CNN Video About Outsourcing Homework (after an introductory commercial) ---
http://www.cnn.com/video/#/video/us/2009/09/04/costello.outsourcing.homework.cnn
Link forwarded by Richard Campbell

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

Accounting Career and Motivational Videos

The AICPA has a number of free videos of possible interest to students ---  http://www.aicpa.org/stream/index.htm

I think some of the best videos for students stress things like “the FBI now hires more accountants than lawyers.” (I’m not sure this is still true, but I sounds good on one of the AICPA videos). At times the AICPA went a little too funky, but for the most part these are interesting videos.

The AICPA’s “Mars Pathfinder” video was really different.

On my computer these videos play on Real Player. This may be necessary for playback.

There are many accounting/accountant videos on YouTube, and many are too far out for me. Videos produced by sophomores look like they were . . . err  . . . produced by sophomores.

 Also see http://www.videosurf.com/video/accountant-and-auditor-careers-68277033

• New Math (Tom Lehrer)--- http://www.youtube.com/watch?v=a81YvrV7Vv8
   

• Mathematics for Accounting Research (Tom Lehrer) ---
  http://www.youtube.com/watch?v=gfZWyUXn3So
  (Watch until you are at or near the end of the video since it sort of has a false ending in the middle.)

Question
Do both political science and accountancy doctoral programs need a "reformation?"

Academic Accounting Research Farmers Are More Interested in Their Tractors Than in Their Harvests.
Bob Jensen --- http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm

Yes, I have biases, as I freely acknowledge. I like research that puts the method before the message, meaning that if the conclusion comes first, as in much of what I perceive under the “critical perspectives” banner, I view that to be advocacy for a cause, not research.”
Steve Kachelmeier, University of Texas and current Editor of The Accounting Review  (in a letter to Paul Williams)

“Research should be problem driven rather than methodologically driven," said Lisa Garcia Bedolla, a member of the task force who teaches at the University of California at Berkeley.
See Below

Assignment
Download the following document into a word processor, click on "Edit, Replace," and replace "political science" with "accounting" and see how much of it rings true.

There will be differences. Undergraduate accounting courses are not as statistical/mathematical as many undergraduate political science courses. Undergraduate accounting courses and textbooks are  largely driven by the CPA examination content. In political science there is no such overriding certification process. For example, when my daughter took her first political science course for a general education major at the University of Texas (she was a biology major), the instructor adopted a game theory textbook that really had very few political science examples --- it was a game theory book. Turns out that he was a doctoral student in political science and was studying game theory himself at the same time.

But there will be almost no difference with respect to political science doctoral programs versus accounting (accountics) doctoral programs --- http://www.trinity.edu/rjensen/theory01.htm#DoctoralPrograms
The rise of accountics-dominance in international doctoral programs is demonstrated at
http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm

"Poli Sci Reformation?" by Scott Jaschik, Inside Higher Ed, September 4, 2009 ---
http://www.insidehighered.com/news/2009/09/04/polisci 

Consider this story: A political science department has a senior thesis program and has attracted a group of engaged undergraduates to pursue research projects that excite them. Then the department's professors have a fight and traditionalists take over supervision of the senior thesis program and "turn it into a statistical methods course." Many students, because the projects that drew them to the program had been wiped out, dropped out. The professor who told the story didn't name his college, but judging from the reaction here at the annual meeting of the American Political Science Association, the story rang true as something that could have taken place at many colleges and universities.

The anecdote came after a presentation Thursday by a special task force of the association, appointed to consider how the discipline should reshape itself -- in just about everything, including the undergraduate curriculum, the evaluation of faculty members and the subjects considered for research. The panel is about halfway through a two-year process to create a report on "political science in the 21st century," and used the association's annual meeting to share some of the ideas it is considering. The ideas include changing the way introductory courses are generally taught, shifting how graduate students are trained so they aren't being prepared only for research university jobs that are hard to come by, and making relevance (in courses and research) a key issue.

“Research should be problem driven rather than methodologically driven," said Lisa Garcia Bedolla, a member of the task force who teaches at the University of California at Berkeley.

Calls to make political science more relevant and less methodological are not new. In 2000, an anonymous e-mail calling the association and its leading journals out of touch and dominated by methodology set off a "perestroika" movement within the discipline (so called because of the pen name of the author of the e-mail and his not-so-subtle comparison of the discipline to the end days of the Soviet Union). The rallying cry of that movement was "methodological diversity."

That appears to be a major part of the way the new task force views political science. But the new reform effort is also very much about diversity in American society and colleges' student bodies -- which is notably not matched by the profession -- and how political science should change to reflect that diversity. And the vision of those on the task force is as much about teaching as it is about research.

Manuel Avalos of the University of North Carolina at Wilmington said that introductory courses typically try to cover bits of all of the "subfields" of political science -- an approach that may make sense for a traditional undergraduate at an elite college, who wants to go to graduate school and earn a doctorate. "But that is not how an undergraduate who is not going to graduate school views the world," he said. "How are we making this relevant to them?"

Another notable difference between this movement and the one that started the decade is that this one has backing from association leaders. The task force was created by Dianne Pinderhughes, the past president and a political scientist at the University of Notre Dame. The perestroika movement was very much from outsiders trying to have some influence (many say that they did, although many also say not enough).

Here are some of the issues raised Thursday -- not as final or even draft recommendations, but as concepts that the committee is exploring:

• The real world. A theme of several of the panel members was that students sign up for political science courses because they want to understand what's going on around them, not because they want theory. "We have to emphasize the connections between the real world and the discipline," said Sherri Wallace of the University of Louisville. Several also noted that by failing to offer such material, political science risks losing students. Terri Givens, co-chair of the panel and a professor at the University of Texas at Austin (who does work on comparative political systems), said she is worried about "the rise of international studies and international relations" (operating outside of political science). "Students are looking for what they think is international relations and they often don't find it in political science," she said.
• A true commitment to teaching. Members of the task force said that the discipline is dominated by an ethos that research is the most important thing and that research universities represent the key model for careers. "We are a bit elitist," said Wallace. Even if political scientists believe that research careers are the ultimate goal, several panelists noted that there are not nearly as many jobs at such institutions as there are at regional state universities or community colleges, and they suggested graduate programs should change to prepare people for jobs that they may actually get. "Most people do not get jobs at Research I institutions. They can't," said Juan Carlos Huerta of Texas A&M University at Corpus Christi. The contrast between the association's annual meeting and its annual conference on teaching, they noted, isn't just in the subject matter, but who attends. At this week's gathering in Toronto, the big names are from research universities and many teaching oriented professors don't bother to attend.
• A broader research agenda. At a time when the student body is increasingly diverse, and issues of global inequities are front and center, several said that a much more diverse research agenda is needed -- with more attention to pressing social and political problems. Bedolla of Berkeley said that the discipline's focus on the state and state institutions has led the discipline to study those in power, at the expense of looking at those without power. Further, Givens said it was important for political scientists to be more willing to embrace other disciplines. She mentioned as an example an area she follows in European politics. German politicians, having studied the Internet techniques used by Barack Obama in his campaign, are now being surprised that they aren't as effective in Germany. Givens said that to understand why, political scientists need not just their own ideas, but knowledge about social networks and new media.
• Understanding the tradeoffs of reform ideas. Luis R. Fraga of the University of Washington, co-chair of the task force, stressed that solutions to these issues are not simple. For example, he said that one idea about reforming graduate education might be to have doctoral programs create specific programs for those interested in teaching careers. But if that were take place, Fraga said, "I wonder which of our graduate students would be quickly tracked into teaching and teaching institutions, and whether that would exacerbate issues associated with access and inclusion," leaving a white male cohort to focus on research.

