believes that the possibility deserves further consideration.

    A number of AAA presidents have asserted that empirical research is not always well suited for “discovery research.” These AAA presidents urged in their messages to the membership and elsewhere that accounting research become more diverse in terms of topics and methods. Examples include Bailey [1994], Langenderfer [1987], Rayburn [2006], and Dyckman and Zeff [1984]. The following is a quote from the President’s Message of Sundem [1993, p. 3]:

    Although empirical scientific method has made many positive contributions to accounting research, it is not the method that is likely to generate new theories, though it will be useful in testing them. For example, Einstein’s theories were not developed empirically, but they relied on understanding the empirical evidence and they were tested empirically. Both the development and testing of theories should be recognized as acceptable accounting research.


    In fairness, the new TAR Editor is listening to our complaints and is inviting the accounting academy to submit more diverse articles to TAR (including commentaries, survey-based studies, AIS-method studies, and (gasp) case studies. Thus far, however, the professors in the leading doctoral programs are not heeding the call. It’s pretty much same old, same old in all of our leading academic research journals.

    I received the following message from a staff member of the FASB. I altered it slightly to keep it anonymous.

    Hi Bob,

    As you know, after 16 years in the corporate world, I spent over (XX) years teaching as a non-tenure track, non PhD in accounting. Several times during my stay in academia, i investigated PhD programs in accounting. Each time i found the mathematical requirements to be distasteful. Precious few programs actually included courses in accounting or current FASB/IASB practice issues and those who did still did so sparingly. I could not see myself, at advanced age and experience, subjecting myself to several year of extremely low pay and distasteful (to me) study. What joy is there in producing "research" that includes heavy statistical analysis that nobody outside a very small circle of researchers looking for citations will ever read? There certainly would have been no time or encouragement to pursue relevant topics like XBRL.

    While I at the FASB, I see first hand the low esteem members of academia held inside FASB. Not once did I hear a staff member indicate that they would be calling a professor to ask an opinion on an accounting issue. I'm sure some did, but they were quiet about it. I also did not see any academic journals in the bookcases of FASB staff members. The library held copies of the top level journals but it was as rare occasion indeed when the library sent a notice to staff alerting them to a new accounting journal article. In contrast, Accounting Today, CFO magazine, Wall Street Journal, The Times, New York Times and the news services that produced digests of current accounting issues were in daily their reads.


    February 12, 2009 reply from Jagdish Gangolly [gangolly@CSC.ALBANY.EDU]

    By Sir Dennis H. Robertson

    As soon as I could safely toddle
    My parents handed me a Model;
    My brisk and energetic pater
    Provided the accelerator.
    My mother, with her kindly gumption,
    The function guiding my consumption;
    And every week I had from her
    A lovely new parameter,
    With lots of little leads and lags
    In pretty parabolic bags.

    With optimistic expectations
    I started on my explorations,
    And swore to move without a swerve
    Along my sinusoidal curve.
    Alas!  I knew how it would end:
    I've mixed the cycle with the trend,
    And fear that, growing daily skinnier,
    I have at length become non-linear.
    I wander glumly round the house
    As though I were exogenous,
    And hardly capable of feeling
    The difference 'tween floor and ceiling.
    I scarcely now, a pallid ghost,
    Can tell ex ante from ex post:
    My thoughts are sadly inelastic,
    My acts invariably stochastic.


    Re-arranging the deck chairs on the USS SEC
    We understand why Ms. Schapiro would want to show some love to the staff after the blistering attack it received last Wednesday on the Hill. Said liberal New York Congressman Gary Ackerman, "You have totally and thoroughly failed in your mission." Then he went negative, referring to the SEC's difficulty in finding a part of the human anatomy "with two hands with the lights on." Mr. Markopolos added that his many interactions with the agency "led me to conclude that the SEC securities' lawyers, if only through their investigative ineptitude and financial illiteracy, colluded to maintain large frauds such as the one to which Madoff later confessed." . . . If Ms. Schapiro seeks to learn from the SEC's recent history, she might start by considering the most basic lesson from the Madoff incident. Private market participants spotted the fraud, while SEC lawyers couldn't seem to grasp it. Rather than giving her staff lawyers still more autonomy, she should instead be supervising them more closely, while trying to harness the intelligence of the marketplace. Meantime, investors should remember that their own skepticism and diversified investing remain their best defenses against fraudsters.
    "Just Don't Mention Bernie:  Unleashing the SEC enforcers who were already unleashed," The Wall Street Journal, February 10, 2009 ---
    Also see "High "Power Distance" at the SEC: Why Madoff Was Allowed to Take Investors Down with Him," by Tom Selling, The Accounting Onion, December 10, 2009 --- 

    I don't think we in the U.S. are as low a power distance society as we fashion ourselves, and the redistribution of wealth that has been occurring since the 1980s may be pushing us inexorably towards Colombia. Also, it wasn't difficult for me to think of a few examples of where the SEC in particular has been exhibiting symptoms characteristic of a high power distance country:
    • When asked why he robbed banks, Willie Sutton simply replied, "Because that's where the money is." Lately, it seems that the SEC staff (i.e., the "co-pilots,") has shied away from the big money, out of a mirror-image version of the self-interest (survival, in case of a staff member) that motivated Mr. Sutton. And that fear is not merely paranoia, as tangibly illustrated recently when a former SEC investigator was fired after pursuing evidence that John Mack, Morgan Stanley's CEO, allegedly had tipped off another investment company about a pending merger.
    • The Christopher Cox administration instituted an unprecedented policy that required the Enforcement staff to obtain a special set of approvals from the Commission in order to assess monetary penalties as punishment for securities fraud. Mary Schapiro, the new SEC chair, claims that the policy, among other deleterious effects, "discouraged staff from arguing for a penalty in a case that might deserve a penalty…" In other words, the co-pilots were "encouraged" to keep a lid on embarrassing news that reflected badly on members of the pilot class.
    • And, lest you should not labor under any illusion that enforcement of accounting rules is a level playing field, consider the case in 1992 (I think) when the SEC effectively handed out special permission to AT&T to account for its acquisition of NCR as a "pooling of interests." Quite evidently, the SEC staff could not bring the bad news to the "pilots" that the merger with NCR would not happen just because AT&T did not technically qualify for the accounting it so sorely "needed." To put it in the stark terms of today, the merger was simply "too big to fail." (And perhaps not coincidentally, acquiring NCR proved to be one of the biggest wastes of shareholder wealth in the history of AT&T.)

    February 10, 2009 reply from Tom Selling [tom.selling@GROVESITE.COM]

    As to why “Madoff went unchallenged for so long,” I provide an ad hoc explanation based on Hofstede’s cultural dimension, “power distance” at

    Linda Thomsen should have resigned long ago, after investigators exposed her role in the firing of attorney/investigator Gary Aguirre, who wanted to obtain testimony from John Mack, the CEO of Morgan Stanley.  Only the autocratic Christopher Cox could have had the chutzpah to keep her on after that. 

    As to why “Madoff went unchallenged for so long,” I provide an ad hoc explanation based on Hofstede’s cultural dimension, “power distance” at

    Linda Thomsen should have resigned long ago, after investigators exposed her role in the firing of attorney/investigator Gary Aguirre, who wanted to obtain testimony from John Mack, the CEO of Morgan Stanley.  Only the autocratic Christopher Cox could have had the chutzpah to keep her on after that. 




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

    From The Wall Street Journal Accounting Weekly Review on February 12, 2009

    Jensen Comment
    What I don't understand is why the massive other losses of GM would not zonk this gain come tax time?

    Tax Bill Threatens GM's Overhaul
    by John D. Stoll
    The Wall Street Journal

    Feb 02, 2009
    Click here to view the full article on ---

    TOPICS: Accounting, Tax Laws, Tax Planning, Taxation

    SUMMARY: General Motors Corp. may generate a taxable gain resulting in a $7 billion tax liability if it can persuade "...bondholders to participate in a debt-for-equity swap and lure the United Auto Workers into re-engineering how a massive health-care trust for retirees will be funded."

    CLASSROOM APPLICATION: Questions focus on how the debt-for-equity swap to retire the bonds can result in a taxable gain and on how GM is assessing its cash needs--quoted at $11 billion to $14 billion in the article--to keep operating.

    1. (Introductory) What is a restructuring plan? When and for what purpose must General Motors develop such a plan?

    2. (Introductory) Why is a debt-for-equity swap part of the General Motors restructuring plan?

    3. (Advanced) How can a debt-for-equity swap lead to taxable income for General Motors under U.S. tax law?

    4. (Advanced) Given past net operating losses at General Motors, their tax liability should be offset for many years. Why does a change in ownership limit the carryforward of net operating losses?

    5. (Introductory) What level of cash does General Motors need in order to maintain operations? How is this level of cash determined? How does this determination differ from assessing profitability over this time period?

    Reviewed By: Judy Beckman, University of Rhode Island

    "Tax Bill Threatens GM's Overhaul:  Auto Maker Lobbies Washington to Avoid a Looming $7 Billion Liability," by John D. Stoll, The Wall Street Journal, February ,, 2009 ---

    General Motors Corp. is reaching out to the U.S. Treasury Department and Congress in hopes of avoiding a multibillion-dollar tax burden that could be attached to a new restructuring plan the auto maker is working to create by mid-February, according to people familiar with the effort.

    GM, racing to submit a viability plan to the White House by Feb. 17, could face an income-tax bill of as much as $7 billion that would be associated with a plan to give much of the company's outstanding stock to debtholders, the United Auto Workers union and the federal government.

    Continued in article


    Fighting the Spread of Corruption
    A new KPMG Forensics survey suggests multinational organizations in the United States continue to face challenges with key issues related to the Foreign Corrupt Practices Act. The survey, completed in summer 2008, found that 85% of the respondents had an FCPA compliance program, but many struggled with fundamental elements, including: performing effective due diligence on foreign agents/third parties (82%); auditing third parties for compliance (76%); and performing due diligence during merger or acquisition activities (73%).
    Journal of Accountancy, February 2009 ---

    Source: KPMG Forensic 2008 Anti-bribery and Anti-corruption Survey, .

    Bob Jensen's threads on fraud are at

    After KPMG sold its consulting division, it promised over and over that its auditors would be independent

    February 11, 2009 message from Roger Collins [rcollins@TRU.CA]

    Two stories....

    1. 'Independent' KPMG earned millions from HBOS Patrick Hosking, Banking and Finance Editor

    The "independent" experts hired by HBOS to investigate allegations of serious failings at the bank in 2005 had been receiving millions of pounds in fees from the company for years.

    KPMG, which was hired by Lord Stevenson of Coddenham, the HBOS chairman at the time, to investigate claims by the whistle-blower Paul Moore, received fees for auditing, tax advice, information technology work and compliance advice.

    Last year it was paid £11.4 million in fees by HBOS and the year before £11.2 million, and it had had a close relationship with the bank since 2001, when it was appointed auditor.

    HBOS is understood to be one of its biggest clients in the UK.

    ....continued in article... 


    2.Top banker Sir James Crosby quits after whistle-blower claims Philip Webster, Political Editor and David Byers

    The deputy head of the country's financial watchdog resigned today after Gordon Brown withdrew confidence in him over damaging allegations from a bank whistle-blower.

    Sir James Crosby, the former HBOS chief executive, stepped down from his role at the Financial Services Authority (FSA) after it was claimed that he personally dismissed his former head of risk who raised fears that the bank was growing too fast.

    Sir James resigned minutes after the No 10 spokesman made it clear that Mr Brown he did not have full confidence in the banker.

    "These are serious allegations but they are contested allegations," the spokesman said.

    ...continued in article... 

    Roger Collins
    TRU School of Business

    Bob Jensen's threads on KPMG's professionalism and legal woes are at

    Bankruptcy and Other Educational Law Materials

    February 10, 2009 message from Krzyzanowski, Jeanine (LNG-NPV) []

    Hello Bob.

    We suggest adding our link on the following page: 

    Bob Jensen's threads on law tutorials and other materials are at

    Bob Jensen's threads on fraud are at

    Bob Jensen's threads on how to find lawyers and accountants are at


    Should You Stick With XP/Office 2003 or Upgrade To Vista/Office 2007?

    Journal of Accountancy Answers, February 2009 --- Click Here

    Jensen Comment
    Windows Vista is heavily flawed, and the forthcoming Windows 7 (now in beta) is intended to overcome these flaws. If you've avoided upgrading to Vista, you may want to do so before upgrading to Windows 7.

    Repeated from
    Computer Purchase Timing:  2009 is the Year of New Windows, Mac, and Palm Operating Systems

    Windows 7 may leave Vista in the dust, but Vista makes switch to Windows 7 much easier
    It will be complicated to leap from XP to Windows 7

    But there are some downsides to Windows 7. First, you will only be able to directly upgrade Vista computers to the new version. People still using Windows XP will need to perform a more cumbersome multistep process. Microsoft is working on a method to help XP owners preserve all their data during this process.
    "Even in Test Form, Windows 7 Leaves Vista in the Dust," by Walter S. Mossberg, The Wall Street Journal, January 29, 2009 ---

    This will be a big year for new operating systems. Apple plans a new version of its Macintosh operating system, to be called Snow Leopard. Palm plans an all-new smart phone operating system called Palm WebOS. But the new release that will affect more users than any other will be Windows 7, the latest major edition of Microsoft's dominant platform.

    Microsoft hasn't announced an official release date for Windows 7, but I would be surprised if it wasn't available to consumers by this fall. The company has just released the first public beta, or test, version of the software, and I've been trying it out on two laptops. One is a Lenovo ThinkPad lent me by Microsoft with Windows 7 already installed, and the other is my own Sony Vaio, which I upgraded to Windows 7 from Windows Vista.

    Personal Technology columnist Walt Mossberg provides a preview of the coming Microsoft Windows 7 operating software, which he says offers significant improvements over the unpopular Windows Vista. I won't be doing a full, detailed review of Windows 7 until it is released in final form, but here's a preview of some of the main features of this new operating system and some of my initial impressions.

    In general, I have found Windows 7 a pleasure to use. There are a few drawbacks, but my preliminary verdict on Windows 7 is positive.

    Even in beta form, with some features incomplete or imperfect, Windows 7 is, in my view, much better than Vista, whose sluggishness, annoying nag screens, and incompatibilities have caused many users to shun it. It's also a serious competitor, in features and ease of use, for Apple's current Leopard operating system. (I can't say yet how it will compare with Apple's planned new release, as I haven't tried the latter.)

    In many respects, Windows 7 isn't a radical shift from Vista, but is more of an attempt to fix Vista's main flaws. It shares the same underlying architecture, and retains graphical touches like translucent Window borders. But it introduces some key new navigation and ease-of-use features, plus scores of small usability and performance improvements -- too many to list here.

    The flashiest departure in Windows 7, and one that may eventually redefine how people use computers, is its multitouch screen navigation. Best known on Apple's iPhone, this system allows you to use your fingers to directly reposition, resize, and flip through objects on a screen, such as windows and photos. It is smart enough to distinguish between various gestures and combinations of fingers. I haven't been able to test this feature extensively yet, because it requires a new kind of touch-sensitive screen that my laptops lack.

    But even if your current or future PC lacks a touch screen, Windows 7 will have plenty of other benefits. The most important may be speed. In my tests, even the beta version of Windows 7 was dramatically faster than Vista at such tasks as starting up the computer, waking it from sleep and launching programs.

    And this speed boost wasn't only apparent in the preconfigured machine from Microsoft, but on my own Sony, which had been a dog using Vista, even after I tried to streamline its software. Of course, these speed gains may be compromised by the computer makers, if they add lots of junky software to the machines. Windows 7 is also likely to run well on much more modest hardware configurations than Vista needed.

    The familiar Windows taskbar is more customizable and useful in Windows 7. The program icons are larger, and can be "pinned" anywhere along the taskbar for easy, repeated use. There are also "jump lists" that pop out from the icons in the taskbar and start menu, showing frequently used or recent actions.

    View Full Image

    Associated Press A screenshot shows several application windows on the desktop of the Beta version of the Microsoft Windows 7 software. Windows 7 also cuts down on annoying warnings and nag screens. Microsoft notifications have been consolidated in a single icon at the right of the taskbar, and you can now decide under what circumstances Windows will warn you before taking certain actions.

    Compatibility with hardware and software, which was a problem in Vista, seems far better in Windows 7 -- even in the beta. I tried a wide variety of hardware, including printers, Web cams, external hard disks and cameras, and nearly all worked fine.

    I also successfully installed and used popular programs from Microsoft's rivals, such as Mozilla Firefox, Adobe Reader, Apple's iTunes, and Google's Picasa. All worked properly, even though none was designed for Windows 7.

    But there are some downsides to Windows 7. First, you will only be able to directly upgrade Vista computers to the new version. People still using Windows XP will need to perform a more cumbersome multistep process. Microsoft is working on a method to help XP owners preserve all their data during this process.

    Continued in article

    Jensen Comment
    I'm still hot under the collar about the vulnerability of Windows to malware. Each year I get closer to buying a Mac out of dirty Windows frustrations.

    OpenOffice 3.0.1 --- 
    Open Office is a fine choice for those looking for an alternative to some of the other commercial word processing software packages. This latest version of OpenOffice includes several new templates for professional writers, weblog publishing, and a tool that will help users export documents for functionality with Google Docs. This particular version is compatible with all operating systems.

    February 6, 2009 message from Bob Jensen to the AECM

    It is interesting that earlier in the day we had an AECM exchange about whether to upgrade from 2003 MS Office to the 2007 version.

    My computer running 2003 MS Office will not run the [Policy assignment 2.docx] file that Denny Beresford attached to his AECM message. This is because I’ve not upgraded to a newer version of MS Office. The Journal of Accountancy in February 2009 discusses this problem.

    "Why Can't They Read My Word 2007 Document?" by Stanley Zarowin, Journal of Accountancy, February 2009 --- 

    Stanley recommends saving a docx file as an rtf file and then sending it to persons like me still running on 2003 MS Word.

    An alternate solution that I’ve always used for transmitted doc files is to open the file in MS Word and then save it as a htm file before attaching them to email messages. This is easy to do in Word. Sometimes this is problematic, but more often or not I found this to be a safe way to send MS Word files to others on the Web. One drawback is that if the file has embedded graphics, there may be added files to send. In that case, perhaps the Stanley’s rtf approach is better.

    An advantage of htm files is that they are read in your Web browser such as Internet Explorer or Firefox or Safari. These are much safer when reading transmitted Word files. Denny would not intentionally send an unsafe doc or docx file to us. But if this is a student paper, he might innocently send a dangerous file. Hence, I recommend that he first save it as a htm file and attach it to his AECM message.

    Bob Jensen

    February 6, 2009 reply from Scott Bonacker [lister@BONACKERS.COM]

    Bob -

    Go here:  

    And download the "Microsoft Office Compatibility Pack for Word, Excel, and PowerPoint 2007 File Formats"

    Overview Users of the Microsoft Office XP and 2003 programs Word, Excel, or PowerPoint-please install all High-Priority updates from Microsoft Update before downloading the Compatibility Pack.

    By installing the Compatibility Pack in addition to Microsoft Office 2000, Office XP, or Office 2003, you will be able to open, edit, and save files using the file formats new to Word, Excel, and PowerPoint 2007. The Compatibility Pack can also be used in conjunction with the Microsoft Office Word Viewer 2003, Excel Viewer 2003, and PowerPoint Viewer 2003 to view files saved in these new formats. For more information about the Compatibility Pack, see Knowledge Base article 924074.

    Note: If you use Microsoft Word 2000 or Microsoft Word 2002 to read or write documents containing complex scripts, please see  for information to enable Word 2007 documents to be displayed correctly in your version of Word.

    Administrators: The administrative template for the Word, Excel, and PowerPoint converters contained within the Compatibility Pack is available for download.

    Scott Bonacker CPA
    Springfield, MO


    A Parmalat Ruling May Broaden Auditing Firm Liability

    From The Wall Street Journal Accounting Weekly Review on February 6, 2009

    A Parmalat Ruling May Broaden Liability
    by Nathan Koppel
    The Wall Street Journal

    Jan 29, 2009
    Click here to view the full article on

    TOPICS: Audit Firms, Auditing

    SUMMARY: U.S. District Judge Lewis Kaplan of New York ruled on Tuesday, January 27, 2009, that "...Deloitte Touche Tohmatsu potentially could be held liable for an allegedly defective Parmalat audit by its Italian member firm, Deloitte & Touche SpA."

    CLASSROOM APPLICATION: Understanding the structure of audit firms and the nature of business risk associated with worldwide operations can be achieved with this article.

    1. (Introductory) What was the nature of the Parmalat scandal in 2003? Cite your source for this information.

    2. (Advanced) The judge in this case concluded that Deloitte Touche Tohmatsu "...exercised substantial control over the manner in which its member firms conducted their professional activities." How is such control achieved? What are the limits to the firm being able to achieve this control?

    3. (Advanced) How might Deloitte Touche Tohmatsu, located in the U.S. and other places, be held responsible for an alleged audit failure in relation to the Parmalat engagement run by the Italian arm of the audit firm? What does this responsibility imply, in terms of choices of affiliated entities when growing an audit firm's business?

    4. (Advanced) Refer to the related article. How might an alleged audit failure over Satyam Computer Services, Ltd., affect PriceWaterhouseCoopers' worldwide operations?

    Reviewed By: Judy Beckman, University of Rhode Island

    Satyam to Hire New Auditor
    by Eric Bellman and Jackie Range
    Jan 13, 2009
    Online Exclusive

    "A Parmalat Ruling May Broaden Liability," by Nathan Koppel, The Wall Street Journal, January 29, 2009 ---

    A U.S. judge issued a ruling in the Parmalat securities litigation that could worry large accounting firms with offices in many countries.

    Parmalat SpA, an Italian conglomerate, collapsed in 2003 following the discovery of a massive fraud in which the company allegedly overstated its assets by $16 billion.

    At issue in Tuesday's ruling, by U.S. District Judge Lewis Kaplan of New York, was whether Deloitte Touche Tohmatsu potentially could be held liable for an allegedly defective Parmalat audit by its Italian member firm, Deloitte & Touche SpA. Judge Kaplan held that it was possible, in denying Deloitte Touche Tohmatsu's motion for summary judgment. A request for summary judgment asks that part or all of the case be dismissed before trial.

    "This is huge," says Stuart Grant, counsel for people who bought Parmalat shares. "Judge Kaplan has finally made the law reflect reality. These accounting firms sell themselves as world-wide, seamless organizations. Now they are going to be held responsible in the same fashion."

    Deloitte Touche Tohmatsu "provided no services of any kind to any Parmalat entity," the firm said in a statement. "We are confident of victory at any trial of this matter."

    Whether Deloitte Touche Tohmatsu can be held liable for Deloitte & Touche SpA turns on whether it had a "principal-agent" relationship with the Italian affiliate. Judge Kaplan concluded that "DTT exercised substantial control over the manner in which its member firms conducted their professional activities."

    Bob Jensen's threads on the Parmalat/Deloitte mess are at


    Grant Thornton is Being Sued Separately
    "Jury Finds Parmalat Defrauded Citigroup," by Eric Dash, The New York Times, October 20, 2008 --- Click Here

    A New Jersey jury found that Parmalat, the Italian food and dairy company, had defrauded Citigroup and awarded the bank $364.2 million in damages.

    The 6-to-1 verdict cleared Citigroup of any wrongdoing after a five-month civil trial that delved into complex, off-balance-sheet accounting that enabled Parmalat to artificially raise its earnings.

    The verdict was returned on Monday in New Jersey Superior Court in Hackensack.

    For Citigroup, the decision will most likely be the last in several accounting scandals that entangled it earlier this decade. The bank previously reached settlements over its roles in Enron and WorldCom. But more litigation is coming.

    The bank is expected to face billions of dollars in legal claims over its role in the subprime mortgage market and is engaged in another battle with Wells Fargo over the takeover of the Wachovia Corporation.

    Parmalat’s new management, including its chief executive, Enrico Bondi, had sought up to $2.2 billion in damages from Citigroup, contending its bankers designed a series of complex transactions that helped Parmalat “mask their systemic looting of the company” while collecting tens of millions in fees. The Italian company collapsed in 2003 under billions of dollars of debt.

    Citigroup said it was a victim of Parmalat’s fraud and countersued for damages. On Monday, Citigroup said it was delighted that a jury had vindicated its position. “We have said from the beginning that we have done nothing wrong,” the bank said. “Citi was the largest victim of the Parmalat fraud and not part of it.”

    Officials from Parmalat could not be reached, but the company is expected to appeal the decision.

    Citigroup was the first financial services firm to go to trial in the United States over Parmalat’s accusations. Parmalat is pursuing separate claims against the Bank of America and Grant Thornton, the accounting firm, in Manhattan federal court. That case is expected to go to trial next year; both companies have denied any wrongdoing.

    Bob Jensen's threads on the Parmalat/GrantThornton mess are at

    From The Wall Street Journal Accounting Weekly Review on February 6, 2009

    Roche Cuts Price of Bid to Own Genentech
    by Jeanne Whalen, Dana Cimilluca and Ron Winslow
    The Wall Street Journal

    Jan 31, 2009
    Click here to view the full article on

    TOPICS: Advanced Financial Accounting, Mergers and Acquisitions

    SUMMARY: "Roche Holding AG made a lower, hostile bid for Genentech Inc. after failing to reach an buy the 44% of Genentech it doesn't already own." Genentech's board of directors rejected and $89 a share bid from July 2008 as too low and "talks since then have failed to reach an agreement on price."