Behind all these and other questions, Fraga said, is a desire by the task force to promote a more rigorous analysis of many of the assumptions that go into how political scientists operate. Fraga said that the traditional ways of operating aren't necessarily wrong, but that adhering to them without evidence is. The profession, he said, "needs to be more self-reflective."

"We think it is important to ask more of those of us in the profession about whether we are doing the best job we can," he said. "To often, we just follow elements of whatever the dominant thinking has been."

"Book: AICPA Guide Helps Businesses Investigate Fraud," SmartPros, September 9, 2009 ---
http://accounting.smartpros.com/x67582.xml

The mechanics of a fraud investigation and associated ramifications for business professionals are the theme of The Guide to Investigating Business Fraud, the latest book publication from the American Institute of Certified Public Accountants’ Specialized Publications Group.

Authored by a team of seasoned professionals from Ernst & Young’s Fraud Investigation and Dispute Services (FIDS) Practice, the guide delivers practical, actionable guidance on fraud investigations from the discovery phase through resolution and remediation.

“The decade’s high-profile scandals, with the Bernard Madoff Ponzi scheme being the most recent, underscore exactly how critical it is for CPAs and the business owners, controllers and managers they advise to understand what to do when fraud hits, how a fraud investigation works, and how to avoid problems during the investigation,” said Arleen Thomas, AICPA senior vice president – member competency and development. “This book provides a very clear framework.”

Thomas added that a June report by the Federal Bureau of Investigation, in which the FBI disclosed that it had opened more than 100 new cases involving corrupt business practices in the previous 18 months, emphasizes the need for the new guidance.

Ernst & Young Principal Ruby Sharma, the main editor and a contributing author, notes the book, which collects the knowledge of 18 firm contributors, took over two years to develop.

“This book is the result of many professionals’ hard work and draws upon their extensive experience,” she said. “This book is for forensic accountants, litigation attorneys, corporate boards and management, audit committees, students of accounting and anybody interested in understanding the risk of fraud and its multiple implications."

In 14 chapters arranged to track the time sequence of an investigation and all anchored to a central case study, The Guide to Investigating Business Fraud answers four basic questions:

How do fraud experts examine and work a fraud case? How do you reason and make decisions at critical times during the investigation? How do you evaluate a case and interact with colleagues? How do you handle preventive anti-fraud programs?

In addition to Sharma, the editors are Michael H. Sherrod, senior manager, Richard Corgel, executive director; and Steven J. Kuzma, Americas Fraud Investigation and Dispute Services chief operating officer.

The Guide to Investigating Business Fraud is available from CPA2Biz ( www.cpa2biz.com ). The cost is $79 for AICPA members and $98.75 for non-members.

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

Pictures Versus Words

"Bending the Curve," by William Saphire, The New York Times, September 11, 2009 ---
http://www.nytimes.com/2009/09/13/magazine/13FOB-OnLanguage-t.html?_r=1&ref=magazine

Taking on the issue of the cost of health care, a Washington Post editorialist intoned recently that “knowing more about which treatments are effective is essential” — knowing about when to use a plural verb is tough, too — “but, without a mechanism to put that knowledge into action, it won’t be enough to bend the cost curve.”

That curvature continued in The Chicago Tribune, which put the fast-blooming metaphor in a headline: ‘‘Bending the Curve on Health Spending.” It leaps boundaries beyond costs and subjects: a book has been titled “Bending the Curve: Your Guide to Tackling Climate Change in South Africa.”

Why has curve-bending become such a popular sport? Because the language is in the grip of graphs. The graphic arts are on the march as “showing” tramples on “explaining,” and now we are afflicted with the symbols of symbols. As an old Chinese philosopher never said, “Words about graphs are worth a thousand pictures.”

The first straight-line challenge to the muscular line-benders I could find was in the 1960s, when the power curve was first explained to me by a pilot. “Being behind or ‘on the backside of the power curve’ is an aviation expression,” rooted in World War I, he maintained. “It’s a condition when flying slow takes more energy than going fast, and you produce a result opposite to what you intended.” On the graph of the power that a plane needs to overcome wind resistance, most “drag” increases as a plane slows; that’s why you hear a fresh surge of power when a jet is landing. Pilots know that being “behind the power curve” is to be on the way to a crash. That image was snapped up in political lingo, when “to be behind that power curve” quickly came to mean “to be out of the loop, trailing the with-it crowd, doomed to be left behind the barn door when the goodies were being handed out.”

Now we have President Obama, no slouch at seizing on popular figures of speech, warning Fred Hiatt of The Washington Post that “it’s important for us to bend the cost curve, separate and apart from coverage issues, just because the system we have right now is unsustainable and hugely inefficient and uncompetitive.” In other words, as the bygone aviators knew — bend it or crash. That led to the Nation’s headline “Bend It Like Obama,” a play on the movie title “Bend It Like Beckham.”

Came the current recession, the graphic-metaphor crowd stopped worrying about a cost line bending inexorably upward and directed its attention to the need to get the upward-bending unemployment figures bending down. Thus, the meaning of the phrase bending the curve is switching from “bend that awful, upward-curving line down before we can’t afford an aspirin” to “bend that line up down quick, before we all head for the bread line!” This leads to metaphoric confusion. It’s what happens when you fall in love with full-color graphs to explain to the screen-entranced set what’s happening and scorn plain words.

I am not the only one who observes this in medium-high dudgeon. “Optics” is hot, rivaling content. “It seems that politicians are now working to ensure that their policy positions are stated in a way that’s ‘optically acceptable’ to their constituents,” writes Tom Short of San Rafael, Calif. “Not good. Anytime I hear this word used in any context outside of graphic arts, my eye doctor’s office or the field of astronomy, my B.S. detector goes into high alert.”

Symbols are fine; we live by words, figures, pictures. But as Alfred Korzybski postulated seven decades ago, the symbol is not the thing itself: you cannot milk the word “cow,” and as he put it, “a map is not the territory.” Arthur Laffer’s famous curve drawn on a cocktail napkin offers some economists a nice shorthand guide to his supply-side idea, but it is not the theory itself. Today’s mind-bending surge toward the use of words about graphs and poll trends — even when presented in color on elaborate Power­Point presentations — takes us steps away from reality. There must be a curve to illustrate that, and I say bend it way back.

DEPARTMENT OF AMPLIFICATION

To a recent exploration of the origin of real estate’s location, location, location, there have been these useful additions from readers: David K. Barnhart of the lexicographical family writes: “It reminds me of the book collector’s eccentric way of insisting that bindings must be in not less than pristine shape. Our adage is condition, condition, condition.”

Joe Asher of Seattle adds the three things that matter in public speaking: “locution, locution, locution.”

And a fishhook on this page daring to suggest that Abe Lincoln deliberately adopted the “mistakes were made” passive voice to avoid taking personal responsibility drew this amplification from Frank Myers, distinguished professor at Stony Brook University in New York: “Lincoln’s Second Inaugural Address contains (by my count) six uses of the passive voice in his first seven sentences, tending to obscure the subject — especially himself as speaker and actor. No doubt this is part of the artistry of the speech.” Nobody’s perfect.

Finally, word from the geezersphere, pioneering Comic Strip Division: “Your citation of Nov shmoz ka pop revitalized nostalgic memories,” writes Albert Varon of Chicago earnestly if redundantly. “My recollection is that the comic strip was called ‘The Squirrel Cage’ and that the ride-thumbing little guy was half-buried in snow next to a barber pole and was dressed in a full tunic or robe and some kind of turban.” He adds proudly — and usefully to later generations — “For many years, I have announced ‘Nov shmoz ka pop!’ assertively and dismissively to put off phone solicitors and aggressive panhandlers. Thank you for refreshing those halcyon days of my youth.”

Ed Scribner suggested that AECMers commence to catalog problems where professors and students in the accounting academy can one day make creative contributions (inventions?) that will aid practitioners as well as researchers.

I’ve long thought that some of the many ways we might be of help is in creating/inventing ways of visualizing multivariate data beyond our traditional two dimensional spreadsheet graphs.  I once published some research with Chernoff faces, Glyph Plotts, etc. along this lines which using social accounting data for power companies --- Volume 14 monograph entitled Phantasmagoric Accounting in the American Accounting Association Studies in Accounting Research Series ---

http://aaahq.org/market/display.cfm?catID=5

Shane Moriarity later picked up on this idea and analyzed some financial statements using Chernoff Faces.
“Communicating Financial Information Through Multidimensional Graphics”
Journal of Accounting Research, Vol. 17, No. 1, Spring 1979 ---
http://www.jstor.org/pss/2490314

I don’t think any accounting researchers picked up on the Jensen and Moriarity ideas, although I may have missed some unpublished working papers.

Are these rights to confidentiality information common?
Jim Mahar pointed out the following confusing statement in Kodak's 8K filing with the SEC:

Information Rights: For so long as KKR and certain related parties hold at least 10% of the common stock issued or issuable upon exercise of the Warrants it originally purchased pursuant to the Purchase Agreement, KKR shall have the right to receive certain information regarding the Company, subject to confidentiality restrictions.
Kodak 8K Report, September 16, 2009 --- http://sec.gov/Archives/edgar/data/31235/000095012309043815/y37583k2e8vk.htm

Question
Are these rights to confidentiality information common?

Answer
Jagdish Gangolly pointed out that there is an SEC rule that an investor owning 10% or more of the voting shares is considered an insider and is subject to the rights (access to some insider information) and trading constraints as other insiders.

All is Not Well in Programs for Doctoral Students in Departments/Colleges of Education
The education doctorate, attempting to serve dual purposes—to prepare researchers and to prepare practitioners—is not serving either purpose well. To address what they have termed this "crippling" problem, Carnegie and the Council of Academic Deans in Research Education Institutions (CADREI) have launched the Carnegie Project on the Education Doctorate (CPED), a three-year effort to reclaim the education doctorate and to transform it into the degree of choice for the next generation of school and college leaders. The project is coordinated by David Imig, professor of practice at the University of Maryland. "Today, the Ed.D. is perceived as 'Ph.D.-lite,'" said Carnegie President Lee S. Shulman. "More important than the public relations problem, however, is the real risk that schools of education are becoming impotent in carrying out their primary missions to prepare leading practitioners as well as leading scholars."
"Institutions Enlisted to Reclaim Education Doctorate," The Carnegie Foundation for Advancement in Teaching --- http://www.carnegiefoundation.org/news/sub.asp?key=51&subkey=2266

The EED does not focus enough on research, and the PhD program has become a social science doctoral program without enough education content. Middle ground is being sought.

All is Not Well in Programs for Doctoral Students in Departments/Colleges of Business, Especially in Accounting
The problem is that not enough accounting is taught in what have become social science doctoral programs
See http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#DoctoralPrograms

Partly the problem is the same as with PhD programs in colleges of education.
The pool of accounting doctoral program applicants is drying up, especially accounting doctoral program pool that is increasingly trickle-filled with mathematically-educated foreign students who have virtually no background in accounting. Twenty years ago, over 200 accounting doctoral students were being graduated each year in the United States. Now it's less than one hundred graduates per year, many of whom know very little about accounting, especially U.S. accounting. This is particularly problematic for financial accounting, tax, and auditing education requiring knowledge of U.S. standards, regulations, and laws.

Accounting doctoral programs are social science research programs that do not appeal to accountants who are interested in becoming college educators but have no aptitude for or interest in the five or more years of quantitative methods study required for current accounting doctoral programs.

To meet the demand of thousands of colleges seeking accounting faculty, the supply situation is revealed by Plumlee et al (2006) as quoted at http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm

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.

The answer here it seems to me is to open doctoral programs to wider humanities and legal studies research methodologies and to put accounting back into accounting doctoral programs.

Partly the problem is the same as with “two-tiered” departments of modern languages
The huge shortage of accounting doctoral graduates has bifurcated the teaching of accounting. Increasingly, accounting, tax, systems, and auditing courses are taught by adjunct part-time faculty or full-time adjunct faculty who are not on a tenure track and often are paid much less than tenure-track faculty who teach graduate research courses.