    CLASSROOM APPLICATION: The article may be used in classes covering business combinations to explain the difference between a merger and a tender offer.

    1. (Introductory) Define a tender offer and contrast this definition with that of a merger.

    2. (Introductory) What is a hostile tender offer? What are the business risks associated with such a takeover?

    3. (Advanced) How much of Genentech does Roche Holding AG currently own? Access the information about Genentech available through The Journal by clicking on the live link in the online article. Review the available information and specifically quote numbers that confirm this percentage.

    4. (Advanced) Access Genentech 10-Q filing for the quarter ended September 30, 2008 at Alternatively, proceed from the web location used in answering question 3 by clicking on the link to SEC filings on the left hand side of the page. Choose the Form 10-Q filing made on 11/04/2008. What disclosures are made about Roche Holding AG in this filing? Describe all that you find.

    5. (Advanced) Refer to your answer to question 4. What accounting standards require the disclosures that you found? Cite the specific reference to U.S. authoritative accounting literature.

    6. (Advanced) Refer again to your answer to question 3 above. How does the ownership level held by Roche Holding impact the accounting for its investment in Genentech?

    7. (Advanced) Confirm your assessment of Roche Holding's accounting for its investment in Genentech by accessing the Roche Holding financial statements. Explain where in the financial statements you find the confirmatory information.

    Reviewed By: Judy Beckman, University of Rhode Island


    From The Wall Street Journal Accounting Weekly Review on February 27, 2009

    Medtronic to Acquire Valve Makers
    by Jon Kamp
    The Wall Street Journal

    Feb 24, 2009
    Click here to view the full article on ---

    TOPICS: Advanced Financial Accounting, Goodwill, Mergers and Acquisitions

    SUMMARY: Medtronic is purchasing two closely-held entities, Ventor Technologies Ltd. and CoreValve, Inc., to expand its product lines to devices which require less-invasive surgical procedures than do implantable heart defibrillators. Ventor's product is expected to be introduced in Europe in 2012 and CoreValve's in the U.S in 2014; CoreValve had sales of $35 million in 2008.

    CLASSROOM APPLICATION: Classes covering business combination accounting can use this article to discuss the nature of items resulting in R&D, patents, and goodwill accounts after such transactions.

    1. (Introductory) What are the strategic reasons for Medtronic, Inc. to make the acquisitions described in this article?

    2. (Advanced) Given that the two products being acquired in these transactions are not yet sold in the U.S., and one is not yet sold in Europe, how can Medtronic decide what price to pay for these acquisitions?

    3. (Advanced) Given the nature of the acquisitions, what category of assets do you expect will be recorded on Medtronic's books in entries to record these business combinations?

    4. (Advanced) Focus on the nature of goodwill in general. Do you think that the goodwill recorded in these business combinations will be relatively high or relatively low in relation to the total $1.03 billion price Medtronic will pay? Cite the factors in the article leading to your assessment.

    Reviewed By: Judy Beckman, University of Rhode Island

    "Medtronic to Acquire Valve Makersm" by Joe Kamp, The Wall Street Journal, February 27, 2009 ---

    Medtronic Inc. agreed to pay at least $1.03 billion to buy two closely held makers of replacement heart valves that don't require major surgery, taking the medical-device maker into a nascent market and fueling a rivalry with Edwards Lifesciences Corp.

    The deals for CoreValve Inc. and Ventor Technologies Ltd. could help Medtronic offset sluggish conditions in its biggest business -- implantable heart defibrillators -- and competitive pressure elsewhere.

    The market for so-called transcatheter valves is small and open only overseas thus far. But Medtronic sees potential for the market to balloon to $2.7 billion to $3.5 billion over time.

    The devices are replacements for the aortic valve, which sends blood from the heart's main pumping chamber. The aortic valve can become narrow to the point at which it impedes blood flow, in which case patients may need a replacement.

    Medtronic already competes in the market for replacement valves that require major surgery. But some patients are too frail to withstand such procedures, which opens the door for transcatheter valves, the implantation of which is less invasive.

    Medtronic agreed to pay $700 million for CoreValve, plus two potential $75 million milestone payments. CoreValve, based in Irvine, Calif., competes with Edwards in Europe in the market for valves delivered through arteries.

    Sometimes patients' arteries can't handle such so-called transfemoral procedures, however. An alternate method, a transapical procedure, involves passing the valve through an incision between the ribs. Ventor, an Israeli company, designs valves that can be delivered by that procedure. Medtronic agreed to pay $325 million for Ventor.

    Medtronic expects the Ventor product to be introduced in Europe in 2012 and for CoreValve's product to hit the U.S. in 2014.

    Medtronic has an internal development program for such valves, but "the acquisition of CoreValve and Ventor will accelerate our market entry," Scott Ward, president of Medtronic's cardiovascular business, said in an interview. CoreValve had sales of $35 million last year, according to a Medtronic spokesman.

    Edwards Lifesciences' valve, the Sapien, garnered $53 million in sales last year. The company has projected sales of $75 million to $95 million for this year. The Sapien value can be installed through either delivery method and is approved in Europe.

    "With the success of transcatheter heart valve technology, we are not surprised that competitors are looking to move into the market; in fact, we are surprised it has not happened sooner," Edwards said.

    Humor Between February 1 and February 28, 2009

    Bailout Rap (link forwarded by David Albrecht) ---

    PJ O’Rourke’s Parliament of Whores ---   

    Forwarded by Paula

    F16 vs C-130:  THERE IS A MORAL HERE!

    A C-130 was lumbering along when a cocky F-16 flashed by. The jet jockey decided to show off.

    The fighter jock told the C-130 pilot, 'watch this!' and promptly Went into a barrel roll followed by a steep climb. He then finished With a sonic boom as he broke the sound barrier. The F-16 pilot Asked the C-130 pilot what he thought of that?

    The C-130 pilot said, 'That was impressive, but watch this!' The C-130 droned along for about 5 minutes and then the C-130 Pilot came back on and said: 'What did you think of that?' Puzzled, the F-16 pilot asked, 'What the heck did you do?' The C-130 pilot chuckled. 'I stood up, stretched my legs, walked To the back, went to the bathroom, then got a cup of coffee and a Cinnamon bun.'

    When you are young & foolish - speed & flash may seem a good thing !!!

    When you get older & smarter - comfort & dull is not such a bad thing !!!

    Us old folks understand this one.

    The last tool in the list is probably the only tool your little kids know by name.


    DRILL PRESS: A tall upright machine useful for suddenly snatching flat metal bar stock out of your hands so that it smacks you in the chest and flings your beer across the room, denting the freshly-painted project which you had carefully set in the corner where nothing could get to it.

    WIRE WHEEL: Cleans paint off bolts and then throws them somewhere under the workbench with the speed of light. Also removes fingerprints and hard-earned calluses from fingers in about the time it takes you to say, 'Oh sh -- '

    ELECTRIC HAND DRILL: Normally used for spinning pop rivets in their holes until you die of old age.

    SKILL SAW: A portable cutting tool used to make studs too short.

    PLIERS: Used to round off bolt heads. Sometimes used in the creation of blood-blisters.

    BELT SANDER: An electric sanding tool commonly used to convert minor touch-up jobs into major refinishing jobs.

    HACKSAW: One of a family of cutting tools built on the Ouija board principle. It transforms human energy into a crooked, unpredictable motion, and the more you attempt to influence its course, the more dismal your future becomes.

    VISE-GRIPS: Generally used after pliers to completely round off bolt heads. If nothing else is available, they can also be used to transfer intense welding heat to the palm of your hand.


    OXYACETYLENE TORCH: Used almost entirely for lighting various flammable objects in your shop on fire. Also handy for igniting the grease inside the wheel hub out of which you want to remove a bearing race.

    TABLE SAW: A large stationary power tool commonly used to launch Wood projectiles for testing wall integrity.

    HYDRAULIC FLOOR JACK: Used for lowering an automobile to the ground after you have installed your new brake shoes, trapping the jack handle firmly under the bumper.

    BAND SAW: A large stationary power saw primarily used by most shops to cut good aluminum sheet into smaller pieces that more easily fit into the trash can after you cut on the inside of the line instead of the outside edge.

    TWO-TON ENGINE HOIST: A tool for testing the maximum tensile strength of everything you forgot to disconnect.

    PHILLIPS SCREWDRIVER: Normally used to stab the vacuum seals under lids or for opening old-style paper-and-tin oil cans and splashing oil on your shirt; but can also be used, as the name implies, to strip out Phillips screw heads.

    STRAIGHT SCREWDRIVER: A tool for opening paint cans. Sometimes used to convert common slotted screws into non-removable screws and butchering your palms.

    PRY BAR: A tool used to crumple the metal surrounding that clip or bracket you needed to remove in order to replace a 50 cent part.

    HOSE CUTTER: A tool used to make hoses too short.

    HAMMER: Originally employed as a weapon of war, the hammer nowadays is used as a kind of divining rod to locate the most expensive parts adjacent the object we are trying to hit.

    UTILITY KNIFE: Used to open and slice through the contents of cardboard cartons delivered to your front door; works particularly well on contents such as seats, vinyl records, liquids in plastic bottles, collector magazines, refund checks, and rubber or plastic parts. Especially useful for slicing work clothes, but only while in use.

    DAMN-IT TOOL: Any handy tool that you grab and throw across the garage while yelling 'DAMN-IT' at the top of your lungs. It is also, most often, the next tool that you will need.


    Forwarded by Paula

    Pay heed, free advice is worth every penny that you pay for it! .

    The Importance of Walking

    Walking can add minutes to your life. This enables you, at 85 years old, to spend an additional 5 months in a nursing home at $7000 per month.

    My grandpa started walking five miles a day when he was 60. Now he's 97 years old and we don't know where he is.

    I like long walks... especially when they are taken by people who annoy me.

    The only reason I would take up walking is so that I could hear heavy breathing again.

    I have to walk early in the morning... before my brain figures out what I'm doing.

    I joined a health club last year, spent about 400 bucks. Haven't lost a pound. Apparently you have to go there.

    Every time I hear the dirty word 'exercise,' I wash my mouth out with chocolate.

    I do have flabby thighs but, fortunately, my stomach covers them.

    The advantage of exercising every day is so, when you die, they'll say, 'Well, he looks good, doesn't he?'

    If you are going to try cross-country skiing, start with a small country.

    I know I got a lot of exercise the last few years,...... just getting over the hill.

    We all get heavier as we get older because there's a lot more information in our heads. That's my story and I'm sticking to it.

    New Financial Terms forwarded by my good neighbors

    Subject: New Financial Terms

    CEO- Chief Embezzlement Officer

    CFO - Corporate Fraud Officer

    BULL MARKET- A random market movement causing investors to mistake themselves for financial geniuses.

    BEAR MARKET- a 6-to-18-month period when the kids get no allowance, the wife gets no jewelry, and the husband gets no sex.

    VALUE INVESTING- The art of buying low and selling lower.

    P/E RATIO- The percentage of investors wetting their pants as the market keeps crashing.

    BROKER - What my financial planner has made me.

    STANDARD & POOR- Your life in a nutshell.

    STOCK ANALYST- Idiot who just downgraded your stock.

    STOCK SPLIT- When your ex-wife and her lawyer split your assets equally between themselves.

    MARKET CORRECTION- The day after you buy stocks.

    CASH FLOW- The movement your money makes as it disappears down the toilet.

    YAHOO! - What you yell after selling it to some poor sucker for $240 per share.

    WINDOWS- What you jump out of when you're the sucker who bought Yahoo at $240 per share.

    INSTITUTIONAL INVESTOR- Past year investor who's now locked up in a nuthouse.

    PROFIT - Archaic word no longer in use.


    Forwarded by Niki

    Think about this...

    THOSE BORN 1920-1979


    TO ALL THE KIDS WHO SURVIVED the 1930's, 40's, 50's, 60's and 70's!!

    First, we survived being born to mothers who smoked and/or drank while they were pregnant.

    They took aspirin, ate blue cheese dressing, tuna from a can, and didn't get tested for diabetes.

    Then after that trauma, we were put to sleep on our tummies in baby cribs covered with bright colored lead-based paints.

    We had no child proof lids on medicine bottles, doors or cabinets and when we rode our bikes, we had no helmets, not to mention, the risks we took hitchhiking.

    As infants & children, we would ride in cars with no car seats, booster seats, seat belts or air bags.

    Riding in the back of a pick up on a warm day was always a special treat.

    We drank water from the garden hose and NOT from a bottle.

    We shared one soft dr ink with four friends, from one bottle and NO ONE actually died from this.

    We ate cupcakes, white bread and real butter and drank Kool-aid made with sugar, but we weren't overweight because,


    We would leave home in the morning and play all day, as long as we were back when the streetlights came on.

    No one was able to reach us all day. And we were OK.

    We would spend hours building our go-carts out of scraps and then ride down the hill, only to find out we forgot the brakes. After running into the bushes a few times, we learned to solve the problem.

    We did not have Playstations, Nintendo's, X-boxes, no video games at all, no 150 channels on cable, no video movies or DVD's, no surround-sound or CD's, no cell phones, no personal computers, no Internet or chatrooms.......

    WE HAD FRIENDS and we went outside and found them!

    We fell out of trees, got cut, broke bones and teeth and there were no lawsuits from these accidents.

    We ate worms and mud pies made from dirt, and the worms did not live in us forever.

    We were given BB guns for our 10th birthdays, made up games with sticks and tennis balls and although we were told it would happen, we did not poke out very many eyes.

    We rode bikes or walked to a friend's house and knocked on the door or rang the bell, or just walked in and talked to them!

    Little League had tryouts and not everyone made the team. Those who didn't had to learn to deal with disappointment. Imagine that!!

    The idea of a parent bailing us out if we broke the law was unheard of. They actually sided with the law!

    These generations have produced some of the best risk-takers, problem solvers and inventors ever!

    The past 50 years have been an explosion of innovation and new ideas.

    We had freedom, failure, success and responsibility, and we learned HOW TO DEAL WITH IT ALL!

    If YOU are one of them CONGRATULATIONS!

    You might want to share this with others who have had the luck to grow up as kids, before the lawyers and the government regulated so much of our lives for our own good .

    While you are at it, forward it to your kids so they will know how brave (and lucky) their parents were.

    Kind of makes you want to run through the house with scissors, doesn't it?!

    The quote of the month is by Jay Leno:

    'With hurricanes, tornados, fires out of control, mud slides, flooding, severe thunderstorms tearing up the country from one end to another, and with the threat of bird flu and terrorist attacks, are we sure this is a good time to take God out of the Pledge of Allegiance?'

    New Financial Terms forwarded by my good neighbors

    Subject: New Financial Terms

    CEO- Chief Embezzlement Officer

    CFO - Corporate Fraud Officer

    BULL MARKET- A random market movement causing investors to mistake themselves for financial geniuses.

    BEAR MARKET- a 6-to-18-month period when the kids get no allowance, the wife gets no jewelry, and the husband gets no sex.

    VALUE INVESTING- The art of buying low and selling lower.

    P/E RATIO- The percentage of investors wetting their pants as the market keeps crashing.

    BROKER - What my financial planner has made me.

    STANDARD & POOR- Your life in a nutshell.

    STOCK ANALYST- Idiot who just downgraded your stock.

    STOCK SPLIT- When your ex-wife and her lawyer split your assets equally between themselves.

    MARKET CORRECTION- The day after you buy stocks.

    CASH FLOW- The movement your money makes as it disappears down the toilet.

    YAHOO! - What you yell after selling it to some poor sucker for $240 per share.

    WINDOWS- What you jump out of when you're the sucker who bought Yahoo at $240 per share.

    INSTITUTIONAL INVESTOR- Past year investor who's now locked up in a nuthouse.

    PROFIT - Archaic word no longer in use.

    To which David Albrecht added the following:

    Here's another list, from:

    Below is the long list:


    Forwarded by David Albrecht

    Some guy bought a new fridge for his house. To get rid of his old fridge, he put it in his front yard and hung a sign on it saying: 'Free to good home. You want it, you take it.' For three days the fridge sat there without even one person looking twice at it. He eventually decided that people were too un-trusting of this deal.

    It looked too good to be true, so he changed the sign to read: 'Fridge for sale $50.'

    The next day someone stole it!

    ***They walk amongst us!***


    *One day I was walking down the beach with some friends when someone shouted....'Look at that dead bird!' Someone looked up at the sky and said...'where?'

    ***They walk among us!!***


    While looking at a house, my brother asked the real estate agent which direction was north because, he explained, he didn't want the sun waking him up every morning. She asked, 'Does the sun rise in the north?' When my brother explained that the sun rises in the east, and has for sometime, she shook her head and said, 'Oh, I don't keep up with that stuff'

    ***They Walk Among Us!!***


    My colleague and I were eating our lunch in our cafeteria, when we overheard one of the administrative assistants talking about the sunburn she got on her weekend drive to the beach. She drove down in a convertible, but 'didn't think she'd get sunburned because the car was moving'.

    ***They Walk Among Us!!!!***


    My sister has a lifesaving tool in her car it's designed to cut through a seat belt if she gets trapped She keeps it in the trunk.

    ***They Walk Among Us!!!!!***


    I was hanging out with a friend when we saw a woman with a nose ring attached to an earring by a chain. My friend said, 'Wouldn't the chain rip out every time she turned her head?' I had to explain that a person's nose and ear remain the same distance apart no matter which way the head is turned...

    ***They Walk Among Us!!!!!!! ***


    I couldn't find my luggage at the airport baggage area. So I went to the lost luggage office and told the woman there that my bags never showed up. She smiled and told me not to worry because she was a trained professional and I was in good hands. 'Now,' she asked me, 'Has your plane arrived yet?'...

    (I work with professionals like this.)

    ***They Walk Among Us!!!!!!!!***


    While working at a pizza parlour I observed a man ordering a small pizza to go. He appeared to be alone and the cook asked him if he would like it cut into 4 pieces or 6. He thought about it for some time before responding. 'Just cut it into 4 pieces; I don't think I'm hungry enough to eat 6 pieces.

    ***Yep, They Walk Among Us, too.!!!!!!!!

    Sadly, not only do they walk among us, they also reproduce !!!!

    Forwarded by Paula

    There were 3 good arguments that Jesus was Black:
    1. He called everyone brother.
    2. He liked Gospel.
    3. He didn't get a fair trial.

    But then there were 3 equally good arguments that Jesus was Jewish:
    1. He went into His Father's business.
    2. He lived at home until he was 33.
    3. He was sure his Mother was a virgin and his Mother was sure He was God.

    But then there were 3 equally good arguments that Jesus was Italian:
    1. He talked with His hands.
    2. He had wine with His meals.
    3. He used olive oil.

    But then there were 3 equally good arguments that Jesus was a Californian:
    1. He never cut His hair.
    2. He walked around barefoot all the time.
    3. He started a new religion.

    But then there were 3 equally good arguments that Jesus was an American Indian:
    1. He was at peace with nature.
    2. He ate a lot of fish.
    3.  He talked about the Great Spirit.

    But then there were 3 equally good arguments that Jesus was Irish:
    1. He never got married.
    2. He was always telling stories.
    3. He loved green pastures.

    But the most compelling evidence of all - 3 proofs that Jesus was a woman:
    1. He fed a crowd at a moment's notice when there was virtually no food.
    2. He kept trying to get a message across to a bunch of men who just didn't get it.
    3. And even when
    He was dead, He had to get up because there was still work to do!


    Forwarded by Niki


    A flight attendant was stationed at the departure gate to check tickets. As a man approached, she extended her hand for the ticket and he opened his trench coat and flashed her. Without missing a beat, she said, 'Sir, I need to see your ticket, not your stub.'


    A lady was picking through the frozen turkeys at the grocery store but she couldn't find one big enough for her family. She asked a stock boy, ' Do these turkeys get any bigger?' The stock boy replied, 'No ma'am, they're dead.'


    The police officer got out of his car as the kid who was stopped for speeding rolled down his window. 'I've been waiting for you all day,' the officer said. The kid replied, Yeah, well I got here as fast as I could.' When the cop finally stopped laughing, he sent the kid on his way without a ticket.


    A truck driver was driving along on the freeway and noticed a sign that read: Low Bridge Ahead. Before he knows it, the bridge is right in front of him and his truck gets wedged under it. Cars are backed up for miles. Finally a police car comes up. The cop gets out of his car and walks to the truck driver, puts his hands on his hips and says, 'Got stuck, huh?' The truck driver says, 'No, I was delivering this bridge and I ran out of fuel!


    A college teacher reminds her class of tomorrow's final exam. 'Now class, I won't tolerate any excuses for you not being here tomorrow. I might consider a nuclear attack or a serious personal injury, illness, or a death in your immediate family, but that's it, no other excuses whatsoever!' A smart-ass student in the back of the room raised his hand and asked, 'What would you say if tomorrow I said I was suffering from complete and utter sexual exhaustion?' The entire class is reduced to laughter and snickering When silence was restored, the teacher smiled knowingly at the student, shook her head and sweetly said, 'Well, I guess you'd have to write the exam with your other hand.'


    A woman is standing nude looking in the bedroom mirror. She is not happy with what she sees and says to her husband, 'I feel horrible; I look old, fat and ugly. I really need you to pay me a compliment.' The husband replied, 'Your eyesight's good.'

    Forwarded by Dr. Wolff

    They keep trying to make it sound complicated but it's really very simple!

    Bank Crisis in Terms Understood

    Heidi is the proprietor of a bar in Washington, DC. In order to increase sales and comply with CRAP (Community Reinvestment Act Program reinforced by Socialist Congressmen), she decides to allow her loyal customers - most of whom are unemployed alcoholics - to drink now but pay later. She keeps track of the drinks consumed on a ledger (thereby granting the customers loans).

    Word gets around and as a result increasing numbers of customers flood into Heidi's bar.

    Taking advantage of her customers' freedom from immediate payment constraints, Heidi increases her prices for wine and beer, the most-consumed beverages. Her sales volume increases massively.

    A young and dynamic customer service consultant at the local bank recognizes these customer debts as valuable future assets and increases Heidi's borrowing limit.

    He sees no reason for undue concern since he has the debts of the alcoholics as collateral.

    At the bank's corporate headquarters, expert bankers transform these customer assets into DRINKBONDS, ALKBONDS and PUKEBONDS. These securities are then traded on markets worldwide. No one really understands what these abbreviations mean and how the securities are guaranteed. Nevertheless, as their prices continuously climb, the  securities become top-selling items.

    One day, although the prices are still climbing, a risk manager (subsequently of course fired due his negativity) of the bank decides that slowly the time has come to demand payment of the debts incurred by the drinkers at Heidi's bar.

    However they cannot pay back the debts.

    Heidi cannot fulfill her loan obligations and claims bankruptcy.

    DRINKBOND and ALKBOND drop in price by 95 %. PUKEBOND performs better, stabilizing in price after dropping by 90 %.

    The suppliers of Heidi's bar, having granted her generous payment due dates and having invested in the securities are faced with a new situation. Her wine supplier claims bankruptcy, her beer supplier is taken over by a competitor.
    The bank is saved by the Government following dramatic round-the-clock  consultations by leaders from the governing political parties.

    The funds required for this purpose are obtained by a tax levied on the non-drinkers.

    Finally an explanation I understand...

    Forwarded by Paula

    The Washington Post has published the winning submissions to its yearly neologism contest, in which readers are asked to supply alternate meanings for common words.

    The winners:

     1. Coffee (n.), the person upon whom one coughs.
     2. Flabbergasted (adj.), appalled over how much weight you have gained.
     3. Abdicate (v.), to give up all hope of ever having a flat stomach.
     4. Esplanade (v.), to attempt an explanation while drunk.
     5. Willy-nilly (adj.), impotent.
     6. Negligent (adj.), describes a condition in which you absentmindedly answer the door in your nightgown.
     7. Lymph (v.), to walk with a lisp.
     8. Gargoyle (n.), olive-flavored mouthwash.
     9. Flatulence (n.) emergency vehicle that picks you up after you are run over by a steamroller.
    10. Balderdash (n.), a rapidly receding hairline.
    11. Testicle (n.), a humorous question on an exam.
    12. Rectitude (n.), the formal, dignified bearing adopted by Proctologists.
    13. Pokemon (n.), a Rastafarian proctologist.
    14. Oyster (n.), a person who sprinkles his conversation with Yiddishisms.
    15. Frisbeetarianism (n.), The belief that, when you die, your Soul flies up onto the roof and gets stuck there.
    16. Circumvent (n.), an opening in the front of boxer shorts worn by Jewish men.

    The Washington Post's Style Invitational also asked readers to take any word from the dictionary, alter it by
    adding, subtracting, or changing one letter, and supply a new definition.

    Here are the winners:

     1. Bozone (n.): The substance surrounding stupid people that stops bright ideas from penetrating. The bozone layer, unfortunately, shows little sign of breaking down in the near future.