The short run answer here is difficult since there are so few doctoral graduates who know enough accounting to take over for the adjunct faculty. If doctoral programs open up more to accountants, perhaps more adjunct faculty will enter the pool of doctoral program prospects. This might help the long run problem. Meanwhile as former large doctoral programs (e.g., at Illinois, Texas, Florida, Indiana, Wisconsin, and Michigan) shrink more and more, we’re increasingly building two-tier accounting education programs due to increasing demand and shrinking supply of doctoral graduates in accountancy.

We’re becoming more and more like “two-tier” language departments in our large and small colleges.

Practitioners in  education schools generally are K-12 teachers and school administrators. In the case of accounting doctoral programs, our dual mission is to prepare college teachers of accountancy as well as leading scholars. Our accounting doctoral programs are drying up (less than 100 per year now graduating in the United States, many of whom know virtually no accounting) primarily because our doctoral programs have become five years of social science and mathematics concentrations that do not appeal to accountants who might otherwise enter the pool of doctoral program admission candidates.

Note that the above Carnegie study also claims that education doctoral programs are also failing to "prepare researchers." I think the same criticism applies to current accountancy doctoral programs in the United States. We're failing in our own dual purpose accountancy doctoral programs and need a concerted effort to become a "degree of choice" among the accounting professionals who would like to move into academe in a role other than that of a low-status and low-paid adjunct professor.

In the United States, following the Gordon/Howell and Pierson reports, our accounting doctoral programs and leading academic journals bet the farm on the social sciences without taking the due cautions of realizing why the social sciences are called "soft sciences." They're soft because "not everything that can be counted, counts. And not everything that counts can be counted."

Leading academic accounting research journals commenced accepting only esoteric papers with complicated mathematical models and trivial hypotheses of zero interest to accounting practitioners --- http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm

Accounting doctoral programs made a concerted effort to recruit students with mathematics, economics, and social science backgrounds even though these doctoral candidates knew virtually nothing about accountancy. To compound the felony, the doctoral programs dropped all accounting requirements except for some doctoral seminars on how to mine accounting data archives with econometric and psychometric models and advanced statistical inference testing.

I cannot find the exact quotation in my archives, but some years ago Linda Kidwell complained that her university had recently hired a newly-minted graduate from an accounting doctoral program who did not know any accounting. When assigned to teach accounting courses, this new "accounting" professor was a disaster since she knew nothing about the subjects she was assigned to teach.

In the year following his assignment as President of the American Accounting Association Joel Demski asserted that research focused on the accounting profession will become a "vocational virus" leading us away from the joys of mathematics and the social sciences and the pureness of the scientific academy:

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

Accounting professors are no longer "leading scholars" if they focus on accounting rather than mathematics and the social sciences --- http://www.trinity.edu/rjensen/395wpTAR/Web/TAR.htm

When Professor Beresford attempted to publish his remarks, an Accounting Horizons referee’s report to him contained the following revealing reply about “leading scholars” in accounting research:

1. The paper provides specific recommendations for things that accounting academics should be doing to make the accounting profession better. However (unless the author believes that academics' time is a free good) this would presumably take academics' time away from what they are currently doing. While following the author's advice might make the accounting profession better, what is being made worse? In other words, suppose I stop reading current academic research and start reading news about current developments in accounting standards. Who is made better off and who is made worse off by this reallocation of my time? Presumably my students are marginally better off, because I can tell them some new stuff in class about current accounting standards, and this might possibly have some limited benefit on their careers. But haven't I made my colleagues in my department worse off if they depend on me for research advice, and haven't I made my university worse off if its academic reputation suffers because I'm no longer considered a leading scholar? Why does making the accounting profession better take precedence over everything else an academic does with their time?
As quoted in Jensen (2006a) ---
http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#AcademicsVersusProfession

Amy,

Statistical methods are not inherently faulty. But they can be, and far too frequently are, misused. So, to turn your metaphor on its head, much accountics econometrics work is more like spraying manure in a perfumed room, or more like a skunk spraying in a perfumed room.

 Statistical methods are used for classifying, associating, predicting, inferring (causally as well as associatively), organising, and learning. It is important to always keep in mind in which context you are using statistics. 

 1.
In the accountics stuff I am familiar with, determining association is the avowed objective, but the language subtly takes a predictive turn in discussions. The reason usually is the positivist dogma having to do with absence of causation in a naive positivist's lexicon.

 I have been stunned by well known accounticians professing that we do not study causes because there are no statistical methods for causal inference. And to the last person, these folks have not heard of modern statistical tools for the study of causation in statistics.

Ignorance is bliss in this wonderland. Social scientists, however, have used them for a long time. Theological commitments are dangerous for ANY "science".

2.
Classification is the first step in learning. It is only VERY recently that accounting folks have started talking about the use of classification by use of clustering, support vector machines, neural nets, etc., but most of these discussions take place in non-mainstream contexts.

 3.
Many of the techniques in 2 are nowadays considered part of the field of machine learning, a hybrid between statistics and computing. I am sure one of these days, when they have become stale elsewhere,They’ll be used in accounting. Mainstream accountics academics are far too conservative to accept any statistical method unless they have been certified stale.

4.
Often, in conversations, accountics folks revert to counterfactual statements.That is natural in the sciences. Underlying such statements are usually causal inferences. It is in this context that I had made observation 1 above. Building a better mousetrap is a legitimate objective   of sciences, and therefore predictive models are essential component of any science. Accountics' theological commitment to positivist dogma makes them schizophrenic in that they cannot admit causality without jeopardising their philosophical suppositions and yet cannot ignore it if they are to maintain their credibility as scientists.

 As to some work in these areas of statistics, any list I prepare would include the following books.

1.
Counterfactuals and Causal Inference: Methods and Principles for Social Research (Analytical Methods for Social Research) by Stephen L. Morgan and Christopher Winship 

 

2.
Causality: Models, Reasoning, and Inference by Judea Pearl

3.
Pattern Recognition and Machine Learning (Information Science and Statistics) by Christopher M. Bishop

4.

The Elements of Statistical Learning: Data Mining, Inference, and Prediction, Second Edition (Springer Series in Statistics) by Trevor Hastie, Robert Tibshirani, and Jerome Friedman

I think 3 is available online for free, but it is dense reading. 1 is outstanding.

2 is a classic, and 4 is, to an extent, based on the work of Vapnik.  

Jagdish

Wall Street’s Math Wizards Forgot a Few Variables
What wasn’t recognized was the importance of a different species of risk — liquidity risk,” Stephen Figlewski, a professor of finance at the Leonard N. Stern School of Business at New York University, told The Times. “When trust in counterparties is lost, and markets freeze up so there are no prices,” he said, it “really showed how different the real world was from our models.
DealBook, The New York Times, September 14, 2009 ---
http://dealbook.blogs.nytimes.com/2009/09/14/wall-streets-math-wizards-forgot-a-few-variables/

Bob Jensen's threads on the current economic crisis ---
http://www.trinity.edu/rjensen/2008Bailout.htm

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

The rise of accountics is summarized at http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm 

Some of the things that turns some accounting graduates away from an accountics doctoral program

"What Should They Teach Professional Accountants?" by Bill Kennedy, CA (Chief Financial Officer), Toolbox for Finance, December 16, 2008 --- Click Here
http://finance.toolbox.com/blogs/energized-accounting/what-should-they-teach-professional-accountants-28842

Where I live, in order to become a Chartered Accountant (the Canadian equivalent of a CPA), you need the following:

Courses Hours

Financial accounting 15
(introductory, intermediate and advanced)

Cost & management accounting 6

Advanced accounting elective 3

Auditing 9

Taxation 6

Business information systems 3

Finance/financial management 3

Economics 3

Law 3

Total credit hours 51
 

What do you think? Is the above enough? What skills seem to be lacking in the young accountants work with?

Here's my wish list:

Communications - how to explain financial information to non financial people, how to present clearly, making a clear case for action, how to organize the lines on a financial statement, how to analyze data so that the analysis leads to a clear course of action.

Working With Data - how to select, filter, sort and present data. How to build a spreadsheet model. How to use a report generator.

Project Accounting - I don't know why we teach cost accounting but not project accounting. Most of my clients have had some form of project work.

Business Ethics - These days, I think that is self-explanatory. If you don't start when you are a student, when will you have time for this subject?

Additional Topics Statistics, Interest calculations (discounting, annuities, mortgages) and risk management (including insurance).

What would you add?

Jensen Comment
This list of courses seems a lot light in economics and finance for openers. Some things like ethics, building a spreadsheet model, discounting, annuities, and using a report generator are probably already be included in accounting courses. What I would like to inquire about are such things capital structure, as structured finance, derivatives speculation and hedging, history of accounting, history of economic thought, and history of management theory --- http://www.trinity.edu/rjensen/theory/00overview/GreatMinds.htm
Also see
Great Minds in Sociology ---
http://www.sociosite.net/topics/sociologists.php
Also see Also see http://www.sociologyprofessor.com/ 

Bob Jensen's threads on accounting doctoral programs ---
http://www.trinity.edu/rjensen/theory01.htm#DoctoralPrograms

From The Wall Street Journal Accounting Weekly Review on September 10, 2009

Madoff Report Reveals Extent of Bungling
by Kara Scannell and Jenny Strasburg
Sep 05, 2009
Click here to view the full article on WSJ.com

TOPICS: Auditing, Ponzi Schemes

SUMMARY: "The SEC's inspector general released the full 477-page version of his report on how the SEC missed red flags on [Bernard Madoff]....and details just how many opportunities there were for examiners to find the fraud and how bungled their efforts were." For example, "one anonymous complaint directed the SEC to a 'scandal of major proportion' by the Madoff firm and said assets of a specific investor 'have been 'co-mingled' with funds controlled by the Madoff firm. The SEC called Mr. Madoff's lawyer and had him ask Mr. Madoff if he managed money for that investor. When the lawyer said Madoff didn't, the complaint wasn't pursued further. The IG report concludes that 'accepting the word of a registrant who is alleged to be engaged in a specific instance of fraud is an inadequate investigation'....SEC Chairman Mary Schapiro said, 'In the coming weeks, we will continue to closely review the full report and learn every lesson we can to help build upon the many reforms we have already put into place since January.'"

CLASSROOM APPLICATION: The article makes clear the need for auditing roles at the SEC as well as in public accounting firms auditing general purpose financial statements.

QUESTIONS: 
1. (Introductory) What is a "Ponzi Scheme"? When was Mr. Madoff convicted of running such a scheme? How did this scheme impact Madoff's investors?

2. (Introductory) Who issued the report on the SEC's failure to uncover the Madoff scheme before it collapsed and he himself admitted to the crime?

3. (Advanced) What did "an unnamed hedge-fund manager" say in an email to the SEC? Explain how each of the points listed in the email indicate the possibility of a Ponzi scheme in operation.

4. (Introductory) What is "front-running" in trading? How did a senior examiner explain this trading activity as his choice of action to investigate in Mr. Madoff's operations?

5. (Advanced) How do you think a choice of action in examination should be determined if the SEC receives a credible indication of possible fraud in operating an investment firm such as Mr. Madoff's? How should this choice drive the determination of expertise needed on an investigatory team?

6. (Advanced) What audit step failure was evident in the SEC investigatory actions undertaken between December 2003 and March 2004, as described in the article?

7. (Introductory) What expertise do you think was needed on the investigative teams handling the Madoff case, at least as described in this article?

Reviewed By: Judy Beckman, University of Rhode Island

RELATED ARTICLES: 
Ex-SEC Lawyer: Madoff Report Misses Point
by Suzanne Barlyn
Sep 04, 2009
Online Exclusive

'Evil' Madoff Gets 150 Years in Epic Fraud
by Robert Frank and Amir Efrati
Jun 30, 2009
Online Exclusive

New Hints at Why the SEC Failed to Seriously Investigate Madoff's Hedge Fund
After being repeatedly warned for six years that this was a criminal scam
It's beginning to look like a family "affair"

(The SEC's) Swanson later married Madoff's niece, and their relationship is now under review by the SEC inspector general, who is examining the agency's handling of the Madoff case, the Post reported. Swanson, no longer with the agency, declined to comment, the Post said.
"SEC lawyer raised alarm about Madoff: report," Reuters, July 2, 2009 --- http://news.yahoo.com/s/nm/20090702/bs_nm/us_madoff_sec
The Washington Post account is at --- Click Here

A U.S. Securities and Exchange Commission lawyer warned about irregularities at Bernard Madoff's financial management firm as far back as 2004, The Washington Post reported on Thursday, citing agency documents and sources familiar with the investigation.

Genevievette Walker-Lightfoot, a lawyer in the SEC's Office of Compliance Inspections and Examinations, sent emails to a supervisor saying information provided by Madoff during her review didn't add up and suggesting a set of questions to ask his firm, the report said.