     2. Foreploy (v.): Any misrepresentation about yourself for the purpose of getting laid.

     3. Cashtration (n.): The act of buying a house, which renders the subject financially impotent for an indefinite

     4. Giraffiti (n.): Vandalism spray-painted very, very high.

     5. Sarchasm (n.): The gulf between the author of sarcastic wit and the person who doesn't get it.

     6. Inoculatte (v.): To take coffee intravenously when you are running late.

     7. Hipatitis (n.): Terminal coolness.

     8. Osteopornosis (n.): A degenerate disease.

     9. Karmageddon (n.): It's like, when everybody is sending off all these really bad vibes, right? And then,
     like, the Earth explodes and it's like, a serious bummer.

    10 Decafalon (n.): The grueling event of getting through the day consuming only things that are good for you.

    11. Glibido (v): All talk and no action.

    12. Dopeler effect (n.): The tendency of stupid ideas to seem smarter when they come at you rapidly.

    13. Arachnoleptic fit (n.): The fra ntic dance performed just after you've accidentally walked through a spider

    14. Beelzebug (n.): Satan in the form of a mosquito that gets into your bedroom at three in the morning and cannot be cast out.

    15. Caterpallor (n.): The color you turn after finding half a grub in the fruit you're eating.
     And the pick of the literature:

    16. Ignoranus (n.): A person who's both stupid and an asshole.



    Forwarded by Professor Edwards

    Another oldie worth a second laugh...

    These 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 that had the torment of staying calm while 

    these exchanges were actually taking place. 


    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: 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: He's twenty, much like your IQ. 

    ATTORNEY: Were you present when your picture was taken? 
    WITNESS: Are you shitting me? 

    ATTORNEY: So the date of conception (of the baby) was August 8th? 
    WITNESS: Yes. 
    ATTORNEY: And what were you doing at that time? 
    WITNESS: getting laid 

    ATTORNEY: She had three children, right? 
    WITNESS: Yes. 
    ATTORNEY: How many were boys? 
    WITNESS: None. 
    ATTORNEY: Were there any girls? 
    WITNESS: Your Honor, I think I need a different attorney. Can I get a new attorney? 

    ATTORNEY: How was your first marriage terminated? 
    WITNESS: By death. 
    ATTORNEY: And by whose death was it terminated? 
    WITNESS: Take a guess.

    ATTORNEY: Can you describe the individual? 
    WITNESS: He was about medium height and had a beard. 
    ATTORNEY: Was this a male or a female? 
    WITNESS: Unless the Circus was in town I'm going with male. 

    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 of them. The live ones put up too much of a fight. 

    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: If not, he was by the time I finished. 

    ATTORNEY: Are you qualified to give a urine sample? 
    WITNESS: Are you qualified to ask that question? 

    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: I see, 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 Auntie Bev

    And you also find out interesting things when you have sons, like...

    1.) A king size waterbed holds enough water to fill a 2000 sq. ft. house 4 inches deep.

    2.) If you spray hair spray on dust bunnies and run over them with roller blades, they can ignite.

    3.) A 3-year old Boy's voice is louder than 200 adults in a crowded restaurant.

    4.) If you hook a dog leash over a ceiling fan, the motor is not st rong enough to rotate a 42 pound Boy wearing Batman underwear and a Superman cape. It is strong enough, however, if tied to a paint can, to spread paint on all four walls of a 20x20 ft. room.

    5.) You should not throw baseballs up when the ceiling fan is on. When using a ceiling fan as a bat, you have to throw the ball up a few times before you get a hit. A ceiling fan can hit a baseball a long way.

    6.) The glass in windows (even double-pane) doesn't stop a baseball hit by a ceiling fan.

    7.) When you hear the toilet flush and the words 'uh oh', it's already too late.

    8.) Brake fluid mixed with Clorox makes smoke, and lots of it.

    9.) A six-year old Boy can start a fire with a flint rock even though a 36- year old Man says they can only do it in the movies.

    10.) Certain Lego's will pass through the digestive tract of a 4-year old Boy.

    11.) Play dough and microwave should not be used in the same sentence.

    12.) Super glue is forever.

    13.) No matter how much Jell-O you put in a swimming pool you still can't walk on water.

    14.) Pool filters do not like Jell-O.

    15.) VCR's do not eject 'PB & J' sandwiches even though TV commercials show they do.

    16.) Garbage bags do not make good parachutes.

    17.) Marbles in gas tanks make lots of noise when driving.

    18.) You probably DO NOT want to know what that odor is.

    19.) Always look in the oven before you turn it on; plastic toys do not like ovens.

    20.) The fire department in�Austin�,�TX�has a 5-minute response time.

    21.) The spin cycle on the washing machine does not make earthworms dizzy.

    22.) It will, however, make cats dizzy.

    23.) Cats throw up twice their body weight when dizzy.

    24.) 80% of Women will pass this on to almost all of their friends, with or without kids.

    25.) 80% of Men who read this will try mixing the Clorox and brake fluid.

    Forwarded by Dick Haar

    Understanding why they voted democrat

    I voted Democrat because I love the fact that I can now marry whatever I want. I've decided to marry my horse.

    I voted Democrat because I believe oil companies' profits of 4% on a gallon of gas are obscene but the government taxing the same gallon of gas at 15% isn't.

    I voted Democrat because I believe the government will do a better job of spending the money I earn than I would.

    I voted Democrat because freedom of speech is fine as long as nobody is offended by it.

    I voted Democrat because when we pull out of Iraq I trust that the bad guys will stop what they're doing because they now think we're good people.

    I voted Democrat because I'm way too irresponsible to own a gun, and I know that my local police are all I need to protect me from murderers and thieves.

    I voted Democrat because I believe that people who can't tell us if it will rain on Friday can tell us that the polar ice caps will melt away I n ten years if I don't start driving a Prius.

    I voted Democrat because I'm not concerned about the slaughter of millions of babies so long as we keep all death row inmates alive.

    I voted Democrat because I believe that business should not be allowed to make profits for themselves. They need to break even and give the rest away to the government for redistribution as THEY see fit.

    I voted Democrat because I believe liberal judges need to rewrite The Constitution every few days to suit some fringe kooks who would never get their agendas past the voters.

    I voted Democrat because my head is so firmly planted up my ass that it is unlikely that I'll ever have another point of view.

    "A Liberal is a person who will give away everything they don't own."

    "W.'s Greatest Hits
    The top 25 Bushisms of all time," by Jacob Weisberg, Slate, January 12, 2009 ---

    Being able to laugh at yourself is a rare quality in a leader. It's one thing George W. Bush can do that Bill Clinton couldn't. Unfortunately, as we bid farewell to Bushisms, we must conclude that the joke was mainly on us.

    1. "Our enemies are innovative and resourceful, and so are we. They never stop thinking about new ways to harm our country and our people, and neither do we."—Washington, D.C., Aug. 5, 2004

    2. "I know how hard it is for you to put food on your family."—Greater Nashua, N.H., Chamber of Commerce, Jan. 27, 2000

    3. "Rarely is the question asked: Is our children learning?"—Florence, S.C., Jan. 11, 2000

    4. "Too many good docs are getting out of the business. Too many OB/GYNs aren't able to practice their love with women all across the country."—Poplar Bluff, Mo., Sept. 6, 2004

    5. "Neither in French nor in English nor in Mexican."—declining to answer reporters' questions at the Summit of the Americas, Quebec City, Canada, April 21, 2001

    6. "You teach a child to read, and he or her will be able to pass a literacy test.''—Townsend, Tenn., Feb. 21, 2001

    7. "I'm the decider, and I decide what is best. And what's best is for Don Rumsfeld to remain as the secretary of defense."—Washington, D.C., April 18, 2006

    8. "See, in my line of work you got to keep repeating things over and over and over again for the truth to sink in, to kind of catapult the propaganda."—Greece, N.Y., May 24, 2005

    9. "I've heard he's been called Bush's poodle. He's bigger than that."—discussing former British Prime Minister Tony Blair, as quoted by the Sun newspaper, June 27, 2007

    10. "And so, General, I want to thank you for your service. And I appreciate the fact that you really snatched defeat out of the jaws of those who are trying to defeat us in Iraq."—meeting with Army Gen. Ray Odierno, Washington, D.C., March 3, 2008

    11. "We ought to make the pie higher."—South Carolina Republican debate, Feb. 15, 2000

    12. "There's an old saying in Tennessee—I know it's in Texas, probably in Tennessee—that says, fool me once, shame on—shame on you. Fool me—you can't get fooled again."—Nashville, Tenn., Sept. 17, 2002

    13. "And there is distrust in Washington. I am surprised, frankly, at the amount of distrust that exists in this town. And I'm sorry it's the case, and I'll work hard to try to elevate it."—speaking on National Public Radio, Jan. 29, 2007

    14. "We'll let our friends be the peacekeepers and the great country called America will be the pacemakers."—Houston, Sept. 6, 2000

    15. "It's important for us to explain to our nation that life is important. It's not only life of babies, but it's life of children living in, you know, the dark dungeons of the Internet."—Arlington Heights, Ill., Oct. 24, 2000

    16. "One of the great things about books is sometimes there are some fantastic pictures."—U.S. News & World Report, Jan. 3, 2000

    17. "People say, 'How can I help on this war against terror? How can I fight evil?' You can do so by mentoring a child; by going into a shut-in's house and say I love you."—Washington, D.C., Sept. 19, 2002

    18. "Well, I think if you say you're going to do something and don't do it, that's trustworthiness."—CNN online chat, Aug. 30, 2000

    19. "I'm looking forward to a good night's sleep on the soil of a friend."—on the prospect of visiting Denmark, Washington, D.C., June 29, 2005

    20. "I think it's really important for this great state of baseball to reach out to people of all walks of life to make sure that the sport is inclusive. The best way to do it is to convince little kids how to—the beauty of playing baseball."—Washington, D.C., Feb. 13, 2006

    21. "Families is where our nation finds hope, where wings take dream."—LaCrosse, Wis., Oct. 18, 2000

    22. "You know, when I campaigned here in 2000, I said, I want to be a war president. No president wants to be a war president, but I am one."—Des Moines, Iowa, Oct. 26, 2006

    23. "There's a huge trust. I see it all the time when people come up to me and say, 'I don't want you to let me down again.' "—Boston, Oct. 3, 2000

    24. "They misunderestimated me."—Bentonville, Ark., Nov. 6, 2000

    25. "I'll be long gone before some smart person ever figures out what happened inside this Oval Office."—Washington, D.C., May 12, 2008

    Forwarded by Maureen

    (Passing requires 4 correct answers) 

    1) How long did the Hundred Years' War last?

    2) Which country makes Panama hats?

    3) From which animal do we get cat gut?

    4) In which month do Russians celebrate the October Revolution?

    5) What is a camel's hair brush made of?

    6) The Canary Islands in the Pacific are named after what animal?

    7) What was King George VI's first name?

    8) What colour is a purple finch?

    9) Where are Chinese gooseberries from?

    10) What is the colour of the black box in a commercial airplane?

    Remember, you need 4 correct answers to pass.

    Check your answers below.


    1) How long did the Hundred Years War last? 
    116 years

    2) Which country makes Panama hats?   

    3) >>From which animal do we get cat gut?   
    Sheep and Horses

    4) In which month do Russians celebrate the October Revolution?  

    5) What is a camel's hair brush made of?  
     Squirrel fur

    6) The Canary Islands in the Pacific are named after what animal?   

    7) What was King George VI's first name?   

    8) What colour is a purple finch?   

    9) Where are Chinese gooseberries from?   
    New Zealand

    10) What is the colour of the black box in a commercial airplane?   
    Orange (of course)

    What do you mean, you failed?  Me, too.

    (And if you try to tell me you passed, you lie!)


    Forwarded by Gene and Joan

    Subject: Doctors' opinions on the stimulus package
    The  Allergists voted to scratch it, and the

    Dermatologists advised not  to make any rash moves.

    The Gastroenterologists had sort of a gut  feeling about it, but the

    Neurologists thought the Administration  had a lot of nerve, and the

    Obstetricians felt they were all  laboring under a misconception. The

    Ophthalmologists considered the  idea shortsighted. The

    Pathologists yelled, 'Over my dead body!'  while the

    Pediatricians said, 'Oh, grow up!'   The

    Psychiatrists thought the whole idea was madness,  the

    Radiologists could see right through it, and  the

    Surgeons decided to wash their hands of the whole thing.  The

    Internists thought it was a bitter pill to swallow, and  the

    Plastic Surgeons said, 'This puts a whole new face on the  matter.'

    The Podiatrists thought it was a step forward, but  the

    Urologists felt the scheme wouldn't hold water.   The

    Anesthesiologists thought the whole idea was a gas, and  the

    Cardiologists didn't have the heart to say no.  In the  end, the

    Proctologists left the decision up to the assholes in  Washington


    Forwarded by Team Carper

    London Times Obituary of the late Mr. Common Sense

    'Today we mourn the passing of a beloved old friend, Common Sense, who has been with us for many years. No one knows for sure how old he was, since his birth records were long ago lost in bureaucratic red tape. He will be remembered as having cultivated such valuable lessons as: Knowing when to come in out of the rain; why the early bird gets the worm; Life isn't always fair; and maybe it was my fault.

    Common Sense lived by simple, sound financial policies (don't spend more than you can earn) and reliable strategies (adults, not children, are in charge).

    His health began to deteriorate rapidly when well-intentioned but overbearing regulations were set in place. Reports of a 6-year-old boy charged with sexual harassment for kissing a classmate; teens suspended from school for using mouthwash after lunch; and a teacher fired for reprimanding an unruly student, only worsened his condition.

    Common Sense lost ground when parents attacked teachers for doing the job that they themselves had failed to do in disciplining their unruly children.

    It declined even further when schools were required to get parental consent to administer sun lotion or an aspirin to a student; but could not inform parents when a student became pregnant and wanted to have an abortion.

    Common Sense lost the will to live as the churches became businesses; and criminals received better treatment than their victims. Common Sense took a beating when you couldn't defend yourself from a burglar in your own home and the burglar could sue you for assault.

    Common Sense finally gave up the will to live, after a woman failed to realize that a steaming cup of coffee was hot. She spilled a little in her lap, and was promptly awarded a huge settlement.

    Common Sense was preceded in death by his parents, Truth and Trust; his wife, Discretion; his daughter, Responsibility; and his son, Reason. He is survived by his 4 stepbrothers; I Know My Rights, I Want It Now, Someone Else Is To Blame, and I'm A Victim.

    Not many attended his funeral because so few realized he was gone. If you still remember him, pass this on. If not, join the majority and do nothing.

    And that's the way it was on February 28, 2009 with a little help from my friends.


    Bob Jensen's Threads ---


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

    Deloitte's International Accounting News ---

    Association of International Accountants --- 

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

    Bob Jensen's accounting history summary ---

    Bob Jensen's accounting theory summary ---


    AccountingWeb ---
    AccountingWeb Student Zone ---


    Introducing the New  (free) ---


    SmartPros ---


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


    Financial Rounds (from the Unknown Professor) ---



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





  • January 31, 2009


  • Bob Jensen's New Bookmarks on  January 31, 2009
    Bob Jensen at Trinity University 

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

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

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

    Many useful accounting sites (scroll down) ---

    Accounting program news items for colleges are posted at
    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


    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

    Federal Revenue and Spending Book of Charts (Great Charts on Bad Budgeting) ---

    Humor Between January 1 and January 31, 2009 ---  

    Jim Mahar pointed out the following behavioral accounting article.
    "Executive Overconfidence and the Slippery Slope to Fraud," by Catherine M. Schrand amd Sarah L. C. Zechman, SSRN, December 30, 2008 ---

    We propose that executive overconfidence increases the likelihood that a firm commits financial reporting fraud. A manager that faces an earnings shortfall is more likely to manage earnings to overcome it if he believes the shortfall is temporary and, hence, the earnings management will be a one-off event that likely will go undetected. If performance does not improve, however, the manager, faced with reversals of prior-period earnings management and continuing poor performance, may choose to engage in the type of egregious financial reporting that the SEC prosecutes. Overconfident managers with unrealistic beliefs about future performance are more likely to find themselves in this situation. Using industry-level proxies for executive overconfidence, we find industries that attract overconfident executives have a greater proportion of frauds. Our analysis that uses firm-level proxies for overconfidence suggests that there are two types of frauds: Those associated with moderate levels of overconfidence, perpetrated by executives who ex post fall down the slippery slope, and those perpetrated by executives with extreme overconfidence that commit fraud for opportunistic reasons ex ante. Analysis of individual executives supports the notion that there are two types of overconfident executives that engage in fraud. Those with opportunistic motives are more likely to be from a founding family, have greater commitment to the firm, earn more total and have a higher percent of variable cash compensation, and are less likely to have accounting experience. Finally, we document that a matched sample of non-fraud firms do not have stronger governance mechanisms that prevent fraud. This result mitigates the possibility that it is weak governance rather than executive overconfidence that is a significant determinant of fraud.

    Jensen Comment
    In spite of the case they make for "executive overconfidence," I still think the main causes are motive and opportunity. Executive compensation contracts that provide huge bonuses and stock option gains are the main cause, in my viewpoint, for earnings management with Frank Raines at Fannie Mae being Exhibit A ---

    White collar crime generally pays even if chances are high of being caught ---

    Congratulations to Marc Massaud
    Alumni, friends, parents, and staff of Claremont McKenna College have honored emeritus accounting professor Marc Massaud with funding for the new Marcos F. Massoud Endowed Chair in Accounting. Marc was one of the most respected and admired professors in history at the Robert Day School of Business at Claremont McKenna. He’s a very caring and humble scholar and a good friend.

    Note the name "Robert Day" below.

    The following is a Tidbit from New Bookmarks for September 2007 ---
    What would your college do with an added $200 million?
    First I want to congratulate Claremont McKenna College for receiving such a huge gift.
    Second I want to congratulate them on how they intend to spend it in this era where so many students opt for professional program majors rather than liberal arts.
    Claremont McKenna College on Thursday announced a $200 million gift, from a trustee and alumnus, Robert Day. One purpose of the funds will be to create new academic programs in which students can combine liberal arts education with an education in business and finance — either during their undergraduate program or through a one-year master of finance program immediately after an undergraduate program is completed. The new options are meant to be an alternative to a traditional M.B.A.
    Inside Higher Ed, September 28, 2007 ---

    Congratulations to Mary Barth
    For her services to the profession, Mary Barth, a professor of accounting at the Stanford University Graduate School of Business, received a Doctor of Science degree from Lancaster University Management School (LUMS) on December 10. It is the first time that Professor Barth, once described by a PhD student as “the Michael Jordan of accounting,” has been awarded an honorary degree on either side of the Atlantic.
    "UK's Lancaster University Honors Barth for Accounting Contributions," Stanford GSB News, December 2008 ---

    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 ---

    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 ---
    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
    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 ---

    The Rest of Marvene's Story ---

    Accounting Implications

    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? ---

    September 30, 1999

    Fannie Mae Eases Credit To Aid Mortgage Lending


    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.

    Robert Shiller visits Google’s Mountain View, CA headquarters to discuss his book “The Subprime Solution: How Today’s Global Financial Crisis Happened, and What to Do About It.” This event took place on October 30, 2008, as part of the Authors@Google series. The subprime mortgage crisis has already wreaked havoc on the lives of millions of people and now it threatens to derail the U.S. economy and economies around the world. In The Subprime Solution, best-selling economist Robert Shiller reveals the origins of this crisis and puts forward bold measures to solve it. He calls for an aggressive response–a restructuring of the institutional foundations of the financial system that will not only allow people once again to buy and sell homes with confidence, but will create the conditions for greater prosperity in America and throughout the deeply interconnected world economy. Robert J. Shiller is the best-selling author of “Irrational Exuberance” and “Subprime Solution” (both Princeton), among other books. He is the Arthur M. Okun Professor of Economics at Yale University.
    "Authors@Google: Robert Shiller," January 8, 2009 ---


    Deloitte's Free IFRS Course Materials

    "Deloitte IFRS curriculum materials are now available ," IAS Plus, January 7, 2008 ---

    Deloitte IFRS curriculum materials are now available Deloitte (United States) is making available a complete set of IFRS course materials through Deloitte's IFRS University Consortium. Featuring on-campus lectures and transcripts from Deloitte subject matter leaders, actual case studies and case solutions, and other materials, the course is available free to all colleges and universities. Course materials are divided into eight sessions, with each session containing a unique set of presentations, case studies, and lecture notes. The materials include a detailed introduction to IFRS and provide an overview of the differences between IFRS and US generally accepted accounting principles. Specific topics covered in the Deloitte IFRS curriculum materials include:


    * financial statement presentation;
    * revenue, inventory and income tax;
    * business combinations, discontinued operations and foreign currency;
    * intangibles and leases;
    * property and asset impairment;
    * provisions, pensions and share-based payments;
    * financial instruments; and
    * consolidation policy, joint ventures and associates.

    For more information about Deloitte's IFRS University Consortium please go to the web site: .

    From Ellen at Ernst & Young:

    We are pleased to announce the release of phase I of our free IFRS curriculum materials produced by our Ernst & Young Academic Resource Center (EYARC). Please click here regarding the details of the material and how you can access them.

    If you are unable to click the link above, please copy and paste the URL into your internet browser:

    We'd like to give a special thanks to the distinguished members of our EYARC. These include the following faculty and retired Ernst & Young partners: Jana Smith-Raedy, University of North Carolina at Chapel Hill, Tim Eaton, Miami University at Ohio and Irene Wiecek, University of Toronto, John Kiss, Peter Nurczynski, Nick Kissel and Bob Riley.



    Ellen J. Glazerman
    Executive Director, Ernst & Young Foundation
    Americas Director, University Relations
    Ernst & Young LLP
    5 Times Square, 6th Floor
    New York, NY 10036
    212-773-5686 (tel)
    866-855-4960 (fax)

    January 22, 2009 message from Patricia Walters [patricia@DISCLOSUREANALYTICS.COM]

    IFRS standards (usually referred to as the "bound volume") are only available for a fee because sales of publications is one of the IASB's primary revenue streams.

    That said, academics can get an on-line subscription to the IASB (ability to download the standards, etc) for (the dues fee of ) $25 if you join the IAAER and your students can get a subscription for their dues fee of only $20. 

    This is a great deal.



    Bob Jensen's threads on the messy transition to IFRS are at

    There must be a mistake:  Free IASB Standards and Interpretations?

    January 21, 2009 inquiry from Tom Oxner <>

    I am trying to get up to speed on IFRS. I am reading 2008 International GAAP by Ernst & Young, published by Wiley. It does a good job of describing many of the requirements. Are the actual IFRS pronouncements available other than for a fee? The IFRS website has summaries, but I could not find the text of the pronouncements.

    Thanks for your help.

    Dr. Thomas H. Oxner
    Professor of Accounting
    University of Central Arkansas
    Conway, AR 72035

    January 21, 2009 reply from Bob Jensen

    Hi Tom,

    Like me, I think most students learn best from illustrations.

    Even if the IASB standards were free I doubt that they would be of great use in the classroom except as references. And I don’t think it is possible to get these standards into the hands of students without paying a relatively large fee per student.

    Relative to FASB statements, interpretations, and implementation guides, the IASB provides a dearth of good illustrations for classroom use. Those of us that like to teach from illustrations will probably find ourselves using FASB illustrations that we modify for IFRS differences. For example, the FASB spent a lot of money outsourcing the writing of illustrations, whereas the IASB is just not as well funded as the IASB. An example of expensive outsourced illustrations from the FASB can be found at

    I recommend that instructors seriously look at an index of the key differences between IFRS and U.S. GAAP. Beware that such an index probably overlooks the various U.S. GAAP rules (e.g. FIN 46) that IFRS has not taken a position on one way or another. You can find great comparisons of IFRS vs. national GAAPs at
    Most of these are free.

    I have some examples highlighted in green at

    One problem is that the IASB has not taken a position of various issues such as synthetic instruments and variable interest entities. But there are many other FASB illustrations that are relatively easy to modify. In a way these modified FASB illustrations are useful because they encourage students to think about why the FASB went one way and the IASB went another on certain issues. Examples from FAS 133 versus IAS 39 include the following:

    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. IAS 39 makes other concessions to net settlement such as in deciding whether a "loan obligation" is a derivative.[1]

    Offsetting amounts due from and owed to two different parties

    • IAS 39: Required if legal right of set-off and intent to settle net.
    • FAS 133: Prohibited.

    Multiple embedded derivatives in a single hybrid instrument

    • IAS 39: Sometimes accounted for as separate derivative contracts.
    • FAS 133: Always combined into a single hybrid instrument.
    • Implications: FAS 133 does not allow hybrid instruments to be hedged items. This restriction can be overcome in some instances by disaggregating for implementation of IAS 39.

    Subsequent reversal of an impairment loss

    • IAS 39: Previous impairment losses may be reversed under some circumstances.
    • FAS 133: Reversal is not allowed for HTM and AFS securities.
    • Implications: The is a less serious difference since Fair Value Options (FVOs) were adopted by both the IASB and FASB. Companies can now avoid HTM and AFS implications by adopting fair values under the FVO hedged instrument.

    Derecognition of financial assets

    • IAS 39: It is possible, under restrictive guidelines, to derecognise part of an a financial instrument and no "isolation in bankruptcy" test is required.
    • FAS 133: Derecognise financial instruments when transferor has surrendered control in part or in whole. An isolation bankruptcy test is required.
    • Status: This inconsistency in the two standards will probably be resolved in future amendments.    

    Hedging foreign currency risk in a held-to-maturity investment

    • IAS 39: Can qualify for hedge accounting for FX risk but not cash flow or fair value risk.
    • FAS 133: Cannot qualify for hedge accounting.

    IAS 39 Hedging foreign currency risk in a firm commitment to acquire a business in a business combination

    • IAS 39: Can qualify for hedge accounting.
    • FAS 133: Cannot qualify for hedge accounting.

    Assuming perfect effectiveness of a hedge if critical terms match

    • IAS 39: Hedge effectiveness must always be tested in order to qualify for hedge accounting.
    • FAS 133: The “Shortcut Method” is allowed for interest rate swaps.
    • Implications: This is an important difference that will probably become more political due to pressures from international bankers.

    Use of "basis adjustment"

    • IAS 39:
      Fair value hedge: Basis is adjusted when the hedge expires or is dedesignated.
      Cash flow hedge: Basis is adjusted when the hedge expires or is dedesignated.

    • FAS 133:
      Fair value hedge: Basis is adjusted when the hedged item is sold or otherwise utilized in operations such as using raw material in production.[2]
      Cash flow hedge of a transaction resulting in an asset or liability: OCI or other hedge accounting equity amount remains in equity and is reclassified into earnings when the earnings cycle is completed such as when inventory is sold rather than purchased or when inventory is used in the production process.[3]
    • Implication: This is am important difference that needs to be resolved. The FAS 133 approach, in our viewpoint, is unnecessarily complicated.

    IAS 39 Macro hedging

    • IAS 39: Allows hedge accounting for portfolios having assets and/or liabilities with different maturity dates.
    • FAS 133: Hedge accounting treatment is prohibited for portfolios that are not homogeneous in virtually all major respects.

    Implications: This is pure theory pitched against practicality, politics, and how industry hedges portfolios. It is a very sore point for companies having lots and lots of items in portfolios that make it impractical to hedge each item separately.

    Bob Jensen

    January 21, 2009 reply from Neal Hannon [nhannon@GMAIL.COM]

    Hi Tom,
    You might want to check out my wiki on IFRS, located at   i hope that you and all AECM interested parties will join the website and contribute to our joint learning.
    Roger Debreceny pointed out to me that Hong Kong has adopted IFRS with no exceptions from IFRS as published by the IASC and the IASB.  Although they have changed the numbering a bit, the regulations are word for word and available for free at their website.  See the preface to the material for copyright information. 
    Additionally, the 2008 IFRS XBRL taxonomy is available for free download from  A handy viewer is located here:  Since the IFRS taxonomy follows the bound volumn regualtions paragraph by paragraph, the viewer is an excellent way for discovering by topic treatment of accounting issues in IFRS.  The viewer exposes a presentation view, a calculation view and a item view.  Also included is a handy look-up tool that students could easily use.
    I think these online tools and the ones already mentioned create a wealth of material for bringing IFRS into ANY level accounting course.  Anyone want to help documenting this idea?

    January 21, 2009 reply from Bob Jensen

    Hi Neal,

    Since Paul Pacter resides in Hong Kong but is still a key player in the IASB, perhaps he will enlighten us about whether we can count on this Hong Kong freebie to continue.

    Thank you for pointing out this Hong Kong Website that has IFRS content available for free.

    I’m inclined to think that the free public access to Hong Kong Volume II
    (  ) is a Website oversight since the Master Volume is only available to members of the Hong Kong CPA Institute. Now that information is leaking out about this Volume II freebie to the world it’s a question of how long this can remain free to the world.

    What we are testing here is an efficient markets hypothesis. If the IASB is dependent upon revenue from sales of its standards and interpretations it can hardly allow any Web server to offer up free content that is identically verbatim with content that is not free from the IASB (aside from slight and obvious changes in numbering). I guess the same can be said for the currently free 2008 IFRS XBRL available from the IASB itself.

    It would be great for academe if Hong Kong and the IASB continue these backdoor freebie alternatives, but I would not count on it for your students. Many college libraries either do or will soon subscribe to Comperio from PwC. This is allows faculty and students to have free online access to FASB Standards, IASB Standards, and a wealth of other database information with the powerful Comperio search engine ---
    But Comperio is not cheap. Perhaps an argument can be made with campus librarians that Comperio has become more essential in the period of transition from U.S. GAAP to IFRS since students must worry about both sets of standards during the transition period and Comperio is very helpful in this regard.

    But who can argue with a Hong Kong freebie as long as the IASB allows this leakage to the world?

    Bob Jensen

    January 22, 2009 message from Patricia Walters [patricia@DISCLOSUREANALYTICS.COM]

    IFRS standards (usually referred to as the "bound volume") are only available for a fee because sales of publications is one of the IASB's primary revenue streams.

    That said, academics can get an on-line subscription to the IASB (ability to download the standards, etc) for (the dues fee of ) $25 if you join the IAAER and your students can get a subscription for their dues fee of only $20. 

    This is a great deal.


    January 22, 2009 reply from Dick van Offeren [dvanofferen@GMAIL.COM]

    The IAAER-fee is worth every single penny.

    In the Netherlands we teach local and IASB-rules. IFRS is obligatory only for consolidated annual reports of listed companies. Besides IFRS we have the commercial code and local Standards for non-listed companies and parent companies statements only. This hodgepodge of sometimes conflicting standards makes teaching financial accounting and reporting a great challenge. However, it makes clear that financial accounting is a professional activity where professional judgements are to be made. There is no single mechanical rule that can be applied in all cases.

    In my view the accounting profession can only reach a higher level when prominent accounting scholars lead the way.

    I really like this discussion and this (AECM) listserv.


    Dick van Offeren
    Leiden University the Netherlands

    January 21, 2009 reply from David A E Raggay [david.raggay@IFRS-CONSULTANTS.COM]

    I am obviously not European, but I know a little bit about what has been happening around the world.

    The ACCA, a body that qualifies accountants, primarily in Europe, Asia and the Caribbean has for some years now, allowed candidates to focus in their exams, on the IFRSs. The texts produced for the exams are therefore, IFRS-friendly. Following is a link to the site of one learning material provider:

    The following should also be useful.

    From Paul Pacter’s website: IAS Plus

    “Applying International Financial Reporting Standards, published in December 2006 by John Wiley and Sons (Australia). The focus of this 1,236-page text is on the interpretation, analysis, illustration, and application of IFRSs. The textbook has been written for intermediate and advanced financial reporting courses, at both undergraduate and postgraduate level, and aligns with the knowledge expectations of the accounting profession. Paul's co-authors are Keith Alfredson, former chairman of the Australian Accounting Standards Board (AASB); Ruth Picker, IFRIC member and a technical partner of Ernst & Young; Ken Leo and Jeannie Radford, both of Curtin University of Technology; and Victoria Wise of Victoria University. Here is the Book's Home Page, for more information and on-line purchasing. Or, for international orders, email 

    From David Cairns website,



    (ISBN 0273679007)

    Full disclosure: I know and speak to both Paul Pacter and David Cairns but am in no way associated with them or their publications. I do, however, recommend these publications.

    With Kind Regards,

    David Raggay
    Managing Principal
    IFRS Consultants
    Offices: 625 Link Road, Lange Park Chaguanas, Trinidad, W.I.
       &  67 Tragarete Road, Port of Spain Trinidad, W.I.

    Phones:  (868)-622-2217; (868)-672-7338
    Fax:       (868)-672-7338
    Mobile:   (868)-739-9500



    Bob Jensen's threads on IFRS are at

    What costs do accounting professors fail to factor in when teaching lease versus buy decisions?

    Jensen Comment
    To the extent that lessees are likely to underspend on maintenance and, thereby, lower ultimate resale value, the lessors probably factor this in when contracting the amount of lease payments. Hence there is implied accounting for this when teaching lease versus buy analysis for decision makers. However, I've not heard that accounting professors factor in the costs of lessees having higher accident rates and other problems.

    Link forwarded by Jim Mahar
    "Moral Hazard in Leasing Contracts:  Evidence from the New York City Taxi Industry," by Henry S. Schneider, SSRN, November 2008 ---

    In this study, I investigate the effects of moral hazard in leasing contracts by examining the driving outcomes of all long-term lessees and owner-operators of New York City taxis. I find that moral hazard explains a sizable fraction of lessees' accidents, driving violations, and vehicle inspection failures, and erodes a moderate fraction of industry income. To address the possibility of endogenous contract choice, I conduct an instrumental variables analysis on the cross-section of all drivers, and a panel-data analysis on a subset of drivers who switched from leasing to owning.

    ...evidence about the leasing moral hazard by examining the New York City taxi industry, which is split between taxis operated exclusively by lessees and taxis with owner-drivers. Lessees have significantly worse driving outcomes than owner drivers:

    In 2005, long-term lessees experienced 62 per cent more accidents and 64 percent more driving violations per mile than owner-drivers, and operated taxis that failed vehicle emissions and safety inspections at a 67 percent higher rate. Moral hazard is an obvious candidate to explain these differences...contracting over driving outcomes instead of actions also faces obstacles since taxis are typically operated by multiple drivers, which prevents some driving outcomes (e.g., vehicle mechanical failures) from being matched to individual drivers....

    Continued in article

    Has Chrysler committed fraud with channel stuffing revenue recognition or is this merely a happenstance of the economic crisis?

    From The Wall Street Journal Accounting Weekly Review on January 23, 2009

    Inventory Traffic Jam Hits Chrysler
    by Kate Linebaugh
    The Wall Street Journal

    Jan 12, 2009
    Click here to view the full article on

    TOPICS: Channel Stuffing, Financial Accounting, Managerial Accounting

    SUMMARY: Chrysler LLC's "...dealers are loaded with inventory and aren't ordering new vehicles....Chrysler's situation is the most extreme example of an inventory glut plaguing all auto makers as a result of the slide in auto sales at the end of 2008...their lowest level in 25 years."

    CLASSROOM APPLICATION: The article notes that Chrysler recognizes revenue upon order of vehicles by a dealer allowing it to be used to discuss issues in revenue recognition and channel stuffing. The article also uses several inventory level ratios.

    1. (Introductory) Describe the "inventory traffic jam" now faced by Chrysler. In your answer, define the term "channel stuffing" and comment on whether it is a concern in the scenario facing Chrysler.

    2. (Advanced) "An auto maker books sales when vehicles are shipped from its plants to its dealers...." Are you surprised at this timing for revenue recognition by Chrysler and other auto makers? What are the possible concerns with this practice?

    3. (Introductory) AutoNation Inc."...estimates that 3.2 million vehicles are now sitting on dealer lots across the country." Is this number large or small? It is relative to what comparisons?

    4. (Advanced) Define the average sales period ratio. How is this ratio used in analysis for the article? Be sure to describe all the comparisons made with the ratio.

    5. (Introductory) Why does Chrysler have a limited time period for working through these inventory levels? How does that situation compare to other auto makers?

    Reviewed By: Judy Beckman, University of Rhode Island

    "Inventory Traffic Jam Hits Chrysler: With Sales Down Sharply, Dealers Aren't Ordering New Cars Despite the Frail Auto Maker's Requests," by Kate Linebaugh, The Wall Street Journal, January 12, 2009 ---

    After a deep slide in sales in the fourth quarter, Chrysler LLC now faces a new obstacle in its battle to survive: Many dealers are loaded with inventory and aren't ordering new vehicles.

    Associated Press Unsold 2008 cars at a Chrysler/Jeep lot in Golden, Colo., last month. Take Bill Rosado, owner of a Chrysler-Dodge-Jeep dealership in Milford, Pa. He says he is resisting the company's requests to add more stock to his already-crowded lot.

    "We're not ordering any cars in spite of the pressure they give us. We are going to sit tight with what we have," Mr. Rosado said. "We don't see any peak coming up where all of a sudden Chryslers are going to be desired."

    Chrysler's financial troubles compound his concerns. Four months ago, Mr. Rosado had to close a Dodge store in Wilkes-Barre, Pa., after sales slowed, and he is still waiting for payment from Chrysler for parts that he returned.

    Detroit Auto Show Follow the latest news and see photos of the concept cars and new models unveiled at the Detroit show at the Auto Industry Tracker.

    Journal Community Subscribers can join the All Things Autos group in Journal Community and discuss the 2009 Detroit Auto Show.

    Auto Industry News"They are so behind paying us," he said. "We're all very cash-strapped at this point. So to build up additional receivables is certainly not attractive to us."

    An auto maker books sales when vehicles are shipped from its plants to its dealers, so a slowdown in orders reduces a car company's revenue.

    Chrysler was nearly out of money last month before it got $4 billion in emergency loans from Washington. During the next few months, the company needs to find a way to keep revenue coming in as it scrambles to slash costs. By March, Chrysler has to show the U.S. Treasury Department it is viable as an independent company, or it could be required to pay back the money or be denied further loans.

    At the North American International Auto Show in Detroit, Chrysler Chief Executive Robert Nardelli acknowledged the company's cash reserves are dwindling. Chrysler ended 2008 with $2 billion in cash, he told reporters, compared with $11.7 billion in June. The company's cash holdings will hit a low point this month, he added.

    He added that Chrysler is expecting to get an additional $3 billion in government loans, and said Chrysler doesn't expect a rebound in the market during the first quarter. Chrysler, a private company controlled by private-equity group Cerberus Capital Management LP, expects an annualized selling rate of 10.6 million vehicles in the quarter, in line with the depressed levels of the past few months.

    Chrysler's situation is the most extreme example of an inventory glut plaguing all auto makers as a result of the slide in auto sales at the end of 2008.

    Continued in article

    January 23, 2009 reply from Saeed Roohani [sroohani@COX.NET]

    If dealers actually purchase and own those cars as they arrive at the dealership, is there still revenue recognition issue for Chrysler? Does anyone know terms/agreements between auto makers and their dealers? I am due for a new car and looking for a good deal.

    Saeed R.

    January 23, 2009 reply from Bob Jensen

    Most automobile dealers buy and finance their own inventories --- 
    The actual “dealer cost” is a very elusive number.

    In channel stuffing, the “customers” buy the merchandise and title is passed to the customer with some type of understanding (possibly under the table) that sales can be reversed under certain conditions. In the tobacco industry where channel stuffing was once rampant, tobacco products were sold back when the unsold retail tobacco inventory commenced to get ”stale” (which mostly happened about two months after the tobacco company closed its books) --- 

    In the genuine channel stuffing frauds, at the end-of-the-accounting-year, suppliers load retailers up with more product than the retailers even want. Sometimes the merchandise is never even sent to the retailers who have title to the unshipped inventory and have not yet paid for their “purchases.” In the case of Chrysler, I think the vehicles are now sitting in dealer lots. But shipment in and of itself does not preclude channel stuffing revenue recognition fraud.

    PS I looked into buying a new car and found out that the deals are not as good as they are hyped by dealers, except maybe in Belgium --- 
    I’ve seen similar two-for-one used car dealer advertisements in the U.S., but so far I don’t see any such deals in the U.S. for new cars.

    Dealers have always tried to lure buyers with phony discounts from the supposed Blue Book prices, e.g. claims that you’ve buying the vehicle at the dealer’s cost --- yeah right! One thing that’s killing American-car dealers at the moment is that foreign-car dealers, unlike American-car dealers at the moment, can still offer pretty good lease deals for buyers who don’t put a large number of miles on a car each year. My son got a heck of a good lease deal near the end of the model year (on a Nissan). But I decided to spend a couple of thousand on my aging Jeep.

    I’ve always considered new cars a waste of money, but then I don’t put a whole lot of miles on my cars. One is a 1989 Cad for summer and the other is a 1999 Jeep for winter. In New Hampshire we have two seasons --- August and Winter.

    Bob Jensen

    Bob Jensen's threads on channel stuffing revenue recognition fraud are at

    Closely related to channel stuffing auditing concerns are those so-called bill and hold frauds ---

    How should revenues known to be fraudulent (e.g., click frauds) be reported and audited?

    Click Fraud --- fraud

    "Report: Click Fraud At Record High," by Jason Kincaid, via The Washington Post, January 27, 2009 ---

    17.1% of all clickthroughs on web advertising are the result of  click fraud - the act of clicking on a web ad to artificially increase its click-through rate - according to the latest report from Click Forensics, a company that specializes in monitoring and preventing internet crime. The level of clickfraud is the highest the company has seen since it started monitoring for it in 2006, dashing our hopes that it might hold steady in 2008. The company recorded a rate of 16.3% in Q1 2008.

    Also alarming is the fact that over 30% of click fraud is now coming from automated bots - a 14% increase from last quarter and the highest rate Click Forensics has seen since it started collecting data. Click fraud for ads on content networks like Google AdSense and Yahoo Publisher Network was up to 28.2% from 27.1% last quarter, though that figure has decreased since Q4 2007, when it was at 28.3%. Outside of the US, Click Forensics reports that the most click fraud came from Canada (which contributed 7.4%), Germany (3%), and China (2.3%).

    Click Forensics also notes that it has seen a reemergence with some old-hat tricks, like link farms. The company speculates that the increase may be tied to the poor economy, which has spurred a rise in activity like phishing and other cybercrime.

    January 29, 2009 reply from Jagdish Gangolly [gangolly@CSC.ALBANY.EDU]

    In a click fraud situation there are three parties:
    1. The search engine company
    2. The advertiser
    3. The hacker (fraudster)
    There are two situations: 

    a. Collusion between 2 and 3
    b. There is no collusion between 2 and 3. Here there are two possibilities:
    (a) the hack is a prank, 
    (b) hacker is a competitor who wants to clobber the advertiser's budget
    In either case a or b, a crime may have been committed, since click fraud is a felony in many states.
    When there is click fraud, the revenue of the search company is overstated,
    and expenses of advertiser is also overstated. In addition, there might be a
    contingent liability due to the fraud for the advertiser (and/or the hacker).
    Overstatements make sense only if the contingency materialises.
    That being the case, as I see it, there is no revenue recognition issue
    here. The revenue that has already been recognised here is a result
    of an executed transaction.
    The only issue is the disclosure (or perhaps booking of it under GAAP)
    if the contingency, and the GAAP there is fairly well established.
    Am I missing something?
    Jagdish Gangolly
    Department of Informatics, College of Computing & Information
    State University of New York at Albany
    1400 Washington Avenue, Albany NY 12222
    Phone: 518-442-4949


    Bob Jensen's threads on E-commerce are at

    Bob Jensen's threads on revenue accounting fraud are at

    What recent 3-2 FASB vote riles the feathers of Tom Selling with innuendos that the banking industry and large accounting firms had too much influence on a vote that was not in the best interests of accounting transparency for investors?

    A "Who Done It?"
    "FSP EITF 99-20-1: Dissenting Board Members Hit the Nail on the Head," by Tom Selling, The Accounting Onion, January 14, 2009 ---
    Jensen Comment
    I perform the despicable deed of (almost) revealing the ending of his mystery to those who've not yet read the mystery. What must our students think?

    About Those Brave Dissenters

    And, who were those masked men (or woman)? If I give you a list of the current FASB members along with a brief description of their backgrounds, I'm betting you can guess correctly, even without knowing anything else about them:

    * Robert Herz -- former ...

    * Thomas Linsmeier -- former ...

    * Leslie Seidman -- former ...

    * Marc Siegel -- a recognized ...

    * Lawrence Smith -- former ...

    They are X and Y, of course -- the only two who did not spend the bulk of their careers serving corporate clients. And incidentally, they are the two most recent additions to the FASB.

    The likes of X and Y give me some hope for the future of standard setting following the second major financial reporting crisis of the decade. If we could somehow get just one more on the board like them, the SEC's recommendations to the FASB can become a reality long before the IASB gets its act together.

    January 17, 2009 reply from Dennis Beresford [dberesfo@TERRY.UGA.EDU]

    Like most accounting issues, reasonable people can disagree on the best accounting for this situation. For example, I refer readers to comment letter 7 on this FASB project written by yours truly. The letter agrees with the majority FASB position and further explains why the current "other than temporary impairment" model ought to be reconsidered by the FASB. The SEC staff took a similar position in its recent report on fair value accounting.

    Not to disparage Tom's well considered views on this matter, but I would also observe that those disagreeing with the output of the process might have more influence on the process by expressing their views directly to the FASB or other standard setting body.

    Denny Beresford

    January 18, 2009 reply from Bob Jensen

    I do understand that the FASB is well intended, but I did hate to see it reduce such power to three people no matter what the issue.

    I think where I agree with Tom is the strong wording of the two that dissented this time.

    January 18, 2009 reply from Dennis Beresford [dberesfo@TERRY.UGA.EDU]


    You've raised two separate issues:

    1 - Whether new standards should require a larger number of board members or a higher number of votes before becoming effective.

    2 - Whether the dissenters present more compelling arguments (in your view) for their position than do the assenters for the final position taken by the FASB.

    As you know, the size of the FASB was reduced to five members last year after having been comprised of seven members from the beginning of the Board. The FAF Trustees made this change after due process and there were arguments for and against. I was in favor of the change primarily because it allows the Board to be more efficient and reach conclusions more quickly rather than the past practice of working on some issues "forever." I also note that, with only five members, the present members from the user and academic community have more influence (2 of 5 votes) than they did under the old system (2 of 7 votes).

    The voting requirement has changed several times - majority vs. super majority. I served under both regimes and don't believe that it made much difference. In almost all cases I can remember, the Board would have acted on a final standard regardless of the voting requirement. The bare majority rule just allowed one more member to get on his/her soapbox and express a personal view that often didn't affect the overall conclusion but rather one or more of the technical details.

    So my question to you and others is should the Trustees reconsider the composition of the Board to change the size again, change the voting requirement again, or change the composition of the Board by choosing members with different backgrounds? I know there has been a fair amount of research on the effect of voting requirements but I'm not aware of any such research that presents a compelling reason for one approach or the other. The size of the Board is a new development and, again, I'm sure there are research opportunities available. And, of course, individuals can always weigh in with their personal opinions on these matters regardless of supporting research.

    On the second point above about whose opinions should prevail, that seems to be the purpose of a standard setting process that has been thoroughly considered and agreed to by those with interest in the process. In other words, once interested parties have bought into the idea that having standards is likely to improve the quality of financial reporting and that the system for developing those standards is reasonable, then those parties should be willing to accept the results of the system. I'm a pragmatist and always felt that the financial markets were better served by having some accounting standards even if those standards aren't perfect (and who can judge that?). Thus, I only dissented a couple of times during my time as Chairman. And even in those cases I thought it was better that the Board issued a new standard than not, even if I would have preferred a different approach. Since leaving the Board over 11 years ago I have continued to write comment letters because I am passionate about financial accounting and have personal views on most of the topics. Often I've disagreed with the Board but I'm happy to have at least had the chance to participate and I can cite at least a few cases where changes were made as a result of my (and others') comments on a particular issue.

    I've always been surprised that so few academics participated in the FASB's process and I wrote about that at least a couple of times while at the Board. And the situation is actually a bit better these days as the AAA financial reporting committee and some individual professors do contribute. But there is plenty of room for further improvement.

    Sorry for getting a little carried away on this. I need to get back to my weekend reading.

    Denny Beresford

    January 19, 2009 reply from Tom Selling [tom.selling@GROVESITE.COM]

    Hi, Denny:

    I hope I am not interrupting your reading with this email. But, I really, really want to respond to some of your points.

    Before I do that, however, and speaking of reading, I did finally finish Alice Schroeder's 800-page authorized biography of Warren Buffet. It was rather long, but quite enjoyable throughout – in large part because it was so well-written. I hope to have more to say about it in a blog post coming soon.

    Coincidentally, I read Katharine Graham's (“Personal History") memoirs about 10 years ago. Graham was the publisher of the Washington Post (Ben Bradlee, Woodward, Bernstein, Pentagon papers, etc.), and was a long time and close friend of Buffet. I would highly recommend her autobiography as well for both enjoyable reading and her perspective on the politics and "great personalities" of her time.

    Also, more or less by coincidence, the book I read after the Buffett biography was "Outliers: The Story of Success," by Malcolm Gladwell. I read Gladwell's previous book, "Blink", and found it to be interesting but not compelling. However, "Outliers" is an absolute must-read for educators who want to understand more about what makes their students tick. I think so highly of the book that, unusual for me, I plan to re-read it. And just this weekend, I started Paul Krugman's book, "The Return of Depression Economics and the Crisis of 2008." Already, it looks like it will be an easy and informative read.

    As to your comments pertaining to the size and processes of the FASB, here are my reactions:

    · So far, it does not appear that the Board has become more efficient after having been pared down from seven to five members. Perhaps the most egregious case is the financial statement presentation project which I wrote about recently on my blog. The Board could have resolved matters quickly but instead chose to combine forces with a 14-member IASB with the result being, among other things, that we still don't have a direct method statement of cash flows. We should also be asking why the amendments to FAS 140 and FIN 46R are taking so long. And, how come a five-member board has not fixed the blatantly bad effects of pension and OPEB accounting on the income statement?

    · While it may appear that the two members from the user and academic communities have more influence, I don't believe it to be the reality. Greater proportion representation does not mean more influence. The chair now exclusively controls the agenda. FSP EITF 99-20-1 provides a strong indication that he or she who controls the agenda now has a much greater influence on outcomes. I highly doubt that Bob Herz would have put this project on the agenda, and indeed on a fast track, unless he already had two other board members in his pocket. Notwithstanding any arguments as to the quality and appropriateness of the FSP, resistance from the other board members and dissenting commenters was futile; the FSP was a done deal after that.