Several of the questions directly challenged Madoff activities that turned out to be elements of his massive fraud, the newspaper said.

Madoff, 71, was sentenced to a prison term of 150 years on Monday after he pleaded guilty in March to a decades-long fraud that U.S. prosecutors said drew in as much as $65 billion.

The Washington Post reported that when Walker-Lightfoot reviewed the paper documents and electronic data supplied to the SEC by Madoff, she found it full of inconsistencies, according to documents, a former SEC official and another person knowledgeable about the 2004 investigation.

The newspaper said the SEC staffer raised concerns about Madoff but, at the time, the SEC was under pressure to look for wrongdoing in the mutual fund industry. Walker-Lightfoot was told to focus on a separate probe into mutual funds, the report said.

One of Walker-Lightfoot's supervisors on the case was Eric Swanson, an assistant director of her department, the Post reported, citing two people familiar with the investigation.

Swanson later married Madoff's niece, and their relationship is now under review by the SEC inspector general, who is examining the agency's handling of the Madoff case, the Post reported.

Swanson, no longer with the agency, declined to comment, the Post said.

SEC spokesman John Nester also declined to comment, citing the ongoing investigation by the agency's inspector general, the newspaper said.

Our Main Financial Regulating Agency:  The SEC Screw Everybody Commission
One of the biggest regulation failures in history is the way the SEC failed to seriously investigate Bernie Madoff's fund even after being warned by Wall Street experts across six years before Bernie himself disclosed that he was running a $65 billion Ponzi fund.

CBS Sixty Minutes on June 14, 2009 ran a rerun that is devastatingly critical of the SEC. If you’ve not seen it, it may still be available for free (for a short time only) at http://www.cbsnews.com/video/watch/?id=5088137n&tag=contentMain;cbsCarousel
The title of the video is “The Man Who Would Be King.”
Also see http://www.fraud-magazine.com/FeatureArticle.aspx

Between 2002 and 2008 Harry Markopolos repeatedly told (with indisputable proof) the Securities and Exchange Commission that Bernie Madoff's investment fund was a fraud. Markopolos was ignored and, as a result, investors lost more and more billions of dollars. Steve Kroft reports.

Markoplos makes the SEC look truly incompetent or outright conspiratorial in fraud.

I'm really surprised that the SEC survived after Chris Cox messed it up so many things so badly.

As Far as Regulations Go

An annual report issued by the Competitive Enterprise Institute (CEI) shows that the U.S. government imposed $1.17 trillion in new regulatory costs in 2008. That almost equals the $1.2 trillion generated by individual income taxes, and amounts to $3,849 for every American citizen. According the 2009 edition of Ten Thousand Commandments: An Annual Snapshot of the Federal Regulatory State, the government issued 3,830 new rules last year, and The Federal Register, where such rules are listed, ballooned to a record 79,435 pages. “The costs of federal regulations too often exceed the benefits, yet these regulations receive little official scrutiny from Congress,” said CEI Vice President Clyde Wayne Crews, Jr., who wrote the report. “The U.S. economy lost value in 2008 for the first time since 1990,” Crews said. “Meanwhile, our federal government imposed a $1.17 trillion ‘hidden tax’ on Americans beyond the $3 trillion officially budgeted” through the regulations.
 Adam Brickley, "Government Implemented Thousands of New Regulations Costing $1.17 Trillion in 2008," CNS News, June 12, 2009 ---
http://www.cnsnews.com/public/content/article.aspx?RsrcID=49487

Jensen Comment
I’m a long-time believer that industries being regulated end up controlling the regulating agencies. The records of Alan Greenspan (FED) and the SEC from Arthur Levitt to Chris Cox do absolutely nothing to change my belief ---
http://www.trinity.edu/rjensen/FraudRotten.htm

How do industries leverage the regulatory agencies?
The primary control mechanism is to have high paying jobs waiting in industry for regulators who play ball while they are still employed by the government. It happens time and time again in the FPC, EPA, FDA, FAA, FTC, SEC, etc. Because so many people work for the FBI and IRS, it's a little harder for industry to manage those bureaucrats. Also the FBI and the IRS tend to focus on the worst of the worst offenders whereas other agencies often deal with top management of the largest companies in America.

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

"Madoff Inquiry Was Fumbled by S.E.C., Report Says," by David Stout, The New York Times, September 2, 2009 ---
http://www.nytimes.com/2009/09/03/business/03madoff.html?_r=1&hp

In a damning report on the S.E.C.’s performance, the agency’s inspector general, H. David Kotz, said numerous “red flags” had been missed by the agency, including some warnings sounded by journalists, well before Mr. Madoff’s Ponzi scheme imploded in 2008.

Mr. Kotz concluded that, “despite numerous credible and detailed complaints,” the S.E.C. never properly investigated Mr. Madoff “and never took the necessary, but basic, steps to determine if Madoff was operating a Ponzi scheme.”

“Had these efforts been made with appropriate follow-up at any time beginning in June of 1992 until December 2008, the S.E.C. could have uncovered the Ponzi scheme well before Madoff confessed,” the report concluded.

That Mr. Madoff’s scheme, estimated to have fleeced as much as $65 billion from investors who ranged from the famous to middle-class people who entrusted him with their life savings, was not caught earlier was not because of his cleverness, the report said. Rather, it was because the S.E.C. fumbled three agency exams and two investigations because of inexperience, incompetence and lack of internal communications.

Continued in article

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

"How Bernie Madoff did it:  Madoff is behind bars and isn't talking. But a Fortune investigation uncovers secrets of his massive swindle," by James Bandler, Nicholas Varchaver and Doris Burke, CNN Money, April 24, 2009 ---
http://money.cnn.com/2009/04/24/news/newsmakers/madoff.brief.fortune/index.htm?cnn=yes

Since Bernard Madoff was arrested in December and confessed to masterminding a multi-billion Ponzi scheme, countless people have wondered: Who else was involved? Who knew about the fraud? After all, Madoff not only engineered an epic swindle, he insisted to the FBI that he did it all by himself. To date, Madoff has not implicated anybody but himself.

But the contours of the case are changing.

Fortune has learned that Frank DiPascali, the chief lieutenant in Madoff's secretive investment business, is trying to negotiate a plea deal with federal prosecutors. In exchange for a reduced sentence, he would divulge his encyclopedic knowledge of Madoff's scheme. And unlike his boss, DiPascali is willing to name names.

According to a person familiar with the matter, DiPascali has no evidence that other Madoff family members were participants in the fraud. However, he is prepared to testify that he manipulated phony returns on behalf of some key Madoff investors, including Frank Avellino, who used to run a so-called feeder fund, Jeffry Picower, whose foundation had to close as a result of Madoff-related losses, and others.