    · Considering the views of "those with interests in the process" is not an appropriate or necessary role of the FASB. While there may be many stakeholders in the FASB’s decisions, the only voices that should count in the FASB's deliberations are those advocating the interests of investors. I believe the SEC has finally acknowledged this unequivocally in its recent report to Congress. So, why do we have former auditors and preparers on the FASB? It would seem that some believe they are there to represent the interests of auditors and preparers, but I believe they are there only to provide technical and practical perspectives. OTTI accounting does not benefit investors, and the changes made to OTTI accounting by the FSP also did not benefit investors.

    · As to why so few academics participate in the FASB's process, I can provide three possible reasons pretty much off the top of my head. First, as always, is incentives, or in this case, lack thereof. Comment letters to the FASB or the SEC do not count as "publications" by academic administrators. Second, academics prefer models to politics; no matter how valid a point and academic may have to make, unless you're a big name advocating the majority position, the impact of your painstakingly written letter will amount to, at best, just a tick mark in the "pro" or "con" column. (And, by the way, I KNOW, that Board members read my blog; I doubt if the same would be true of my comment letters.) Third, disincentives. The large accounting firms are not appreciative of contentious comments; why should one go through all the effort with the only certain outcome being a bite to a hand that could feed you. Abe Briloff was ostracized, and I know of at least one other case where a local partner of a Big Four firm complained to a university about opinions publicly expressed by one of its faculty.



    Spinning Debt Into Earnings With the Wave of a Fair Value Accounting Wand
    "Euro banks' £169bn in accounting alchemy," by: Lindsey White, Financial Times Advisor, January 19, 2009 --- Click Here

    European banks conjured more than £169bn of debt into profit on their balance sheets in the third quarter of 2008, a leaked report shows.

    Money Managementhas gained exclusive access to a report from JP Morgan, surveying 43 western European banks.

    It shows an exact breakdown of which banks increased their asset values simply by reclassifying their holdings.

    Germany is Europe's largest economy, and was the first European nation to announce that it was in recession in 2008. Based on an exchange rate of 1 Euro to £0.89, its two largest banks, Deutsche Bank and Commerzbank, reclassified £22.2bn and £39bn respectively.

    At the same exchange rate, several major UK banks also made the switch. RBS reclassified £27.1bn of assets, HBOS reclassified £13.7bn, HSBC reclassified £7.6bn and Lloyds TSB changed £3.2bn. A number of Nordic and Italian banks also switched debts to become profits.

    Banks are allowed to rearrange these staggering debts thanks to an October 2008 amendment to an International Accounting Standards law, IAS 39. Speaking to MM, IAS board member Philippe Danjou said that the amendment was passed in "record time".

    The board received special permission to bypass traditional due process, ushering through the amendment in a matter of days, in order to allow banks to apply the changes to their third quarter reports.

    However, it is unclear how much choice the board actually had in the matter.

    IASB chairman Sir David Tweedie was outspoken in his opposition to the change, publicly admitting that he nearly resigned as a result of pressure from European politicians to change the rules.

    Danjou also admitted that he had mixed views on the change, telling MM, "This is not the best way to proceed. We had to do it. It's a one off event. I'd prefer to go back to normal due process."

    While he was reluctant to point fingers at specific politicians, Danjou admitted that Europe's "largest economies" were the most insistent on passing the change.

    As at December 2008, no major French, Portuguese, Spanish, Swiss or Irish banks had used the amendment.

    BNP Paribas, Credit Agricole, Danske Bank, Natixis and Societe Generale were expected to reclassify their assets in the fourth quarter of 2008.

    The amendment was passed to shore up bank balance sheets and restore confidence in the midst of the current credit crunch. But it remains to be seen whether reclassifying major debts is an effective tactic.

    "Because the market situation was unique, events from the outside world forced us to react quickly," said Danjou. "We do not wish to do it too often. It's risky, and things can get missed."

    Bob Jensen's threads on fair value accounting are at

    Are many share repurchases motivated more out of executive greed than shareholder benefits?
    In accounting classes, it might be stressed that increased executive compensation is one of the incentives of buying treasury stock.

    "Controlled by the corporations:  Before we can deal with a financial crisis manufactured in boardrooms, we must curb corporate power over our legislators," by Prem Sikka, The Guardian, January 8, 2008 ---

    Repurchase of shares has the potential to enable company executives to make huge profits. A simple example would help to illustrate the point. Suppose a company has earnings of £100 and 100 shares. Now the earnings per share are £1. Suppose the company decides to use its surplus cash to buy back 50 shares. After repurchase, it has only 50 shares in circulation. So the earnings per share (EPS) are now £2. The significance of this is that many executive remuneration schemes link profits to EPS. Without creating an iota of additional wealth, directors can increase earnings per share, their bonuses and share options. The company pays out real cash to buy back its shares. Such cash could have been used to bolster capital, liquidity or research and development, or could even have been put away for a rainy day. In some cases, companies have taken on extra debts to buy back their own shares, which opens them up to higher interest charges and vulnerability. Of course, there is the forlorn hope that the reduction in the number of shares might make the remaining shares somehow more marketable, or that the repurchase of shares might assure markets and push up the share price.

    One US
    study estimated that about 100 companies a month were buying back their shares. Nearer home, Alliance & Leicester announced a £300m share buyback at nearly £12 a share. Soon afterwards it was rescued by Banco Santander at just £3.17 a share. HBOS had a £750m share buyback programme and has now been bailed out by the UK taxpayer. Barclays bought back 2m shares at 451p. In recent weeks, its share price has been about a third of that and the bank had to raise additional money from Middle East investors. Northern Rock also has a history of buying back its shares and had to be bailed out by the taxpayer as well.

    Continued in article

    Bob Jensen "Rotten to the Core" threads are at

    Bob Jensen's Fraud Updates ---

    "Stewart Enterprises Consents to Order Regarding Revenue Recognition Policies," Securities Law Prof Blog, December 30, 2008 ---

    On December 29, the SEC issued an Order Instituting Administrative Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings and Imposing a Cease-and-Desist Order (Order) against Stewart Enterprises, Inc. (Stewart), Kenneth C. Budde, CPA (Budde) and Michael G. Hymel, CPA (Hymel).  The Order finds that, from 2001 through 2005, Stewart, the second largest publicly traded provider of death care services in the United States, and Budde, Stewart's former chief financial officer and chief executive officer, and Hymel, Stewart's former chief accounting officer, made repeated public filings with the Commission that materially misrepresented Stewart's revenue recognition policies and methodologies with respect to the sale of cemetery merchandise made prior to the need for a funeral (pre-need cemetery merchandise). Stewart misleadingly represented that it utilized a straightforward delivery method to recognize revenue for the sale of pre-need cemetery merchandise, by which, upon delivery, Stewart would recognize as revenue the full contract amount paid by the customer. However, Stewart could not actually identify the pre-need contract amount and instead created an estimate of the amount of revenue to be recognized. Stewart's failure to disclose this methodology of estimating revenues in its public filings with the Commission rendered its financial statements not in conformity with Generally Accepted Accounting Principles. Only when required to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and informed by its outside auditor that it would no longer issue unqualified audit opinions if this estimated methodology continued to be used did Stewart finally shift to a revenue recognition system no longer reliant on estimates. Errors arising from the assumptions underlying Stewart's methodology for estimating revenues resulted in an overstatement of net revenue from 2001 through 2005 by more than $72 million, overstated annual net earnings before taxes during this period by amounts ranging from 10.76% to 38.76%, and were the primary basis for a subsequent material restatement of earnings.

    Based on the above, the Order ordered Stewart to cease and desist from committing or causing any violations and any future violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder; ordered Budde to cease and desist from committing or causing any violations and any future violations of Exchange Act Rule 13a-14 and cease and desist from causing any violations and any future violations of Section 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder; and ordered Hymel to cease and desist from causing any violations and any future violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. Stewart, Budde and Hymel consented to the issuance of the Order without admitting or denying any of the findings contained therein. In the Matter of Stewart Enterprises, Inc., Kenneth C. Budde, CPA, and Michael G. Hymel, CPA.

    In December 2008 the FASB and the IASB announced a new joint project on cleaning up much of mess in revenue recognition standards in IFRS ---

    Bob Jensen's threads on issues in revenue recognition and timing ---

    Is revenue recognition really as simple as the IASB is trying to make us believe?

    From  IAS Plus on January 29, 2009

    Deloitte's IFRS Global Office has published an IAS Plus Update Newsletter Discussion Paper Proposes New Basis for Revenue Recognition (PDF 117k). On 19 December 2008, the IASB and FASB jointly published a discussion paper (DP) that proposes a single, contract-based revenue recognition model. The model would apply broadly to contracts with customers, although contracts in the areas of financial instruments, insurance, and leasing may be excluded. Under the proposed model, revenue would be recognised on the basis of increases in an entity's net position in a contract with a customer.
    With regard to recognition of revenue, the DP states:
    In the proposed model, revenue is recognised when a contract asset increases or a contract liability decreases (or some combination of the two). That occurs when an entity performs by satisfying an obligation in the contract.
    With regard to measurement of revenue, the DP states:
    The boards propose that performance obligations initially should be measured at the transaction price – the customer's promised consideration. If a contract comprises more than one performance obligation, an entity would allocate the transaction price to the performance obligations on the basis of the relative stand-alone selling prices of the goods and services underlying those performance obligations.

    Subsequent measurement of the performance obligations should depict the decrease in the entity's obligation to transfer goods and services to the customer. When a performance obligation is satisfied, the amount of revenue recognised is the amount of the transaction price that was allocated to the satisfied performance obligation at contract inception. Consequently, the total amount of revenue that an entity recognises over the life of the contract is equal to the transaction price.

                The download link is

    Jensen Comment
    Revenue recognition is so complicated I don't think this relatively simple standard will prevent many of the revenue recognition abuses and frauds detected in the United States. For example, it still seems to me that we need drill down rules like those in the FASB's EITF rules ---

    I don't see most issues in the above document covered in the IASB's DP, You be the judge!
    I don't see the DP ending many of the abuses documented at 

    "Credit Default Swamp:  The Fed wants to give the blundering rating agencies even more power – this time over derivatives.." The Wall Street Journal, January 3, 2008 ---

    Could the political campaign to blame the financial panic on unregulated derivatives be losing momentum? Let's hope so, because this might save us from making new mistakes in the name of fixing the wrong problems.

    We now know that the predicted disaster for credit default swaps (CDS) following the Lehman Brothers bankruptcy never happened. The government also still hasn't explained how AIG's use of CDS to go long on housing would have destroyed the planet. And now the New York Federal Reserve's effort to regulate the CDS market is mired in a turf war. The Securities and Exchange Commission and the Commodity Futures Trading Commission have backed rival efforts in New York and Chicago.

    But it is the New York Fed proposal that may pose the most immediate threat to taxpayers, because it is designed to include firms on at least one end of 90% of CDS contracts. After announcing its intention to begin by the end of 2008, the New York branch of the central bank is still awaiting approval from the Fed's Board of Governors to launch a central clearinghouse for CDS trades. Credit default swaps are essentially insurance against an organization defaulting on its debt, and they provide a real-time gauge of credit risk. This has proven particularly valuable because the Fed's method of judging risk -- relying on the ratings agencies S&P, Moody's and Fitch -- has been disastrous for investors.

    Under pressure from the New York Fed, nine large CDS dealers -- giants like Goldman Sachs -- agreed to construct a central counterparty, which would backstop and monitor CDS trades. Called The Clearing Corp., it failed to catch on in the marketplace. So the big dealers recently gave an ownership stake to IntercontinentalExchange (ICE). In return, ICE agreed to make this government-created but privately owned institution work.

    ICE has given the venture, now called ICE Trust, operational street cred, but the Fed-imposed architecture should still cause taxpayer concern. That's because it takes the widely dispersed risk in the CDS marketplace and attempts to centralize it in one institution. If not structured correctly, it may reward the participating firms with the weakest balance sheets. For this reason, some of the dealers who have resisted a central counterparty because it threatens their profits may now embrace it as a way to socialize their risks. What's more, if it allows these big Wall Street dealers to build an electronic trading platform on top of the central clearinghouse, the big banks could prevent pesky Internet start-ups from threatening their market share.

    Here's how the New York Fed's central counterparty would change the market: Right now, CDS trades are conducted over-the-counter as private contracts between two parties. They are reported to the Trade Information Warehouse, so the market has some transparency, but nobody is on the hook besides the two parties to the agreement. This provides an incentive for each party to make an informed judgment on whether the counterparty can be relied upon to pay debts. The buyer of credit protection -- who is paying annual premiums for the right to be compensated if a company defaults on its bonds -- has every reason to study the balance sheet of the seller of a CDS contract.

    In the New York Fed's judgment, the recent panic showed there wasn't enough transparency in CDS trades. This claim would have more credibility if the Fed would come clean about AIG. But in any case, the Fed's solution is to force CDS contracts into its central counterparty. There is a virtue here: A particular bank cannot throw out its collateral standards to please one large favored client, because the same standards apply to all participants. The nine large dealers plus perhaps four or five more participating firms would each contribute roughly $100 million to the central counterparty, and they'd have to cough up more money if failures burn through this cash reserve.

    However, this system also introduces new risks, because all participants become liable for the potential failure of the weakest members. How does one appropriately judge the credit risk of a participant? ICE Trust and the Fed haven't released details. Sources tell us that participants will need to have a net worth of at least $1 billion, and, more ominously, that the Fed wants a high rating from a major credit-ratings agency as a crucial test of financial health.

    If regulators learn nothing else from the housing debacle, they should recognize that their system of anointing certain firms to judge credit risk is structurally flawed and immensely expensive for investors. As Columbia's Charles Calomiris has explained on these pages, one reason the Basel II standards for bank capital failed is because they subcontracted risk assessments to the same ratings agencies that slapped AAA on dodgy mortgage paper.

    Unfortunately, the Fed stubbornly refuses to learn this lesson. With its various lending facilities, the Fed continues to demand collateral rated exclusively by S&P, Moody's or Fitch. A rival ratings agency reports that the Fed recently rejected a request from a clearing bank to consider a ratings firm other than the big three.

    No doubt ICE Trust has a strong incentive to monitor counterparty credit risk. Our concern is that the Fed's failed policy on credit ratings will increase risks even further if it is allowed to pollute the $30 trillion CDS market. The credit raters have shown they are usually the last to know if a bank is in trouble, yet under a credit-rating seal of approval such a bank could maintain the illusion that all is well. If you have trouble conceiving of such a scenario, reflect on the history of Enron, Bear Stearns, Lehman, Citigroup, the mortgage market, collateralized-debt obligations, etc. Now try to imagine how long it will take the Fed to commit taxpayer dollars if this central counterparty fails.

    Any plan that seeks to minimize marketplace risks by concentrating them in one institution deserves skepticism. Relying on ratings from the big three to assess these risks would be an outrage.

    "In Plato's cave:  Mathematical models are a powerful way of predicting financial markets. But they are fallible" The Economist, January 24, 2009, pp. 10-14 ---

    ROBERT RUBIN was Bill Clinton’s treasury secretary. He has worked at the top of Goldman Sachs and Citigroup. But he made arguably the single most influential decision of his long career in 1983, when as head of risk arbitrage at Goldman he went to the MIT Sloan School of Management in Cambridge, Massachusetts, to hire an economist called Fischer Black.

    A decade earlier Myron Scholes, Robert Merton and Black had explained how to use share prices to calculate the value of derivatives. The Black-Scholes options-pricing model was more than a piece of geeky mathematics. It was a manifesto, part of a revolution that put an end to the anti-intellectualism of American finance and transformed financial markets from bull rings into today’s quantitative powerhouses. Yet, in a roundabout way, Black’s approach also led to some of the late boom’s most disastrous lapses.

    Derivatives markets are not new, nor are they an exclusively Western phenomenon. Mr Merton has described how Osaka’s Dojima rice market offered forward contracts in the 17th century and organised futures trading by the 18th century. However, the growth of derivatives in the 36 years since Black’s formula was published has taken them from the periphery of financial services to the core.

    In “The Partnership”, a history of Goldman Sachs, Charles Ellis records how the derivatives markets took off. The International Monetary Market opened in 1972; Congress allowed trade in commodity options in 1976; S&P 500 futures launched in 1982, and options on those futures a year later. The Chicago Board Options Exchange traded 911 contracts on April 26th 1973, its first day (and only one month before Black-Scholes appeared in print). In 2007 the CBOE’s volume of contracts reached almost 1 trillion.

    Trading has exploded partly because derivatives are useful. After America came off the gold standard in 1971, businesses wanted a way of protecting themselves against the movements in exchange rates, just as they sought protection against swings in interest rates after Paul Volcker, Mr Greenspan’s predecessor as chairman of the Fed, tackled inflation in the 1980s. Equity options enabled investors to lay off general risk so that they could concentrate on the specific types of corporate risk they wanted to trade.

    The other force behind the explosion in derivatives trading was the combination of mathematics and computing. Before Black-Scholes, option prices had been little more than educated guesses. The new model showed how to work out an option price from the known price-behaviour of a share and a bond. It is as if you had a formula for working out the price of a fruit salad from the prices of the apples and oranges that went into it, explains Emanuel Derman, a physicist who later took Black’s job at Goldman. Confidence in pricing gave buyers and sellers the courage to pile into derivatives. The better that real prices correlate with the unknown option price, the more confidently you can take on any level of risk. “In a thirsty world filled with hydrogen and oxygen,” Mr Derman has written, “someone had finally worked out how to synthesise H2O.”

    Poetry in Brownian motion Black-Scholes is just a model, not a complete description of the world. Every model makes simplifications, but some of the simplifications in Black-Scholes looked as if they would matter. For instance, the maths it uses to describe how share prices move comes from the equations in physics that describe the diffusion of heat. The idea is that share prices follow some gentle random walk away from an equilibrium, rather like motes of dust jiggling around in Brownian motion. In fact, share-price movements are more violent than that.

    Over the years the “quants” have found ways to cope with this—better ways to deal with, as it were, quirks in the prices of fruit and fruit salad. For a start, you can concentrate on the short-run volatility of prices, which in some ways tends to behave more like the Brownian motion that Black imagined. The quants can introduce sudden jumps or tweak their models to match actual share-price movements more closely. Mr Derman, who is now a professor at New York’s Columbia University and a partner at Prisma Capital Partners, a fund of hedge funds, did some of his best-known work modelling what is called the “volatility smile”—an anomaly in options markets that first appeared after the 1987 stockmarket crash when investors would pay extra for protection against another imminent fall in share prices.

    The fixes can make models complex and unwieldy, confusing traders or deterring them from taking up new ideas. There is a constant danger that behaviour in the market changes, as it did after the 1987 crash, or that liquidity suddenly dries up, as it has done in this crisis. But the quants are usually pragmatic enough to cope. They are not seeking truth or elegance, just a way of capturing the behaviour of a market and of linking an unobservable or illiquid price to prices in traded markets. The limit to the quants’ tinkering has been not mathematics but the speed, power and cost of computers. Nobody has any use for a model which takes so long to compute that the markets leave it behind.

    The idea behind quantitative finance is to manage risk. You make money by taking known risks and hedging the rest. And in this crash foreign-exchange, interest-rate and equity derivatives models have so far behaved roughly as they should.

    A muddle of mortgages Yet the idea behind modelling got garbled when pools of mortgages were bundled up into collateralised-debt obligations (CDOs). The principle is simple enough. Imagine a waterfall of mortgage payments: the AAA investors at the top catch their share, the next in line take their share from what remains, and so on. At the bottom are the “equity investors” who get nothing if people default on their mortgage payments and the money runs out.

    Despite the theory, CDOs were hopeless, at least with hindsight (doesn’t that phrase come easily?). The cash flowing from mortgage payments into a single CDO had to filter up through several layers. Assets were bundled into a pool, securitised, stuffed into a CDO, bits of that plugged into the next CDO and so on and on. Each source of a CDO had interminable pages of its own documentation and conditions, and a typical CDO might receive income from several hundred sources. It was a lawyer’s paradise.

    This baffling complexity could hardly be more different from an equity or an interest rate. It made CDOs impossible to model in anything but the most rudimentary way—all the more so because each one contained a unique combination of underlying assets. Each CDO would be sold on the basis of its own scenario, using central assumptions about the future of interest rates and defaults to “demonstrate” the payouts over, say, the next 30 years. This central scenario would then be “stress-tested” to show that the CDO was robust—though oddly the tests did not include a 20% fall in house prices.

    This was modelling at its most feeble. Derivatives model an unknown price from today’s known market prices. By contrast, modelling from history is dangerous. There was no guarantee that the future would be like the past, if only because the American housing market had never before been buoyed up by a frenzy of CDOs. In any case, there are not enough past housing data to form a rich statistical picture of the market—especially if you decide not to include the 1930s nationwide fall in house prices in your sample.

    Neither could the models take account of falling mortgage-underwriting standards. Mr Rajan of the University of Chicago says academic research suggests mortgage originators, keen to automate their procedures, stopped giving potential borrowers lengthy interviews because they could not easily quantify the firmness of someone’s handshake or the fixity of their gaze. Such things turned out to be better predictors of default than credit scores or loan-to-value ratios, but the investors at the end of a long chain of securities could not monitor lending decisions.

    The issuers of CDOs asked rating agencies to assess their quality. Although the agencies insist that they did a thorough job, a senior quant at a large bank says that the agencies’ models were even less sophisticated than the issuers’. For instance, a BBB tranche in a CDO might pay out in full if the defaults remained below 6%, and not at all once they went above 6.5%. That is an all-or-nothing sort of return, quite different from a BBB corporate bond, say. And yet, because both shared the same BBB rating, they would be modelled in the same way.

    Issuers like to have an edge over the rating agencies. By paying one for rating the CDOs, some may have laid themselves open to a conflict of interest. With help from companies like Codefarm, an outfit from Brighton in Britain that knew the agencies’ models for corporate CDOs, issuers could build securities with any risk profile they chose, including those made up from lower-quality ingredients that would nevertheless win AAA ratings. Codefarm has recently applied for administration.

    There is a saying on Wall Street that the test of a product is whether clients will buy it. Would they have bought into CDOs had it not been for the dazzling performance of the quants in foreign-exchange, interest-rate and equity derivatives? There is every sign that the issuing banks believed their own sales patter. The banks so liked CDOs that they held on to a lot of their own issues, even when the idea behind the business had been to sell them on. They also lent buyers much of the money to bid for CDOs, certain that the securities were a sound investment. With CDOs in deep trouble, the lenders are now suffering.

    Modern finance is supposed to be all about measuring risks, yet corporate and mortgage-backed CDOs were a leap in the dark. According to Mr Derman, with Black-Scholes “you know what you are assuming when you use the model, and you know exactly what has been swept out of view, and hence you can think clearly about what you may have overlooked.” By contrast, with CDOs “you don’t quite know what you are ignoring, so you don’t know how to adjust for its inadequacies.”

    Now that the world has moved far beyond any of the scenarios that the CDO issuers modelled, investors’ quantitative grasp of the payouts has fizzled into blank uncertainty. That makes it hard to put any value on them, driving away possible buyers. The trillion-dollar bet on mortgages has gone disastrously wrong. The hope is that the trillion-dollar bet on companies does not end up that way too.

    Continued in article

    Denny Beresford forwarded the following link. I don't know how long it will be a free download.
    "The Crash: What Went Wrong? How did the most dynamic and sophisticated financial markets in the world come to the brink of collapse? The Washington Post examines how Wall Street innovation outpaced Washington regulation.," The Washington Post, January 2009 ---
    Jensen Comment
    The above site has three links to AIG and what went wrong with their credit default swaps.
    Part 1 "The Beautiful Machine" ---
    Part 2 "A Crack in the System"---
    Part 3 "Downgrades and Downfall"---

    "Everything You Wanted to Know about Credit Default Swaps--but Were Never Told," by Peter J. Wallison, RGE, January 25, 2009 ----
    Click Here 
    Also see


    Bob Jensen's Primer on Derivatives ---
    Also see how AIG and some other Wall Street firms were bailed out of their credit default swaps ---

    Madoff Chasers Dug for Years, to No Avail
    by Kara Scannell
    Jan 05, 2009
    Click here to view the full article on

    TOPICS: Auditing, Fraudulent Financial Reporting, SEC, Securities and Exchange Commission

    SUMMARY: "I think the reality is the [SEC] enforcement program needs some systematic review at this point, and it is not a review which should start with judgments," said, Joel Seligman, president of the University of Rochester, in the related article. "You want to know what went wrong." The main article describes a series of detailed investigations into Madoff investment management practices that failed to uncover the biggest Ponzi scheme in history.

    CLASSROOM APPLICATION: Auditing classes can use the article to discuss fraud investigations versus overall financial statement audits, evidential matter, and the importance of overall financial statement analysis to assess reasonability of reported results.

    1. (Introductory) What auditing expertise is needed by Securities and Exchange Commission staff members to properly perform their functions related to the matter of Bernard L. Madoff Securities Investment LLC?