If, for example, one of these special customers had large gains on other investments, he would tell DiPascali, who would fabricate a loss to reduce the tax bill. If true, that would mean these investors knew their returns were fishy.

Explains the source familiar with the matter: "This is a group of inside investors -- all individuals with very, very high net worths who, hypothetically speaking, received a 20% markup or 25% markup or a 15% loss if they needed it." The investors would tell DiPascali, for example, that their other investments had soared and they needed to find some losses to cut their tax bills. DiPascali would adjust their Madoff results accordingly.

(Gary Woodfield, a lawyer for Avellino, and William Zabel, the attorney for Picower, both declined to comment. Marc Mukasey, DiPascali's laywer, says, "We expect and encourage a thorough investigation.")

Inside the Madoff swindle: Read the full story --- http://money.cnn.com/2009/04/24/news/newsmakers/madoff.fortune/index.htm

These special deals for select Madoff investors have become a key focus for federal prosecutors, according to this source and a second one familiar with the investigation. The second source describes the arrangements as "kickbacks" and "bonuses." A spokesperson for the U.S. Attorney declined to comment.

But a little-noticed line in a public filing by the prosecutors in March supports at least part of these sources' account. The document that formally charged Madoff with his crimes asserted that he "promised certain clients annual returns in varying amounts up to at least approximately 46 percent per year." That was quite a boost when most investors were receiving 10% to 15%. It appears to reflect the benefits that accrued to those who helped bring large sums to Madoff.

The emergence of this potential star witness is the best news to surface publicly for the Madoff family since the case began. DiPascali has every incentive to implicate high-profile names to save his skin -- and nobody is more under scrutiny than the Madoffs, many of whom worked for the firm. (Representatives for all of the family members have asserted their innocence.) It should be noted that DiPascali is not in a position to say what the Madoffs knew -- this should not be construed as an exoneration. But the fact that a high-ranking participant in the investment operation is not implicating them is telling.

The DiPascali revelations are part of a special Fortune investigation into the inner workings of Madoff's firm. It chronicles Madoff's rise -- how he started his firm in 1960 with only $200, rose to become a pioneer of electronic trading, and became notorious for his investment operation -- a strange, secretive world supervised by DiPascali.

DiPascali was a 33-year veteran of Madoff's firm. A high school graduate with a Queens accent, he came to work in an incongruously starched version of a slacker's uniform: pressed jeans, a sweatshirt, and pristine white sneakers or boat shoes. He could often be found outside the building, smoking a cigarette.

Nobody was quite sure what he did or what his title was. "He was like a ninja," says a former trader in the legitimate operation upstairs. "Everyone knew he was a big deal, but he was like a shadow."

He may not have looked or acted like a financier, but when customers like the giant feeder fund Fairfield Greenwich came in to talk, DiPascali was usually the only Madoff employee in the room with Bernie. Madoff told the visitors that DiPascali was "primarily responsible" for the investment operation, according to a Fairfield memo.

And now DiPascali may be primarily responsible for taking the ever-surprising Madoff case in yet another unexpected direction

 Bob Jensen's threads on the Ponzi schemes are at
http://www.trinity.edu/rjensen/FraudRotten.htm#Ponzi

50 Most Common Mistakes Made by Traders and Investors ---
http://www.ratiotrading.com/2009/09/50-common-mistakes-most-traders-make/

Alpha Return on Investment --- http://en.wikipedia.org/wiki/Alpha_(investment)

The Small-Cap Alpha Myth - http://www.cpanet.com/up/s0210.asp?ID=0609

What the professional investors don't tell you ---
I downloaded this video --- http://www.cs.trinity.edu/~rjensen/temp/FinancialRounds.flv

From the Financial Rounds Blog on September 4, 2009 ---
http://financialrounds.blogspot.com/

When I teach investments, there's always a section on market efficiency. A key point I try to make is that any test of market efficiency suffers from the "joint hypothesis" problem - that the test is not tests market efficiency, but also assumes that you have the correct model for measuring the benchmark risk-adjusted return.

In other words, you can't say that you have "alpha" (an abnormal return) without correcting for risk.

Falkenblog makes exactly this point:
 

In my book Finding Alpha I describe these strategies, as they are built on the fact that alpha is a residual return, a risk-adjusted return, and as 'risk' is not definable, this gives people a lot of degrees of freedom. Further, it has long been the case that successful people are good at doing one thing while saying they are doing another.
 

Even better, he's got a pretty good video on the topic (it also touches on other topics). Enjoy.

You can watch the video under September 4, 2009 at http://financialrounds.blogspot.com/
I downloaded this video --- http://www.cs.trinity.edu/~rjensen/temp/FinancialRounds.flv

Bob Jensen's threads on Return on Investment (ROI) are at
http://www.trinity.edu/rjensen/roi.htm

Bob Jensen's threads on market efficiency (EMH) are at 
http://www.trinity.edu/rjensen/theory01.htm#EMH

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

Rotten to the Core ---
http://www.trinity.edu/rjensen/FraudRotten.htm

Leases—Joint Project of the IASB and FASB
Last Updated: August 17, 2009 (Updated sections are indicated with an asterisk *)
FASB, August 17, 2009 --- Click Here

"NINETY-NINE PERCENT OF CORPORATE REAL ESTATE EXECUTIVES ARE UNPREPARED FOR PROPOSED FASB/IASB LEASE ACCOUNTING CHANGES," Accounting Education News, August 21, 2009 ---
http://accountingeducation.com/index.cfm?page=newsdetails&id=150040

Source:	Jones Lang LaSalle
Country:	United States
Date:	21/08/2009
Contributor:	Andrew Priest
Web:	http://www.joneslanglasalle.com/

Corporate real estate (CRE) executives are substantially unprepared for a proposed major change in national and international accounting treatment of real estate lease obligations, according to a recent survey by Jones Lang LaSalle and CoreNet Global that revealed 99 percent of respondents had not fully evaluated the impact the proposed change would have on their financial statements and operations. Companies could receive a massive shock to their businesses, as indicated by two-thirds (66 percent) of the respondents who said the changes would have a significant or major impact on the size of their company's balance sheets. Eighty-seven percent of respondents agree that they need to learn more about this proposed change soon.

"These new leasing proposals will greatly impact every type and size business in the United States. Whether a firm is public or private, this change would impact literally every item a corporation leases -- not just real estate. Everything from computers to trucks, an ATM kiosk to a floor in an office tower, would have to be capitalized on a balance sheet," said Mindy Berman, Managing Director of Jones Lang LaSalle's Corporate Capital Markets practice. "Lease accounting has been a stealth issue in light of immediately pressing business matters in the current economic environment and other major accounting changes that were recently made."