    2. (Introductory) Author of the lead article Kara Scannell writes that "regulatory gaps abound in the paper trail generated by the SEC's scrutiny of Bernard L. Madoff Investment Securities." What were the regulatory gaps?

    3. (Introductory) What reasonableness test was used by Harry Markopolous to make the assessment that "Madoff Securities is the world's largest Ponzi Scheme," as he wrote in a letter to the SEC. Did the SEC follow up on this accusation?

    4. (Advanced) One accusation by an outsider that the SEC did specifically pursue, according to the article, was to determine whether Mr. Madoff was "front-running" for favored clients. Design an audit test to assess that question, including in your answer a definition of the term.

    5. (Advanced) Review the audit test drafted in answer to question 4. Is it likely that your test would uncover the type of fraud Madoff committed? Why or why not?

    6. (Advanced) What audit steps did the SEC undertake in its review of January 2005 customer accounts, according to the article? What audit steps did they possibly overlook? How might these steps have uncovered fraud?

    7. (Introductory) In 1992, the SEC's enforcement division sued two Florida accountants for selling unregistered investment securities managed by Madoff. "With no investors found to be harmed, the SEC concluded there was no fraud." Why were the investors not shown to be harmed?

    Reviewed By: Judy Beckman, University of Rhode Island

    SEC Nominee to Face Tough Questions at Confirmation Hearing
    by Sarah N. Lynch
    Jan 07, 2009
    Online Exclusive

    "Madoff Chasers Dug for Years, to No Avail:  Regulators Probed at Least 8 Times Over 16 Years; Congress Starts Review of SEC Today," by Kara Scannell, The Wall Street Journal, January 5, 2008 ---

    Bernard L. Madoff Investment Securities LLC was examined at least eight times in 16 years by the Securities and Exchange Commission and other regulators, who often came armed with suspicions.

    SEC officials followed up on emails from a New York hedge fund that described Bernard Madoff's business practices as "highly unusual." The Financial Industry Regulatory Authority, the industry-run watchdog for brokerage firms, reported in 2007 that parts of the firm appeared to have no customers.

    Mr. Madoff was interviewed at least twice by the SEC. But regulators never came close to uncovering the alleged $50 billion Ponzi scheme that investigators now believe began in the 1970s.

    The serial regulatory failures will be on display Monday when Congress holds a hearing to probe why the alleged fraud went undetected. Among the key witnesses is SEC Inspector General David Kotz, who was asked last month by the agency's chairman, Christopher Cox, to investigate the mess.

    The situation is even more awkward because SEC examiners seemed to be looking in the right places, yet still were unable to unmask the alleged scheme. For example, investigators were led astray by concerns that Mr. Madoff, now under house arrest, was placing orders for favored clients ahead of others to get a better price, a practice known as "front running." Front running isn't thought to have played a role in the firm's collapse.

    Concern that the SEC lacks the expertise to keep up with fraudsters is the latest criticism of the agency, which saw the Wall Street investment banks it oversees get pummeled or vanish altogether in 2008. With Congress likely to take a hard look at how to structure oversight of financial markets, the SEC is struggling to maintain its clout.

    The failure to stop Mr. Madoff also is an embarrassment for Mary Schapiro, the Finra chief who has been nominated by President-elect Barack Obama as the next SEC chairman. Finra was involved in several investigations of Mr. Madoff's firm, concluding in 2007 that it violated technical rules and failed to report certain transactions in a timely way.

    Ms. Schapiro declined to comment. Mr. Cox has previously acknowledged mistakes by the SEC. The agency declined to comment.

    Regulatory gaps abound in the paper trail generated by the SEC's scrutiny of Bernard L. Madoff Investment Securities, according to a review of the documents. Many of the details haven't been reported previously.

    For years, Mr. Madoff told regulators he wasn't running an investment-advisory business. By saying he instead managed accounts for hedge funds, Mr. Madoff was able to avoid regular reviews of his advisory business.

    In 1992, Mr. Madoff had a brush with the SEC's enforcement division, which had sued two Florida accountants for selling unregistered securities that paid returns of 13.5% to 20%. The SEC believed at the time it had uncovered a $440 million fraud.

    "We went into this thinking it could be a major catastrophe," Richard Walker, then-chief of the SEC's New York office, told The Wall Street Journal at the time.

    The SEC probe turned up money that had been managed by Mr. Madoff. He said he didn't know the money had been raised illegally.

    With no investors found to be harmed, the SEC concluded there was no fraud. But the scheme indicated Mr. Madoff was managing money on behalf of other people.

    In 1999 and 2000, the SEC sent examiners into Mr. Madoff's firm to review its trading practices. SEC officials worried the firm wasn't properly displaying orders to others in the market, violating a trading rule. In response, Mr. Madoff outlined new procedures to address the findings.

    Continued in article

    A Tale of Four Investors
    Forwarded by Dennis Beresford

    Four investors made different investment decisions 10 years ago.  Investor one was extremely risk averse so he put $1 million in a safe deposit box.  Today he still has $1 million.  Investor two was a bit less risk averse so she bought $1 million of 6% Fanny Mae Preferred.  She put the $15,000 she received in dividends each quarter in a safe deposit box.  After receiving 40 dividends, she recently sold her investment for $20,000 so she now has $620,000 in her safe deposit box.  Investor three was less risk averse so he bought and held a $1 million well diversified U.S. stock portfolio which he recently sold for $1 million, putting the $1 million in his safe deposit box.  Investor four had a friend who knew someone who was able to invest her $1 million with Bernie Madoff.  Like clockwork, she received a $10,000 check each and every month for 120 months.  She cashed all the checks, putting the money in her safe deposit box.  She was outraged to learn that she will no longer receive her monthly checks.  Even worse, she lost all her principal.  She only has $1,200,000 in her safe deposit box. She hopes the government will bail her out.

     Lawrence D. Brown
    J. Mack Robinson Distinguished Professor of Accounting
    Georgia State University
    December 18, 2008

    "Madoff 'Victims' Do Math, Realize They Profited," SmartPros, January 2009 ---

    The many Bernard Madoff investors who withdrew money from their accounts over the years are now wrestling with an ethical and legal quandary. What they thought were profits was likely money stolen from other clients in what prosecutors are calling the largest Ponzi scheme in history. Now, they are confronting the possibility they may have to pay some of it back.

    The issue came to the forefront this week as about 8,000 former Madoff clients began to receive letters inviting them to apply for up to $500,000 in aid from the Securities Investor Protection Corp.

    Lawyers for investors have been warning clients to do some tough math before they apply for any funds set aside for the victims, and figure out whether they were a winner or loser in the scheme.

    Hundreds and maybe thousands of investors in Madoff's funds have been withdrawing money from their accounts for many years. In many cases, those investors have withdrawn far more than their principal investment.

    "I had a call yesterday from a guy who said, 'I've taken out more money then I originally put in, but I still had $1 million left with Madoff. Should I file a $1 million claim?'" said Steven Caruso, a New York attorney specializing in securities and investment fraud.

    "I'm hard-pressed to give advice in that situation," Caruso said.

    Among the options: Get in line with other victims looking for restitution. Keep quiet and hope nobody notices. Return the money. Or hire a lawyer and fight to keep profits that were probably fraudulent.

    No one knows yet how many people will emerge as net winners in the scandal, but the numbers appear to be substantial. Many of Madoff's long-term investors have, over time, cashed out millions of dollars of their supposed profits, which routinely amounted to 11 percent to 15 percent per year.

    Jonathan Levitt, a New Jersey attorney who represents several former Madoff clients, said more than half of the victims who called his office looking for help have turned out to be people whose long-term profits exceeded their principal investment.

    "There are a lot of net winners," he said.

    Asked for an example, Levitt said one caller, whom he declined to name, invested $1.8 million with Madoff more than a decade ago, then cashed out nearly $3 million worth of "profits" as the years went by.

    On paper, he still had $4 million invested with Madoff when the scheme collapsed, but it now looks as if that figure was almost entirely comprised of fictitious profits on investments that were never actually made, leaving his claim to be owed anything unclear.

    Other attorneys report getting similar calls.

    Under federal law, the court-appointed trustee trying to unravel Madoff's business can demand that people who profited from the scheme return some or all of the money.

    These so-called "clawbacks" are generally limited to payouts over the last six years, but could still amount to big bucks for some investors.

    When a hedge fund run by the Bayou Group collapsed and was revealed to be a Ponzi scheme in 2005, the trustee handling the case sought court orders forcing investors to return false profits. Many experts anticipate a similar process in the Madoff case.

    Applying for the aid could give the trustee evidence he needs to initiate a clawback claim. On the other hand, investors who ignore the letter would most likely forfeit any chance of recovering lost funds.

    No matter how they respond, it may only be a matter of time before investors wiped out in the scandal turn on those who unknowingly enjoyed the fruits of the fraud.

    "The sharks are all circling," Caruso said.

    Some hedge funds that had billions of dollars invested with Madoff are already going through years worth of records, trying to figure out which of their investors withdrew more than they put in.

    That data could be used by the fund managers to defend themselves against lawsuits, or go after clients deemed to have profited from the scheme and get them to return the cash.

    The future is equally cloudy for investors who cashed out entirely before Madoff's arrest.

    Continued in article

    All Reported Trades in Madoff's Investment Fund Were Fakes for 28 Years:  How could the "auditors" not be complicit in the Ponzi fraud?
    "BERNIE'S FAKE TRADES REGULATORS: NO TRACE OF MADOFF STOCK BUYS SINCE 1960s," by James Doran, The New York Post, January 16, 2009 ---

    The mystery surrounding Bernard Madoff's alleged $50 billion Ponzi scheme deepened further yesterday after the securities industry's watchdog said there was no evidence that the accused swindler ever traded a single share on behalf of his clients, suggesting financial irregularities going back to the 1960s.

    Officials at the Financial Industry Regulatory Authority, known as FINRA, told The Post that after examining more than 40 years' worth of financial records from Madoff's now-defunct broker dealer, there are no signs that Bernard L. Madoff Investment Securities ever traded shares on behalf of the investment-advisory business at the center of the scandal.

    The startling findings contradict statements that Madoff's advisory clients received showing hundreds, if not thousands of trades, completed by the broker dealer every year.

    "Our investigations of Bernard Madoff's broker dealership showed no evidence that any shares were ever traded on behalf of his investment advisory business," a FINRA spokesman said, adding that the regulator has looked at Madoff's books going back to 1960.

    Ira Lee Sorkin, a Madoff lawyer, declined to comment.

    Madoff was arrested last month after his sons said their father had confessed to them that his investment-advisory business was a Ponzi scheme that had bilked $50 billion out of wealthy friends, vulnerable charities and universities. Madoff remains free on $10 million bail.

    While his advisory business is at the center of the scandal, all signs point to Madoff's broker dealer being a legitimate business that traded shares wholesale on behalf of investment banks, mutual funds and other institutions.

    Madoff was previously vice chairman of FINRA's predecessor NASD. He was also a member of the Nasdaq stock exchange, where he served as chairman of its trading committee.

    Richard Rampell, a Florida-based certified accountant who counts as clients several of Madoff's victims, said his review of dozens of statements supports FINRA's findings.

    "Everything I saw on those statements told me that Madoff was clearing his own trades," he said. "There was no third party mentioned on any of those statements."

    Steve Harbeck, CEO of Securities Industry Protection Corp., the outfit overseeing the Madoff bankruptcy to ensure clients get some sort of compensation, said his findings are similar to FINRA's.

    "I do not have any evidence to contradict that," he said. "This is an amazing story that something like this could have gone on undetected for so long."

    Harbeck added that he believed Madoff has been defrauding clients for at least 28 years. "I have seen evidence to that end and I have nothing to contradict it," he said.

    If Madoff's stock trades were faked for 28 years, where did the cash come from to pay some investors?

    The definition of a Ponzi scheme depends upon new investors paying cash to pay earlier investors ---
    This almost eliminates the amount of $50 billion Madoff stole that can be recovered for the latest investors in his investment fund.

    Why Madoff's Hedge Fund Could Be Audited by Non-registered Auditors
    We all know that Bernie Madoff's brokerage firm was audited by an obscure 3-person accounting firm that is not registered with the Public Company Accounting Oversight Board.  This was permitted because the SEC exempted privately owned brokerage firms from the SOX requirement that firms are audited by registered accountants.  Floyd Norris reports, in today's NY Times, that the SEC has now quietly rescinded that exemption.  As a result, firms that audit broker-dealers for fiscal years that end December 2008 or later will have to be registered.  However, under another SOX provision, PCAOB is allowed to inspect only audits of publicly held companies.  NYTimes, Oversight for Auditor of Madoff.
    "Why an Obscure Accounting Firm Could Audit Madoff's Records," Securities Law Professor Blog, January 9, 2008 ---

    Bob Jensen's Rotten to the Core threads ---

    "SEC Goes After Another Ponzi Scheme," Securities Law Professor Blog, January 8, 2009 ---

    Another Ponzi scheme -- is the SEC seeking atonement for failure to uncover the Madoff fraud?

    The SEC announced today that it has filed an emergency civil enforcement action to halt an ongoing affinity fraud and Ponzi scheme orchestrated by Buffalo-based Gen-See Capital Corporation a/k/a Gen Unlimited ("Gen-See") and its owner and president, Richard S. Piccoli.  According to the Commission's complaint, the defendants have raised millions of dollars from investors by promising steady, "guaranteed" returns, ranging from 7.1% to 8.3% per annum, and no fees or commissions. In November 2008 alone, the defendants raised over $500,000 from investors. The defendants have relied heavily on advertisements in newsletters published by churches and dioceses. The complaint further alleges that the defendants told investors that their money was invested in "high quality" residential mortgages that the defendants were able to purchase at a discount. The defendants did not invest the funds as promised, but instead used new investor funds to make payments to earlier investors. In addition, the complaint alleges that Gen-See's offering and sale of securities to the public was not registered with the Commission.

    The Commission seeks, among other emergency relief, a temporary restraining order (i) enjoining the defendants from future violations of the federal securities laws; (ii) freezing the defendants' assets; (iii) directing the defendants to provide verified accountings; and (iv) prohibiting the destruction, concealment or alteration of documents. In addition to this emergency relief, the Commission seeks preliminary and permanent injunctive relief and civil money penalties against the defendants as well as disgorgement by the defendants of their ill-gotten gains plus prejudgment interest.

    "SEC Takes Action to Halt Ponzi Scheme," Securities Law Professor Blog, January 7, 2009 ---

    The SEC filed an emergency action to halt an estimated $50 million Ponzi scheme conducted by Joseph S. Forte (“Forte”) and Joseph Forte, L.P. (“Forte LP”), of Broomall, Pennsylvania. According to the Commission’s complaint, from at least February 1995 to the present, Forte has been operating a Ponzi scheme in which he fraudulently obtained approximately $50 million from as many as 80 investors through the sale of securities in the form of limited partnership interests.  The federal district court for the Eastern District of Pennsylvania issued an order granting a preliminary injunction, freezing assets, compelling an accounting, and imposing other emergency relief. Without admitting or denying the allegations in the Commission’s complaint, Forte and Forte LP consented to the entry of the order.

    The Commission’s complaint alleges that in late December 2008, Forte admitted to federal authorities that from at least 1995 through December 2008, he had been conducting a Ponzi scheme. Forte, who has never been registered with the Commission in any capacity, told investors that he would invest the limited partnership funds in a securities futures trading account in the name of Forte LP that would trade in futures contracts, including S&P 500 stock index futures (“trading program”).  Forte has admitted that he misrepresented and falsified Forte LP’s trading performance from the very first quarter. From 1995 through September 30, 2008, the defendants reported to investors annual returns ranging from 18.52% to as high as 37.96%. However, from January 1998 through October 2008, the Forte LP trading account had net trading losses of approximately $3.3 million.

    Bob Jensen's Rotten to the Core threads are at

    More Headaches for PwC
    Two Partners in India are Arrested

    "Price Waterhouse Auditors Arrested in Satyam Inquiry," by Harichandan Arakali and Saikat Chatterjee, Bloomberg News, January 24, 2009 ---

    PricewaterhouseCoopers LLP’s Indian affiliate, the auditor of Satyam Computer Services Ltd., said two partners were arrested by police as authorities extended the nation’s largest fraud inquiry.

    Srinivas Talluri and S. Gopalakrishnan were remanded to judicial custody on charges of “conspiracy and co- participation,” A. Shivanarayana, a police spokesman in Andhra Pradesh state, said from the province’s capital Hyderabad, where Satyam is based. Price Waterhouse said in an e-mailed statement it didn’t know why two partners were detained.

    Seven years after the implosion of Enron Corp. led to the dissolution of accounting firm Arthur Andersen LLP, the Satyam case has put PricewaterhouseCoopers in the spotlight. Indian police, fraud squad, markets regulator and accounting body have started investigations after Satyam founder Ramalinga Raju said Jan. 7 that he had fabricated $1 billion of assets.

    “Over the last fortnight, the firm has fully cooperated in all inquiries and has provided the documents called for by the Indian authorities,” Price Waterhouse said today in a statement from New Delhi. “We greatly regret that two Price Waterhouse partners have been detained today for further questioning.”

    PricewaterhouseCoopers LLP may also face scrutiny in the U.S. after Satyam’s New York-listed equities lost 82 percent of their market value in two weeks. The U.S. Securities and Exchange Commission is investigating whether Satyam misled investors and officials from the SEC plan to coordinate inquiries with counterparts in India.

    Fudged Accounts

    The auditing firm said Jan. 15 that its reports could no longer be relied on after former chairman Raju said he’d fudged the accounts. The Institute of Chartered Accountants of India, a statutory body which oversees auditors, will report on its investigation into Price Waterhouse on Feb. 11.

    Prosecutors allege Satyam padded employee numbers to siphon off cash and forged documents to support fake bank deposits.

    Satyam had about 33 billion rupees ($674 million) of “fictitious and non-existent” accounts, public prosecutor K. Ajay Kumar told a hearing on Jan. 22. The company had about 40,000 employees, compared with the 53,000 claimed by Satyam, he said.

    India’s biggest corporate fraud investigation is being led by teams from the Andhra Pradesh state police’s criminal investigation department, the markets regulator, the independent accounting body and the government’s serious fraud office.

    Separate Entity

    Satyam’s state-appointed board has almost arranged funds to help tide over a cash crunch till the end of March, the company said yesterday. The board has hired KPMG and Deloitte Touche Tohmatsu to restate the accounts.

    Satyam is struggling to raise cash to pay salaries after Raju said he had falsified accounts for several years. It is also battling to stop off customers from joining State Farm Mutual Automobile Insurance Co. in canceling contracts.

    Price Waterhouse has offices in nine Indian cities, according to the firm’s Web site. The Indian operation is a separate legal identity from PricewaterhouseCoopers International Ltd., according to the Web site.

    The auditor’s clients include Maruti Suzuki India Ltd., maker of half the cars in the country, and the local units of Colgate-Palmolive Co., the world’s largest toothpaste maker.

    PricewaterhouseCoopers LLP has a “vigorous global network” allowing member firms to “operate simultaneously as the most local and the most global of businesses,” the firm says on its Web site. The site also includes a disclaimer that each member firm “is a separate and independent legal entity.”

    Larsen & Toubro

    Larsen & Toubro Ltd., India’s biggest engineering company, yesterday tripled its stake in Satyam to give it greater say in the rescue of the software exporter.

    Continued in article

    "Indian Prosecutors Allege Satyam Founder Siphoned Funds," by Eric Bellman and Niraj Sheth, The Wall Street Journal, January 23, 2009 ---

    The disgraced former chairman of Satyam Computer Services Ltd., B. Ramalinga Raju, used salary payments to 13,000 fictitious employees to siphon millions of dollars from the Indian outsourcer for land purchases, prosecutors said Thursday.

    Prosecutors in the southern Indian city of Hyderabad, where the technology-outsourcing firm is based, told a criminal court that Satyam has only about 40,000 employees instead of the 53,000 it claims.

    Prosecutors claimed the money, in the form of salaries paid to ghost employees, came to around $4 million a month. The money was diverted through front companies and through accounts belonging to one of Mr. Raju's brothers and his mother to buy thousands of acres of land, the prosecutors said.

    Prosecutors said they are investigating but didn't allege that Mr. Raju's mother or brother were involved. They didn't offer further details on how the alleged diversion of funds took place.

    Prosecutors made the claims in a hearing Thursday where the state police for the state of Andhra Pradesh asked for more time to interrogate Mr. Raju and Satyam's former chief financial officer, Srinivas Vadlamani, who is also in custody.

    "The funds of Satyam have been diverted to many other companies," K. Ajay Kumar, assistant prosecutor, told a packed courtroom. Investigators need more time with Mr. Raju and Mr. Vadlamani to figure out where the money has gone, Mr. Kumar said.

    Continued in article

    PwC Auditors Apparently Let This Massive and Long-Term Accounting Fraud Go Undetected
    Price Waterhouse, auditor to Satyam Computer Services Ltd. (500376.BY), Wednesday said it is examining the contents of Satyam Chairman B. Ramalinga Raju's statement in which he said Satyam's accounts were falsified. "We have learnt of the disclosure made by the chairman of Satyam Computer Services and are currently examining the contents of the statement. We are not commenting further on this subject due to issues of client confidentiality," Price Waterhouse said in an e-mailed statement.
    "Price Waterhouse: Currently Examining Satyam Chmn's Statement," Lloyds, January 7, 2008 ---

    Earlier in the day, Satyam Chairman Raju resigned, admitting to falsifying company accounts and inflating revenue and profit figures over several years.

    "Satyam Chief Admits Huge (multi-year accounting) Fraud," by Heather Timmons, The New York Times, January 7, 2008 ---

    Satyam Computer Services, a leading Indian outsourcing company that serves more than a third of the Fortune 500 companies, significantly inflated its earnings and assets for years, the chairman and co-founder said Wednesday, roiling Indian stock markets and throwing the industry into turmoil.

    The chairman, Ramalinga Raju, resigned after revealing that he had systematically falsified accounts as the company expanded from a handful of employees into a back-office giant with a work force of 53,000 and operations in 66 countries.

    Mr. Raju said Wednesday that 50.4 billion rupees, or $1.04 billion, of the 53.6 billion rupees in cash and bank loans the company listed as assets for its second quarter, which ended in September, were nonexistent.

    Revenue for the quarter was 20 percent lower than the 27 billion rupees reported, and the company’s operating margin was a fraction of what it declared, he said Wednesday in a letter to directors that was distributed by the Bombay Stock Exchange.

    Satyam serves as the back office for some of the largest banks, manufacturers, health care and media companies in the world, handling everything from computer systems to customer service. Clients have included General Electric, General Motors, Nestlé and the United States government. In some cases, Satyam is even responsible for clients’ finances and accounting.

    The revelations could cause a major shake-up in India’s enormous outsourcing industry, analysts said, and may force many large companies to investigate and perhaps revamp their back offices.

    “This development is going to have a major impact on Satyam’s business with its clients,” said analysts with Religare Hichens Harrison on Wednesday. In the short term “we will see lot of Satyam’s clients migrating to competition like Infosys, TCS and Wipro,” they said. Satyam is the fourth-largest outsourcing firm after the three named.

    In the four-and-a-half page letter distributed by the Bombay stock exchange, Mr. Raju described a small discrepancy that grew beyond his control. “What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years. It has attained unmanageable proportions as the size of company operations grew,” he wrote. “It was like riding a tiger, not knowing how to get off without being eaten.”

    Mr. Raju said he had tried and failed to bridge the gap, including an effort in December to buy two construction firms in which the company’s founders held stakes. Speaking of a “deep regret” and a “tremendous burden,” Mr. Raju said that neither he nor the co-founder and managing director, B. Rama Raju, had “taken one rupee/dollar from the company.” He said the board had no knowledge of the situation, nor did his or the managing director’s families.

    The size and scope of the fraud raises questions about regulatory oversight in India and beyond. In addition to India, Satyam has been listed on the New York Stock Exchange since 2001, and on Euronext since January of 2008. The company has been audited by PricewaterhouseCoopers since its listing on the New York Stock exchange.

    Satyam has been under close scrutiny in recent months, after an October report that the company had been banned from World Bank contracts for installing spy software on some World Bank computers. Satyam denied the accusation but in December, the World Bank confirmed without elaboration on the cause that Satyam had been banned. Also in December, Satyam’s investors revolted after the company proposed buying two firms with ties to Mr. Raju’s sons.

    On Dec. 30, analysts with Forrester Research warned that corporations that rely on Satyam might ultimately need to stop doing business with the company. “Firms should take the initial steps of reviewing the exit clauses in their current Satyam contracts,” in case management or direction of the company changed, Forrester said.

    The scandal raised questions over accounting standards in India as a whole, as observers asked whether similar problems might lie buried elsewhere. The risk premium for Indian companies will rise in investors’ eyes, said Nilesh Jasani, India strategist at Credit Suisse.

    R. K. Gupta, managing director at Taurus Asset Management in New Delhi, told Reuters: “If a company’s chairman himself says they built fictitious assets, who do you believe here?” The fraud has “put a question mark on the entire corporate governance system in India,” he said.

    Continued in article

    Over 13,000 Well-Paid Ghosts (according to earlier news accounts)
    The newspaper said the Serious Frauds Investigation Office believes Satyam's headcount could have been inflated by 15-20 percent to siphon off money as salary payments to non-existent employees. "Since a major chunk of the costs were actually salaries, a minor distortion in the number of employees could change the personnel expenses significantly," the paper quoted the source as saying . . . The company's website says it had close to 53,000 staff, including those in subsidiaries and joint ventures as at end-September, and it has since said that around 2,000 staff have left.
    Rueters, January 20, 2009 ---

    Where were the auditors?
    We don't know where they were, but they're now in jail
    "Price Waterhouse Auditors Arrested in Satyam Inquiry," by Harichandan Arakali and Saikat Chatterjee, Bloomberg News, January 24, 2009 ---

    Bob Jensen's threads on PwC woes are at

    The huge accounting scandal at Satyam Computer Services Ltd., one of India's biggest information-technology firms, could lead to an overhaul of corporate-governance standards in the country and force changes in how Indian companies do business. Although some leading Indian companies have become international powerhouses in recent years, the general standard of corporate ethics and accounting have traditionally been poor in India.
    Jackie Range and Joann S. Lublin, "Spotlight on India's Corporate Governance," The Wall Street Journal, January 8, 2008 ---

    From The Wall Street Journal Accounting Weekly Review on January 16, 2009

    Corporate Scandal Shakes India
    by Niraj Sheth, Jackie Range and Geeta Anand
    The Wall Street Journal
    Jan 08, 2009
    Click here to view the full article on

    TOPICS: Accounting, Audit Committee, Audit Quality, Auditing, Corporate Governance

    SUMMARY: The found chairman of the Indian outsourcing company Satyam, B. Ramalinga Raju, wrote a letter of resignation to his Board of Directors in which he said that he "...overstated profits for the past several years, overstated the amount of debt owed to the company and understated its liabilities." Raju prepared the portion of the financial statements that presented over $1 billion in cash when in fact the cash balances were about $66 million. He finally wrote the letter when "...the scheme reached 'simply unmanageable proportions' and he was left in a position that was 'like riding a tiger, not knowing how to get off without being eaten.'" The scandal has raised questions about the role of the auditors, PricewaterhouseCoopers, and the company's Board of Directors, particularly its audit committee. It also has left Indian investors lacking confidence in other Indian investments.

    CLASSROOM APPLICATION: Auditing and management classes may use this article to discuss corporate governance issues, the role of the audit committee, and the question of whether the Satyam Board contained a financial expert as required by Sarbanes-Oxley and supporting SEC regulations.

    1. (Introductory) Based on the description in the article, what methods did Mr. Ramalinga Raju say that he had used to improperly inflate Satyam's financial results for the past several years?

    2. (Introductory) What financial controls should prevent fraud, particularly fraud of this magnitude?

    3. (Advanced) What audit procedures should Satyam's auditors, PricewaterhouseCoopers, have undertaken that may have uncovered the fraud prior to the time of Mr. Raju's letter?

    4. (Advanced) What is corporate governance? What role does accounting and auditing play in upholding proper corporate governance?

    5. (Advanced) Refer to the first related article. What impact does the Satyam scandal have on the regulatory environment in India? What factors in India make it difficult, more difficult than, say, in the U.S., to implement such changes in corporate governance behaviors?

    6. (Advanced) In general, what is the role of an audit committee in a corporate Board of Trustees? What is the role of this committee with respect to a fraud, such as this one committed at Satyam?

    7. (Introductory) Refer to the second related article in which a corporate governance review firm notes that it questioned Satyam's fulfillment of U.S. requirements for an audit committee financial expert. What is an audit committee financial expert under SEC guidelines developed to implement the requirements of Sarbanes-Oxley?

    Reviewed By: Judy Beckman, University of Rhode Island

    Spotlight on India's Corporate Governance
    by Jackie Range and Joann S. Lublin
    Jan 08, 2009
    Page: A9

    Satyam Probe Scrutinizes CFO, Audit Committee
    by Eric Bellman and Jackie Range
    Jan 14, 2009
    Online Exclusive

    "The Death of LIFO?:  Changing inventory method requires managing the accounting-tax differences," by Robert Bloom and William J. Cenker, The Journal of Accountancy,  January 2009 ---

    Few differences between IFRS and U.S. GAAP loom larger than accounting for inventories, particularly the disallowance of the last-in, first-out (LIFO) method in IFRS. The proposed shift of U.S. public companies to IFRS could affect many companies currently using LIFO for both financial reporting and taxation. This is because the conformity rule of IRC § 472(c) requires taxpayers who apply LIFO for tax purposes to also apply it for income measurement in financial reporting, and IFRS does not permit LIFO for book accounting.

    Therefore, CPAs may be called upon to help manage inventory method changes. Companies using LIFO would have to switch to FIFO or average cost. The change would place companies in violation of the conformity requirement. Absent relief from the Treasury Department, it would require them to change their tax method of inventory reporting.

    This article highlights the impact of LIFO accounting, widely used in the U.S. but scarcely used elsewhere. It could be eliminated if U.S. GAAP were to fully conform to IFRS inventory accounting. If LIFO were to disappear, many U.S. companies could face large income tax liabilities from accelerated income recognition. In 2007, Exxon Mobil Corp. reported its aggregate replacement cost of inventories at year-end exceeded the inventories’ LIFO carrying value by $25.4 billion. The Sherwin-Williams Co. reported that if it had used FIFO instead of LIFO, its net income for 2005 would have been $40.8 million higher (Exxon Mobil Corp., 2007 SEC Form 10-K; The Sherwin-Williams Co., 2007 SEC Form 10-K).

    The proposed SEC road map released in November contemplates some large U.S. companies voluntarily adopting IFRS, starting with filings in 2010. Its application could be mandated for large public companies starting in 2014.

    Another major difference between IFRS and GAAP is that IFRS requires entities to carry inventory at the lower of cost or net realizable value. GAAP, on the other hand, values inventories at the lower of cost or current replacement cost, which is subject to a ceiling of net realizable value and a floor of net realizable value minus a normal profit margin.

    Currently, the GAAP guidance under Statement no. 154, Accounting Changes and Error Corrections, calls for changes in inventory costing methods to be retrospectively applied to the prior financial statements presented in annual reports (paragraph 7), unless it is impracticable to do so. In that case, the new principles can be applied prospectively (paragraphs 8–9). An entity makes retrospective application only for the direct effects of the change (paragraph 10). However, indirect effects—for example, bonuses—are reflected prospectively (paragraph 10).

    Thus, a typical change in inventory method, such as from average cost to FIFO, is treated retrospectively. The entity reflects a change from LIFO to FIFO in the same manner. The result (assuming that the accounting basis for inventory under the new method exceeds the corresponding basis under the prior methods) is (1) an increase in inventory, (2) an increase in current income taxes resulting from the effective increase in income, and (3) an adjustment to retained earnings for the effect of the increase in net income. The entity may need to show a deferred tax liability for the temporary difference between the accounting and tax bases for the inventory change if it were to remain, for example, on average cost for tax purposes yet switch from average cost to FIFO for book purposes.

    Over time, LIFO can have a significant cumulative downward effect on the inventory’s value. The cost of goods sold for any particular year equals the sum of beginning inventory, plus purchases, less ending inventory. Thus, a lower ending inventory increases cost of goods sold and reduces taxable income.

    For voluntary changes occurring in tax years ending on or after Dec. 31, 2001, IRC § 481(a) generally permits an entity to deduct the entire change in the year of the change if the adjustment is favorable to the entity. Alternatively, if the cumulative effect of the change increases the entity’s liability, the change may be taken into account over four years beginning with the year of the change—with some exceptions—see "Timing Issues," below (Revenue Procedure 2008-52, section 5.04). Therefore, instead of crediting Income Tax Payable for the total tax bill in the following journal entry, only one-fourth of the tax would be treated as a current liability. The remainder would go into a Deferred Tax Liability account:

    Inventory (asset increase) Retained Earnings (stockholders' equity increase) Income Tax Payable (liability increase) Deferred Tax Liability (liability increase)

    For income tax purposes, a change in the accounting method includes a change in the overall plan for reporting gross income or deductions, or a change in the treatment of any material item (Revenue Procedure 2008-52 and Treas. Reg. § 1.446-1(e)(2)(ii)(a)).

    An accounting change from LIFO to another method is made on Form 3115, Application for Change in Accounting Method, and can either be an "advance consent request" or "automatic change request" (see instructions to Form 3115).

    INCOME EFFECTS Companies adopt LIFO primarily to lower their income tax liability and to postpone paying taxes, but it also reduces income for financial reporting purposes. Nevertheless, companies are not required to use the same LIFO method for taxation and accounting. For example, a unit LIFO method could be used in accounting and a dollar-value LIFO method in taxation.

    A change from LIFO will normally have a significant positive income effect because the accumulation of prior years’ costs in beginning inventory will replace cost of goods sold valued at current costs. Assuming that the inventory turns over, income for the year of change would increase by the entire amount of the LIFO reserve.

    Rolling-Average Method
    Another inventory issue in flux has been use of the rolling-average method. With Revenue Procedure 2008-43, the Service in June reversed its long-held position against the method. The IRS formerly said the method did not clearly and accurately reflect income, especially where inventory is held for long periods or its costs fluctuate significantly. The revenue procedure provides a safe harbor for using a rolling-average method of inventory accounting and taxation. If the rolling-average method is not used in accounting, this method may not accurately portray taxable income. An entity can secure automatic consent to change its tax inventory method to the rolling average by complying with all the provisions of this revenue procedure under IRC § 446(e).

    Fortunately, the accounting change adjustment of establishing the opening LIFO reserve, as well as the initial section 263A capitalization amount, prevent amounts from being duplicated or omitted from income. Should the taxpayer be required to include the section 481(a) amounts in the year of the change, the potential increase in tax liability can be significant. Accordingly, such amounts are normally taken into income ratably over four years. If the entity follows procedures properly, and if the LIFO reserve was not created over a short period, a four-year adjustment period will normally be permitted. But if the change occurred because the entity did not apply LIFO properly, or did not file a timely application, the total amount of the change may be required to be taken as income in the year of the change. See Treas. Reg. § 1.481-4 and Revenue Procedure 2008-52. Thus, there will be a deferred tax liability associated with the switch in the year of the change and the three following years.

    Example. To illustrate an inventory method change, assume BC Co. is a retail business. BC switches from dollar-value LIFO to FIFO as of Jan. 1, 20X0, for both financial accounting and income taxation. The inventory at FIFO is $20 million, and the dollar- value LIFO reserve is $4 million. BC secures IRS permission to spread the adjustment over four years.

    A change from LIFO to any other method will impact the balance sheet as well as the income statement in the year of the change. The LIFO reserve is a contra-asset or asset reduction account that companies use to adjust downward the cost of inventory carried at FIFO to LIFO. Many companies use dollarvalue LIFO, since this method applies inflation factors to "inventory pools" rather than adjusting individual inventory items. Companies that are on LIFO for taxation and financial reporting typically use FIFO internally for pricing, purchasing and other inventory management functions.

    Continued in article

    Bob Jensen's threads on accounting theory are at

    Neutrality Dreams versus Reality
    Dell said Wednesday that it is accelerating the vesting of options that are priced at an average $22.03 a share, far above the current price, resulting in the quarterly charge . . . Bill Kreher, a stock analyst at Edward Jones who follows Dell, said the manufacturing-related expenses aren't surprising given the recent changes Dell has made. He added that by recording the compensation expenses now, Dell is in a better position to give employees future stock or options grants. With Dell's share price far below the options' exercise price, he said, "it's probably unrealistic to think those are going to motivate important employees." The Dell spokesman said the company isn't planning to award large numbers of new options and that most of its equity-based compensation now comes in the form of restricted stock.
    "Dell's Costs for Stock Options, Restructuring Will Cut Earnings," The Wall Street Journal, January 29, 2009 ---

    Jensen Comment
    I only highlighted this tidbit to emphasize how accounting standards are seldom neutral. Although I've been a consistent advocate of FAS 123-R and feel the FASB did the right think in requiring the expensing of stock options when they vest, the revised standard did have a tremendous impact on how firms compensate employees with restricted stock now instead of stock options that were enormously popular before the revision of FAS 123 (when expensing was optional and was most certainly the road not taken).

    Neutrality may exist in terms of the frame of mind of an accounting standard setter, but it flies in the face of reality.

    Federal securities class action lawsuits increased 19 percent in 2008, with almost half involving firms in the financial services sector according to the annual report prepared by the Stanford Law School Securities Class Action Clearinghouse in cooperation with Cornerstone Research ---

    Especially note the 2008 Year in Review link at

    "Director Capture," The Icahn Report, January 20, 2009 ---

    Jonathan Macey is Deputy Dean and Sam Harris Professor of Corporate Law, Corporate Finance, and Securities Law at Yale Law School. He is the author most recently of Corporate Governance: Promises Made, Promises Broken (Princeton University Press, 2008) available at 

    The Icahn Report has exposed: (1) abuses in the use of golden parachute agreements; (2) many of the false premises behind the faulty assumption that corporate elections are "democratic" event that legitimize corporate boards; (3) the entrenchment effects of staggered boards of directors and, most importantly perhaps; (4) the sheer corruption of law and morality that is represented by the continued legality and adoption of poison pill defensive devices.

    In my next two blog postings I would like to bring my own, admittedly academic perspective to two topics that are, I believe, highly relevant to the agenda of this blog. The first topic is the problem of "board capture" among boards of directors of public companies. The second is the general problem with shareholder democracy caused by defects in the shareholder voting process.

    Director Capture

    In the academic world, particularly among political scientists and economists, "capture" occurs when decision-makers such as corporate directors favor certain vested interests such as incumbent management, despite the fact that they purport to be acting in the best interests of some other group, i.e. the shareholders. The problem of capture and the theories associated with the idea of capture are most closely associated with George Stigler, and the free-market Chicago School of Economic thought. Among the more interesting and important theories of Stigler and other proponents of capture theory is the idea that capture is not only possible, in many contexts it is inevitable.

    In my recent Princeton University Press book "Corporate Governance: Promises Made: Promises Broken" I apply capture theory, which is usually used to describe and model the behavior of bureaucrats in the public sector, to the directors of publicly traded companies who come to their positions through the board nominating committee.

    In my view, such directors are highly susceptible to capture… even more susceptible than bureaucrats and politicians. Capture is inevitable because management controls the machinery of the corporate election process. Management's narrow interest in having passive and supportive boards manifests itself in the appointment of docile directors who are likely to support management's initiatives and unlikely to challenge management or to demand that managers earn their compensation by maximizing value for shareholders.

    The extension of capture theory to corporate boards of directors is supported not only by foundational work in political science and economics but also by important work in social psychology. Directors participate in corporate decision-making. In doing so, these directors, as a psychological matter, come to view themselves in a very real way as the owners of the strategies and plans that the corporation pursues. And of course, these plans and strategies inevitably are proposed by incumbent management. Thus, directors inevitably risk simply becoming part of the management "team" instead of the vigorous outside monitors and evaluators that they are supposed to be. Management’s persistent support of and acquiescence in the proposals of management consistently renders directors incapable of objectively evaluating these strategies and plans later on. Of course this is not the case when the directors represent hedge funds or other large investors who have a large financial stake in making sure that the company prospers.

    Another factor leading to board capture is the fact that boards of directors have conflicting jobs. They are supposed not only to monitor management, but also to select and evaluate the performance of top management. After top managers have been selected, the boards of directors making the selection decisions are highly likely to become committed to these managers. For this reason, as board tenure lengthens, it becomes increasingly less likely that boards will remain independent.

    The theory of "escalating commitments" predicts that decision-makers such as corporate directors will come to identify strongly with management once they have endorsed the strategies and decisions made by management. Earlier board decisions supporting management, once made and defended, will affect future board decisions such that later decisions comport with earlier decisions. As the well-respected Cornell psychologist Thomas Gilovich has shown, "beliefs are like possessions" and "[w]hen someone challenges our beliefs, (for example the belief of directors that management is highly competent) it is as if someone [has] criticized our possessions."

    The cognitive bias that threatens boards of directors and other proximate monitors is a manifestation of what Daniel Kahneman and Dan Lovallo have described as the "inside view." Like parents unable to view their children objectively or in a detached manner, directors tend to reject statistical reality (such as earnings performance or stock prices) and view their firms as above average even when they are not. The first step in dealing with the problem of board capture is to recognize that the problem exists.

    Boards should be free to choose whether they wish to be trusted advisors of management or whether they want to be credible monitors of management. They can’t be both. We should stop pretending that they can.

    One policy proposal would be for companies to have two boards of directors (as they do in Germany and the Netherlands), one for monitoring and one for assisting in the management of the company. Firms that decide to retain the single board format should be required to choose whether their board should devote itself to "monitoring" (or supervising) management or to advising (or managing along with) the company’s CEO and the rest of the management team. The farce that board can do both should end.

    Boards that purport to monitor or supervise management should be held to an extremely high standard of independence. Management should not be involved in any way in the recruitment or retention of these board members. Socializing and gift-giving should be prohibited. And, of course, managers themselves should not be allowed to sit on monitoring boards. Managers should not be allowed to serve as the chairmen of monitoring boards.

    Independence standards should be relaxed for the boards of companies that elect to participate in management. Decisions that involve a conflict between the interests of shareholders and the interests of management should be subjected to close scrutiny. Such decisions include decisions about executive compensation of all kinds, particularly bonus and severance payments, as well as decisions about such things as the adoption of staggered terms for the board or the adoption of a poison pill rights plan.

    Continued in article

    Bob Jensen's threads on corporate governance are at

    Bob Jensen's threads on great minds in management are at

    "Faculty Members Given Laptops May Incur Taxes, by David Shieh, Chronicle of Higher Education, January 7, 2008 ---

    Professors lucky enough to get laptops from their institutions may want to watch out — the taxman could come knocking.

    Manchester College has announced that employees with university-owned laptops will now have to add those laptops to their tax forms as taxable items. This means a $1,600 laptop with a four-year life expectancy would add $400 per year to an employee’s taxable income, Manchester’s information-technology director, Michael Case, wrote in a message sent to an e-mail list for campus technology officials hosted by Educause.

    At Manchester, the news has caused “significant push back from employees” who want to avoid paying additional taxes, Mr. Case wrote.

    “Many want to exchange their laptop for a desktop to avoid the tax liability in the future,” he wrote. “I can’t blame them because I’m thinking the same thing.”

    Because university laptops are often used for personal purposes, the Internal Revenue Service counts them as taxable “fringe benefits,” said Bertrand Harding, a tax lawyer specializing in nonprofit institutions, in an interview with The Chronicle. If a college is able to provide documentation showing such laptops were used for business purposes every time they were turned on, it would not have to pay tax on the machines. But few institutions could offer any such proof, Mr. Harding said.

    In recent years, the IRS has started to crack down on fringe benefits like laptops and cellphones, and it has asked institutions to pay taxes that were not withheld from employees, Mr. Harding said.

    This has resulted in an increasing number of colleges — like Manchester — listing laptops as taxable items, Mr. Harding said.

    “Some colleges just put their heads in the sand and say we’re just going to wait for the IRS to come,” Mr. Harding said. “Others are changing their policies so they don’t get hammered when the IRS comes in.”

    Bob Jensen's taxation helpers are at

    "IASB proposes amendments to clarify the accounting for embedded derivatives," IASB, December 22, 2008 --- 

    The International Accounting Standards Board (IASB) today published for public comment proposals to clarify the accounting treatment for embedded derivatives.

    The proposals respond to requests received from those taking part in the recent round-table discussions organised by the IASB and the US Financial Accounting Standards Board (FASB) to clarify the requirements in IAS 39 Financial Instruments: Recognition and Measurement and IFRIC 9 Reassessment of Embedded Derivatives.

    Participants asked the IASB to act in order to prevent any diversity in practice developing as a result of the amendments made to IAS 39 in October 2008 to permit the reclassification of particular financial assets. The proposals published today would require all embedded derivatives to be assessed and, if necessary, separately accounted for in financial statements.

    Commenting on the proposals, Sir David Tweedie, IASB Chairman, said:

    * In October 2008, in response to exceptional circumstances, the IASB amended accounting standards relating to the reclassification of financial instruments. Issuing that amendment without normal due process always carried the risk of unintended consequences, and these proposals seek to clarify the application of that amendment to embedded derivatives.

    The proposals are set out in an exposure draft Embedded Derivatives, on which the IASB invites comments by 21 January 2009. The exposure draft is available on the Website from the 'open for comment' at .

    The Exposure Draft may be temporarily downloaded from

    IASB Financial Instruments Projects Page ---

    Bob Jensen's threads on embedded derivatives are under the E-Terms at

    Among those mounting a grassroots movement to slow the rush to IFRS are Analyst's Accounting Observer newsletter editor Jack Ciesielski, former FASB member Ed Trott, and Bowling Green State University professor David Albrecht (who has compiled the arguments of seven IFRS critics, including Niemeier and himself, on his blog The Summa). Among their arguments: preliminary research from Europe shows that the international "standards" in fact afford investors little comparability among financial statements, one of the key reasons given for U.S. convergence. Niemeier is also leery of letting the International Accounting Standards Board (IASB) be the standards-setter for the world, given its recent capitulation to pressure from European Union authorities to loosen fair-value accounting for banks.
    Alix Stuart, "Which One When? A roundup of key accounting deadlines, developments, and detours to watch for in 2009," CFO Magazine, January 1, 2009 ---

    From The Wall Street Journal Accounting Weekly Review on January 16, 2009

    Time Warner Takes $25 Billion Hit
    by Merissa Marr and Nat Worden
    The Wall Street Journal

    Jan 08, 2009
    Click here to view the full article on

    TOPICS: Accounting, Advanced Financial Accounting, Asset Disposal, Goodwill, Impairment

    SUMMARY: "Time Warner has made a slew of acquisitions since the company's last major write-down in 2002 for the value of AOL and its cable systems...Investors chided AOL last year for the steep $850 million price tag of its Bebo acquisition." Time Warner has announced a $25 billion write down of its assets "to account for the tumbling value of its cable, publishing and AOL businesses." The write down includes goodwill; an investment in Clearwire; a lease restructuring for floors in Manhattan held by Lehman Brothers; an increase in credit loss reserves for bankruptcy filings by retail customers; and charges for a court judgment against Turner Broadcasting.

    CLASSROOM APPLICATION: Accounting for goodwill and other asset impairments, as well as loss accruals, is covered with this article, including addressing implications for future financial reporting.

    1. (Introductory) In general, what are the accounting requirements for writing down goodwill and other intangible assets?

    2. (Advanced) Refer to the related article. How do companies have "discretion in implementing accounting rules on impairment"?

    3. (Introductory) Refer again to the related article. Time Warner says that the impairment charge was prompted by "...the dip in its stock price last year. 'If our stock price was higher we would not have to take this charge..." How is this possible?

    4. (Introductory) What assets besides goodwill has Time Warner also written down? What other charges have been recorded? Identify each as listed in the article and state the authoritative accounting literature establishing requirements in these areas.

    5. (Advanced) How do all of these writedowns "reset the level of shareholders' equity" as stated in the related article? What are the future implications of these writedowns today? Be sure to explain your answer.

    6. (Introductory) How do these write downs impact other companies in the cable industry?

    7. (Advanced) "Time Warner still expects cash flows for 2008 to total $5.5 billion, matching its outlook provided in November...." After this announcement of a downturn to a loss, why hasn't this projection changed?

    Reviewed By: Judy Beckman, University of Rhode Island

    Timely Warning on Cable Values
    by Martin Peers
    Jan 08, 2009
    Page: C12

    "Time Warner Takes $25 Billion Hit," by Merissa Marr and Nat Worden, The Wall Street Journal, January 8, 2009 ---

    Responding to past problems and the future perils of the economic downturn, Time Warner Inc. attempted to clear its slate by writing down $25 billion of assets to account for the tumbling value of its cable, publishing and AOL businesses.

    The move, coming as the advertising outlook sours, could signal more write-downs for media and cable companies. After a rash of acquisitions at peak prices, companies in those industries are having to scale back accounting values in the now-sullen climate. The media industry also faces secular declines in areas such as newspapers, broadcast television and radio, which are being ravaged by ad declines.

    Coupled with weaker-than-expected advertising revenue,Time Warner's fourth-quarter write-down is expected to swing the company to an annual loss for 2008 -- its first in six years.

    Time Warner Cable Inc., whose shares have fallen 50% in the past couple of years, represented the bulk of the non-cash write-down, at nearly $15 billion. The news also highlights the lingering effects of Time Warner's disastrous 2001 merger with AOL and a gloomy outlook for the magazine-publishing business.

    Time Warner has made a slew of acquisitions since the company's last major write-down in 2002 for the value of AOL and its cable systems. Time Warner Cable spent about $9 billion of cash and 16% of its equity acquiring assets from rival Adelphia in 2005. AOL also has been on a buying spree in its bid to revamp itself as an ad-based company. Investors chided AOL last year for the steep $850 million price tag of its Bebo acquisition.

    Cable-TV company Comcast Corp. similarly plans to write down its stake in wireless broadband company Clearwire Corp., whose shares have fallen about 60% in the past 12 months, said people familiar with the situation. Last October, CBS Corp. recorded a $14.1 billion charge, largely for the shrinking value of its local television and radio stations. "We believe that similar announcements from other media companies could be forthcoming," said UBS analyst Michael Morris.

    Time Warner's write-down says a lot about the challenges that face Chief Executive Jeff Bewkes. Mr. Bewkes has signaled a shift to focus more on the TV and movie businesses and less on non-content assets such as Time Warner Cable, which he expects to spin off by the end of the current quarter.

    But he still needs to find long-term solutions for AOL and publishing. Time Warner CFO John Martin, speaking at an investor conference, said the company is still interested in finding AOL a partner, after on-off talks with potential candidates, but noted the current climate "is not conducive to" quick action.

    Time Warner rang more alarm bells about the advertising climate, saying "the economic environment has proved somewhat more challenging" than previously expected, particularly at its AOL and publishing units. The company scaled back its operating projection for 2008, saying it now expects adjusted operating income before depreciation and amortization to be $13 billion, up 1%, a drop from its previous forecast of a 5% increase.

    Time Warner shares were down 6.3% at $10.29 in 4 p.m. composite trading on the New York Stock Exchange, while Time Warner Cable stock was down 4.8% at $21.56.

    In addition to the write-down, Time Warner will record charges of as much as $380 million in the fourth quarter, including as much as $60 million from the restructuring of a lease for floors in its Time & Life Building in Manhattan held by Lehman Brothers Holdings Inc.; a $40 million increase in its credit-loss reserves for bankruptcy filings by retail customers; and $280 million for a court judgment against its Turner Broadcasting System Inc.

    Time Warner still expects cash flows for 2008 to total $5.5 billion, matching its outlook provided in November, because of strong performances from its film division and its cable-television networks.

    Time Warner was expected to come under pressure to write down assets as it carried over $42.5 billion in goodwill on the books for 2008. Mr. Martin said he expects no "adverse impacts" from the write-down, noting there are no debt covenants or tax implications that will lead to more financial pain.

    The Time Warner Cable write-down reflects the decline in the market value of the company, a drop in the value of its franchise rights and lowered expectations for cash flow amid increased competition and higher borrowing costs. Time Warner Cable said it also plans to take a charge of about $350 million related to its investment in Clearwire.

    Time Warner is to report fourth-quarter earnings Feb. 4.

    Bob Jensen's threads on goodwill impairment issues are at

    "New Prerequisites for CPAs," by David Motz, Inside Higher Ed, December 17, 2008 ---

    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.”

    The Value at Risk (VaR) Model of Investment Risk ---

    "In Defense Of Value At Risk (VaR) And Other Risk Management Methods," by Suna Reyent, Seeking Alpha, January 19, 2009 ---

    In the beginning of the month, New York Times Magazine published an article by Joe Nocera called “Risk Mismanagement” that created quite a stir in the blogosphere and beyond. Despite the watering-down of certain aspects related to risk management tools, as well as the diversity with which these tools are applied practice, the article was a success because of the buzz it created as well as the ensuing debate.

    The article portrays a debate over value at risk methodology between well-known practitioners of VAR and the critics of the methodology led by Nassim Taleb. It is hard not to get carried away with Mr. Taleb’s tabloid-like descriptions of VAR as a “fraud” and its practitioners as “intellectual charlatans.”

    I love how the debate is construed. The premise is that value at risk and other valuation models (such as Black-Scholes) assume normal distribution of asset returns. Okay, they do that in their most primitive forms, but let’s just accept the oversimplification as a fact for a moment because the debate would hardly exist in this simplistic form if we didn’t go along with the show here.

    This is where our hero Mr. Taleb, an experienced options trader no less, emerges to the public mainstream to inform all of us ignorant folks that asset returns do not follow a normal distribution! The horror! The painful realization that this stuff continues to be taught in business schools! All that wasted class time learning statistics!

    It is fair to say that this assumption will mislead naïve market participants about the nature of their risk exposures as “Black Swan” events happen a lot more frequently than suggested by Gaussian distributions. The problem is, almost anyone in finance already knows that asset prices are not normally distributed, and many practitioners build models or apply extensions to existing ones in order to take this into consideration.

    I decided to give a little background on value at risk in order to get the points across that I feel strongly about. Since I teach VAR in the classroom as part of a risk management curriculum, I feel it is best to give some preliminary information.

    A Primer On Value At Risk

    Depending on the confidence interval chosen, value at risk, in its simplest form, exists of applying a one-sided test to figure out the loss that a portfolio may weather in a given time period. For instance, a 95% daily VAR of ten million dollars indicates that a portfolio is likely to lose at most that amount of money 95% of the time, or once a month assuming 20 trading days in a given month. At the same time, it displays the LEAST amount of money that the portfolio can lose 5% of the time. I appreciated it when Mr. Nocera mentioned this in his article prepared for general readership. As VAR is unable to tell us about what kind of a loss we should expect in that tail of 5%, the limitation of this metric if taken as gospel becomes apparent even to the untrained eye.

    More on the tail risk later. But first, I would like to talk about three established ways of calculating value at risk for one asset and analyze the current risk management crisis within this framework:

    Analytical VAR – “Misunderestimating” Risks

    Otherwise known as variance-covariance method of calculating the value at risk, this is the well-known method of calculating VAR and the easiest one to apply. It assumes a normal distribution of returns. All it takes to calculate VAR is a standard deviation, which represents the “volatility” of the asset as well as a mean, which is the expected return on the same asset.

    This is the VAR that Mr. Taleb seems to conveniently focus on, because it will indeed underestimate the risk at the tails of a negatively skewed or a leptokurtic distribution.

    Stock markets in general exhibit negative skewness, which means that the distribution of returns will exhibit a long tail (a few extreme losses) to the left side. They also exhibit leptokurtosis, which means that both tails of the distribution are fatter than implied by normal distribution.

    So we could go nuts over how wrong the normal distribution assumption is, and apparently people do. But we should also be very concerned over how sensitive this measure is to the standard deviation as well the mean, both of which are subject to change as markets change especially in the light of the current crisis.

    Historical VAR – Good As Long As Future Resembles Past

    This method does not need any assumptions about the distribution of returns and is certainly superior to analytical VAR because it is not parametric. The more data there is, the better the measurement. Historical data will exhibit characteristics such as skewness or kurtosis as long as the asset itself exhibits these qualities as well.

    Assuming 250 trading days in a given year, in order to measure the 95% daily VAR you need to rank the returns from worst to best and pick the greatest return among those that correspond to the bottom 5% of returns. So the worst 12th return (or you could interpolate between the 12th and13th worst return, since 250 divided by 20 is 12.5, but since VAR itself is an approximation, why bother?) will tell you the maximum percentage loss 95% percent of the time, or the minimum percentage loss 5% of the time. Multiply the loss by your portfolio value and you get the neat VAR value in terms of dollars.

    Moreover, the majority of investment houses use historical VAR as the basis for measurement as it is a clear improvement over the analytical VAR. You do not need return assumptions or standard deviation values to come up with this value.

    Historical VAR calculations replace parametric assumptions with historical data. This means that if you had positions in mortgage derivative securities and started the year 2007 with models that were built around data of the previous two years encompassing the “peaceful” periods of 2005 and 2006, you would soon be awakened to a world where your VAR measures no longer reflected the reality of the marketplace. Note that such limitations of VAR as an all-encompassing risk measure were visible to any professional who understood risk management models as well as the limitations of historical data that went into them.

    As Mr. Nocera’s article conveys, this is precisely what Goldman Sachs (GS) did. When it became obvious that the mortgage markets had changed in fundamental ways and aggressive positions in these securities started bringing in gigantic losses (as opposed to reaping the usual gigantic profits on the back of the ever-rising housing market), the team decided to limit its risk exposure by “getting closer to home.”

    I don’t think the article conveys what “getting closer to home” really means. Let me use day trading as an example here. In day trading terms, this means that when your positions start showing huge losses at the end of the day, you accept “defeat” and take your losses as opposed to trying to ride them in the hope that the market will come around. So instead of wishing for market to make a comeback to recoup losses, you close out your open positions, take your losses and go home. Then you go back to the drawing board to strategize for the next day given the new reality of the marketplace.

    Of course, looking retrospectively, the decision to limit exposure and take losses as opposed to trying to ride them in the expectation of a housing market turnaround has been the right decision to make. However, as we have seen with many other bubbles, managers do not have the incentive to make the sound trading decisions, nor do they have the incentive to listen to their risk managers as long as they get a huge piece of profits made during the ride and the taxpayer ends up holding the bag when the market finally blows up.

    We have seen this movie over and over again. What surprises me is the heavy blame put on models for not reflecting “reality,” whereas those in charge knew that the mortgage bubble was collapsing, they had many opportunities to get rid of their huge exposures to the derivatives securities, but they chose not to do it most likely because of expectations of a market turn around. This is trading 101. If you try to ride your losses, you may make comebacks, but you will eventually blow up.

    Now the next episode features critics who tell us that the “models” have been faulty and wrong. Hence the conclusion that value at risk is an erroneous and misleading measure, not to mention a “fraud.”

    Ladies and gentleman, we found the “fraud” haunting the trading floor on the street, and it is not a human being: Shame on you, VAR and other risk management tools! Of course, we can blame the car manufacturers for the accident: the car’s faulty speedometer, or its lack of an apparatus to show us the bumps on the road ahead. But why is the culture that is reticent to blame the drunk driver who was clearly intoxicated with the thrill of making green?

    These “models” are as guilty as the “accounting” that was used with a sleight of hand to conceal what was really going on behind the curtains during the Enron debacle and others. Of course, given the mathematical complexities of models, the quantitative brainpower needed to understand some of them, and the assumptions required in creating a map of your territory, there is more of an opportunity to either blame the models or to pretend that you didn’t understand them when things turned sour.

    As I ventured with this essay, hoping to make my points within the value at risk framework featured in textbooks, I will move on to the third methodology used in calculating the measure.

    Monte Carlo Simulation – Anything Goes, But More Of An Art Than Science

    Monte Carlo Simulation is especially useful in calculating risk exposures of assets that have either little historical data or whose historical data is rendered irrelevant due to changing economic conditions that affect both the price of securities and the way these securities interact with each other in a portfolio. Also, historical returns of assets with asymmetric payoffs or returns of derivative securities that interact with variables such as interest rates, housing prices, and the like will not reflect the future when factors that influence the return of the security change as the economic climate shifts.

    Continued in article

    Bob Jensen's threads on VaR are at




    Humor Between January 1 and January 31, 2009 ---  

    Tidbits Directory for Earlier Months and Years ---

    Humor Between January 1 and January 31, 2009

    Forwarded by Auntie Bev

    A Birth Certificate shows that we were born

    A Death Certificate shows that we died

    Pictures show that we lived!

    Have a seat . Relax . . . And read this slowly..

    I Believe...
    Just because two people argue,
    it doesn't mean they don't love each other.
    And just because they don't argue,
    it doesn't mean they do love each other.

    I Believe...
    We don't have to change friends if
    we understand that friends change.

    I Believe..
    No matter how good a friend is,

    they're going to hurt you every once in a while and
    you must forgive them for that.

    I Believe...
    True friendship continues to grow, even over
    the longest distance..
    The same goes for true love.

    I Believe..
    You can do something in an instant
    that will give you heartache for life.

    I Believe...
    That it's taking me a long time
    to become the person I want to be.

    I Believe...
    You should always leave loved ones with loving words.
    It may be the last time you see them.

    I Believe...
    You can keep going long after you think you can't.

    I Believe...
    We are responsible for what we do, no matter how we feel.

    I Believe...
    Either you control your attitude or it controls you.

    I Believe...
    Money is a lousy way of keeping score.

    I Believe...
    My best friend and I, can do anything, or
    nothing and have the best time.

    I Believe...
    Sometimes the people you expect to kick you when you're down,

    will be the ones to help youget back up.

    I Believe...
    Maturity has more to do with what types of experiences you've had

    and what you've learned from them and
    less to do with how many birthdays you've celebrated.

    I Believe..
    It isn't always enough, to be forgiven by others.
    sometimes, you have to learn to forgive yourself.

    I Believe...
    No matter how bad your heart is broken

    the world doesn't stop for your grief.

    I Believe...
    Our background and circumstances may have
    influenced who we are, but.

    we are responsible for who we become.

    I Believe...
    Two people can look at the same
    thing and see something totally different.

    I Believe...
    Your life can be changed in a matter of
    hours by people who don't even know you.

    I Believe...
    Even when you think you have no more to give,
    when a friend cries out to you -

    you will find the strength to help.

    I Believe...
    Credentials on the wall do not make you a
    decent human being.

    I Believe...
    You should send this to all the people
    you believe in, I just did.

    'The happiest of people don't necessarily have the best of everything;

    they just make the most of everything.'



    Humor Between January 1 and January 31, 2009

    PJ O’Rourke’s Parliament of Whores ---   

    "W.'s Greatest Hits
    The top 25 Bushisms of all time," by Jacob Weisberg, Slate, January 12, 2009 ---

    Being able to laugh at yourself is a rare quality in a leader. It's one thing George W. Bush can do that Bill Clinton couldn't. Unfortunately, as we bid farewell to Bushisms, we must conclude that the joke was mainly on us.

    1. "Our enemies are innovative and resourceful, and so are we. They never stop thinking about new ways to harm our country and our people, and neither do we."—Washington, D.C., Aug. 5, 2004

    2. "I know how hard it is for you to put food on your family."—Greater Nashua, N.H., Chamber of Commerce, Jan. 27, 2000

    3. "Rarely is the question asked: Is our children learning?"—Florence, S.C., Jan. 11, 2000

    4. "Too many good docs are getting out of the business. Too many OB/GYNs aren't able to practice their love with women all across the country."—Poplar Bluff, Mo., Sept. 6, 2004

    5. "Neither in French nor in English nor in Mexican."—declining to answer reporters' questions at the Summit of the Americas, Quebec City, Canada, April 21, 2001

    6. "You teach a child to read, and he or her will be able to pass a literacy test.''—Townsend, Tenn., Feb. 21, 2001

    7. "I'm the decider, and I decide what is best. And what's best is for Don Rumsfeld to remain as the secretary of defense."—Washington, D.C., April 18, 2006

    8. "See, in my line of work you got to keep repeating things over and over and over again for the truth to sink in, to kind of catapult the propaganda."—Greece, N.Y., May 24, 2005

    9. "I've heard he's been called Bush's poodle. He's bigger than that."—discussing former British Prime Minister Tony Blair, as quoted by the Sun newspaper, June 27, 2007

    10. "And so, General, I want to thank you for your service. And I appreciate the fact that you really snatched defeat out of the jaws of those who are trying to defeat us in Iraq."—meeting with Army Gen. Ray Odierno, Washington, D.C., March 3, 2008

    11. "We ought to make the pie higher."—South Carolina Republican debate, Feb. 15, 2000

    12. "There's an old saying in Tennessee—I know it's in Texas, probably in Tennessee—that says, fool me once, shame on—shame on you. Fool me—you can't get fooled again."—Nashville, Tenn., Sept. 17, 2002

    13. "And there is distrust in Washington. I am surprised, frankly, at the amount of distrust that exists in this town. And I'm sorry it's the case, and I'll work hard to try to elevate it."—speaking on National Public Radio, Jan. 29, 2007

    14. "We'll let our friends be the peacekeepers and the great country called America will be the pacemakers."—Houston, Sept. 6, 2000

    15. "It's important for us to explain to our nation that life is important. It's not only life of babies, but it's life of children living in, you know, the dark dungeons of the Internet."—Arlington Heights, Ill., Oct. 24, 2000

    16. "One of the great things about books is sometimes there are some fantastic pictures."—U.S. News & World Report, Jan. 3, 2000

    17. "People say, 'How can I help on this war against terror? How can I fight evil?' You can do so by mentoring a child; by going into a shut-in's house and say I love you."—Washington, D.C., Sept. 19, 2002

    18. "Well, I think if you say you're going to do something and don't do it, that's trustworthiness."—CNN online chat, Aug. 30, 2000

    19. "I'm looking forward to a good night's sleep on the soil of a friend."—on the prospect of visiting Denmark, Washington, D.C., June 29, 2005

    20. "I think it's really important for this great state of baseball to reach out to people of all walks of life to make sure that the sport is inclusive. The best way to do it is to convince little kids how to—the beauty of playing baseball."—Washington, D.C., Feb. 13, 2006

    21. "Families is where our nation finds hope, where wings take dream."—LaCrosse, Wis., Oct. 18, 2000

    22. "You know, when I campaigned here in 2000, I said, I want to be a war president. No president wants to be a war president, but I am one."—Des Moines, Iowa, Oct. 26, 2006

    23. "There's a huge trust. I see it all the time when people come up to me and say, 'I don't want you to let me down again.' "—Boston, Oct. 3, 2000

    24. "They misunderestimated me."—Bentonville, Ark., Nov. 6, 2000

    25. "I'll be long gone before some smart person ever figures out what happened inside this Oval Office."—Washington, D.C., May 12, 2008


    Gas Right Strips (video) ---

    Forwarded by Maureen

    What Is Butt Dust???

    What, you ask, is 'Butt dust'? Read on and you'll discover the joy in it! These have to be original and genuine. No adult is this creative!!

    JACK (age 3) was watching his Mum breast-feeding his new baby sister. After a while he asked: 'Mum why have you got two? Is one for hot and one for cold milk?'

    MELANIE (age 5) asked her Granny how old she was. Granny replied she was so old she didn't remember any more. Melanie said, 'If you don't remember you must look in the back of your pants. Mine say five to six.'

    STEVEN (age 3) hugged and kissed his Mum good night. 'I love you so much that when you die I'm going to bury you outside my bedroom window.'

    BRITTANY (age 4) had an ear ache and wanted a pain killer. She tried in vain to take the lid off the bottle. Seeing her frustration, her Mom explained it was a child-proof cap and she'd have to open it for her. Eyes wide with wonder, the little girl asked: 'How does it know it's me?'

    SUSAN (age 4) was drinking juice when she got the hiccups. 'Please don't give me this juice again,' she said, 'It makes my teeth cough.'

    DJ (age 4) stepped onto the bathroom scale and asked: 'How much do I cost?'

    MARC (age 4) was engrossed in a young couple that were hugging and kissing in a restaurant. Without taking his eyes off them, he asked his dad: 'Why is he whispering in her mouth?'

    CLINTON (age 5) was in his bedroom looking worried When his Mum asked what was troubling him, he replied, 'I don't know what'll happen with this bed when I get married. How will my wife fit in it?'

    JAMES (age 4) was listening to a Bible story. His dad read : 'The man named Lot was warned to take his wife and flee out of the city but his wife looked back and was turned to salt.' Concerned, James asked: 'What happened to his flea?'

    TAMMY (age 4) was with her mother when they met an elderly, rather wrinkled woman her Mum knew. Tammy looked at her for a while and then asked, 'Why doesn't your skin fit your face?'

    The Sermon I think this Mum will never forget...this particular Sunday sermon...'Dear Lord,' the minister began, with arms extended toward heaven and a rapturous look on his upturned face. 'Without you, we are but dust...' He would have continued but at that moment my very obedient daughter who was listening leaned over to me and asked quite audibly in her shrill little four year old girl voice, 'Mum, what is butt dust?'

    Forwarded by Paula

    As I was registering at this 2-star motel, I said to the blonde receptionist, "I hope that the porn channel in my room is disabled."

    "No," she replied with a real attitude, "It's just regular porn, you sick bastard."

    Forwarded by Auntie Bev

    _And in the beginning. . ._

      In ancient Israel, it came to pass that a trader by the name of
      Abraham Com did take unto himself a young wife by the name of

      And Dot Com was a comely woman, broad of shoulder and long of
      leg. Indeed, she had been called Amazon Dot Com.

      She said unto Abraham, her husband, "Why doth thou travel far
      from town to town with thy goods when thou can trade without ever
      leaving thy tent?"

      And Abraham did look at her as though she were several saddle
      bags short of a camel load, but simply said, "How, Dear?"

      And Dot replied, "I will place drums in all the towns and drums
      in between to send messages saying what you have for sale and
      they will reply telling you which hath the best price. And the
      sale can be made on the drums and delivery made by Uriah's Pony
      Stable (UPS)."

      Abraham thought long and decided he would let Dot have her way
      with the drums. The drums rang out and were an immediate success.
      Abraham sold all the goods he had at the top price, without ever
      moving from his tent.

      But this success did arouse envy. A man named Maccabia did
      secrete himself inside Abraham's drum and was accused of insider

      And the young men did take to Dot Com's trading as doth the
      greedy horsefly take to camel dung. They were called Nomadic
      Ecclesiastical Rich Dominican Siderites, or NERDS for short.

      And lo, the land was so feverish with joy at the new riches and
      the deafening sound of drums that no one noticed that the real
      riches were going to the drum maker, one Brother William of
      Gates, who bought up every drum company in the land. And indeed
      did insist on making drums that would work only with Brother
      Gates' drumheads and drumsticks.

      Dot did say, "Oh, Abraham, what we have started is being taken
      over by others." And as Abraham looked out over the Bay of
      Ezekiel, or as it came to be known as "E-Bay" he said,

      "We need a name that reflects what we are."
      And Dot replied, "Young Ambitious Hebrew Owner Operators."

      "YAHOO," said Abraham.

      And that is how it all began. It wasn't Al Gore after all.

    Forwarded by Auntie Bev

    For all my dog-loving friends.

    How many dogs does it take to change a light bulb?

    1. Golden Retriever: The sun is shining, the day is young, we've got our whole lives ahead of us, and you're inside worrying about a stupid burned out bulb?

    2. Border Collie: Just one. And then I'll replace any wiring that's not up to code.

    3. Dachshund: You know I can't reach that stupid lamp!

    4. Rottweiler: Make me.

    5. Boxer: Who cares? I can still play with my squeaky toys in the dark.

    6. Lab: Oh, me, me!!!!! Pleeeeeeeeeze let me change the light bulb! Can I? Can I? Huh? Huh? Huh? Can I? Pleeeeeeeeeze, please, please, please!

    7. German Shepherd: I'll change it as soon as I've led these people from the dark, check to make sure I haven't missed any, and make just one more perimeter patrol to see that no one has tried to take advantage of the situation.

    8. Jack Russell Terrier: I'll just pop it in while I'm bouncing off the walls and furniture.

    9. Old English Sheep Dog: Light bulb? I'm sorry, but I don't see a light bulb!

    10. Cocker Spaniel: Why change it? I can still pee on the carpet in the dark.

    11. Chihuahua : Yo quiero Taco Bulb. Or "We don't need no stinking light bulb."

    12. Greyhound: It isn't moving. Who cares?

    13. Australian Shepherd: First, I'll put all the light bulbs in a little circle...

    14. Poodle: I'll just blow in the Border Collie's ear and he'll do it. By the time he finishes rewiring the house, my nails will be dry..

    How many cats does it take to change a light bulb?
    Cats do not change light bulbs. People change light bulbs. So, the real question is:
    "How long will it be before I can expect some light, some dinner, and a massage?"


    Forwarded by my good neighbors


    Actual writings from hospital charts:

    1. The patient refused autopsy.

    2. The patient has no previous history of suicides.

    3. Patient has left white blood cells at another hospital.

    4. She has no rigours or shaking chills, but her husband states she was very hot in bed last night.

    5. Patient has chest pain if she lies on her left side for over a year.

    6. On the second day the knee was better, and on the third day it disappeared.

    7. The patient is tearful and crying constantly. She also appears to be depressed.

    8. The patient has been depressed since she began seeing me in 1993.

    9. Discharge status: Alive but without permission.

    10. Healthy appearing decrepit 69-year old male, mentally alert but forgetful

    11. Patient had waffles for breakfast and anorexia for lunch.

    12. She is numb from her toes down.

    13. While in ER , she was examined, x-rated and sent home.

    14. The skin was moist and dry.

    15. Occasional, constant infrequent headaches.

    16. Patient was alert and unresponsive.

    17. Rectal examination revealed a normal size thyroid.

    18. She stated that she had been constipated for most of her life, until she got a divorce.

    19. I saw your patient today, who is still under our car for physical therapy.

    20. Both breasts are equal and reactive to light and accommodation.

    21. Examination of genitalia reveals that he is circus sized.

    22. The lab test indicated abnormal lover function.

    23. Skin: somewhat pale but present.

    24. The pelvic exam will be done later on the floor.

    25. Patient has two teenage children, but no other abnormalities.

    Forwarded by Paula

    No one believes seniors .. . . everyone thinks they are senile.

    An elderly couple was celebrating their sixtieth anniversary. The couple had married as childhood sweethearts and had moved back to their old neighbourhood after they retired. Holding hands, they walked back to their old school. It was not locked, so they entered, and found the old desk they'd shared, where Andy had carved 'I love you, Sally.'

    On their way back home, a bag of money fell out of an armoured car, practically landing at their feet. Sally quickly picked it up and, not sure what to do with it, they took it home. There, she counted the money-fifty thousand dollars! Andy said, 'We've got to give it back.'

    Sally said, 'Finders keepers.' She put the money back in the bag and hid it in their attic.

    The next day, detectives were canvassing the neighbourhood looking for the money, and knocked on their door. 'Pardon me, did either of you find a bag that fell out of an armoured car yesterday?'

    Sally said, 'No'.

    Andy:’ She’s lying.. She hid it in the attic. '

    Sally : 'Don't believe him