Under new standards presented on a preliminary basis by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) slated to be issued in 2011, all leases of real estate and equipment will have to be capitalized on a reporting entity's balance sheet, whether public or private.

The Securities and Exchange Commission estimated in 2005 that U.S. public companies will be forced to capitalize approximately $1.3 trillion in operating leases under the new rules, which would replace FAS 13 and IAS 17 as early as 2012. Industry experts estimate that approximately 70 percent of all operating leases are for real estate, impacting balance sheets by $1 trillion or more.

Of the 83 respondents to the Jones Lang LaSalle/CoreNet Global survey, virtually all real estate lease obligations are accounted as operating rather than capital leases. The survey respondents included corporate real estate executives who work at companies with revenues in excess of $1 billion (73 percent), and 82 percent oversee real estate portfolios in excess of 1 million square feet.

According to the survey results, nearly a quarter of respondents (23 percent) said they were unaware of the impending lease accounting changes, while an additional 60 percent had heard of it, but were unfamiliar with the details.

Further results indicate:

1. Only one respondent said his or her company had fully considered the impact of the proposed changes on the earnings, while 58 percent had given the issue no consideration, and 41 percent had looked at it only in a preliminary manner
2. Eighty-three percent of respondents indicated the proposed changes would cause a significant (19 percent) or major burden (64 percent) on their company's administrative requirements.
3. Ninety percent noted that 95 percent or more of their company's real estate leases are currently structured as operating leases--responses which cut across all business sectors and everything from small to large lease portfolios.
4. More than a third of those surveyed (39 percent) agree or strongly agree that the increase in lease-related expenses on their income statements will result in a meaningful detriment to earnings, but even so--respondents are split on the question of whether or not this will change the way analysts and investors consider lease liabilities in valuing companies (29 percent agree it will have an impact, 22 percent disagree).
5. If this standard takes effect, respondents were nearly evenly split about whether the change will influence their corporation's lease-versus-own decisions. Still, well over half of respondents (58 percent) either agree or strongly agree that they may alter the structure of leases should they be capitalized on balance sheets.

"We're definitely seeing a lack of awareness on the part of respondents about these proposed lease accounting changes and impact on their corporation's financial position," said Michael Anderson, research and knowledge manager of CoreNet Global. "We're pleased that those that will be most affected by these changes are realizing they need to be more informed and prepared for the change."

Will the proposed rule change ultimately result in better financial reporting which is the Boards' objective? A slim majority of respondents (53 percent) see the change as more accurately reflecting company assets and liabilities, while nearly a third (32 percent) disagree the changes will create more transparency. In the end, one thing is certain: those within the commercial real estate industry are slowly but surely coming to the conclusion that they must begin dealing with this issue in the near future, as the year 2012 is rapidly approaching.

AICPA Guidance for New Lease Accounting Rules (2005) --- http://www.aicpa.org/download/acctstd/LEASE_TPAs_5600.07.pdf

Under the current rule, companies distinguish between capital lease obligations, which appear on the balance sheet, and operating leases (or rental contracts), which do not. Based on FASB's and IASB's discussion paper on the topic, released earlier this year, the new rule will likely require companies to also capitalize assets that have traditionally fallen under the "operating lease" category, making them appear more highly leveraged.

In addition, warns Ken Bentsen, president of the Equipment Leasing and Financing Association, the proposed changes could lead to higher costs for both capital and accounting. "Rather than simplifying [FAS 13], it ends up creating an extremely complex formula, which will put a great burden, particularly on smaller, nonpublic companies, and does not achieve what we believe is the ultimate goal of FASB and IASB, which is to improve financial reporting," he told CFO.com.

Bentsen's trade association notes in a recent comment letter (the deadline for comments was last Friday) that the proposed changes will impose on smaller companies a disproportionate burden to apply the new accounting to their leases "for immaterial but required adjustments." According to ELFA, more than 90% of leases involve assets worth less than $5 million and have terms of two to five years.

The 109-page discussion paper at least starts with what seems like a new simplified concept for lease accounting: lessees must account for their right to use a leased item as an asset and their obligation to pay future rental installments for that item as a liability.

JCPenney claims it has been in that mindset all along. "Historically, we have managed our capital structure internally as if all real estate property leases were recognized on the balance sheet," wrote Dennis Miller, controller for the retailer, adding that lease obligations are considered long-term debt and have been disclosed in financial-statement footnotes.

Dissidents to FASB's changing of lease accounting rules have all along said that rating agencies and analysts have referenced such disclosures in footnotes and made adjustments in their modeling to account for a company's leased assets.

Still, as IASB chairman David Tweedie has noted, the current rules, for example, allow airlines' balance sheets to appear as if the companies don't have airplanes. One of the quibbles with the existing standard is its bright lines, which have legally allowed companies to restructure a leasing agreement so that it be considered an operating lease and not have its assets and liabilities fall onto the balance sheet. In 2005, the Securities and Exchange Commission staff estimated that publicly traded companies are in this way able to hide $1.25 trillion in future cash obligations.

Critics of the rule-makers' discussion paper are hoping that they'll at least replace the deleted bright lines with some new ones, such as the exclusion of short-term leases. For instance, the Small Business Administration suggested companies should be able to expense rather than capitalize lease transactions of less than $250,000, and others said leases that last less than one year should be expensed. However, the discussion paper notes that such scenarios could give way to workarounds.

Other common issues raised by respondents to the discussion paper: they want the standard-setters to also tackle lease accounting by lessors. The rule-makers had deferred thinking about lessors as the project continued to be delayed.

In addition, some respondents pushed back against the suggestion that they should have to reassess each lease as "any new facts and circumstances" come to light. Exxon Mobil's controller, Patrick Mulva, said such reassessments — which would require a quarterly review — would be "excessively onerous" for his company, which has more than 5,000 "significant" operating leases and thousands of "low level" leases. Mulva called on the standard-setters to be more specific for when a reassessment would be required.

Another One from That Ketz Guy

"The Accounting Cycle:  CVS Caremark Leases Op/Ed," by: J. Edward Ketz, SmartPros, September 2008 ---
http://accounting.smartpros.com/x67548.xml 

The FASB is slowly -- very slowly -- looking at the accounting for leases. It is working with the IASB to improve accounting standards in this area. I am thankful for the action, because the off-balance sheet accounting has undermined good accounting for a long time.

The Board issued a Discussion Paper “Leases: Preliminary Views” in March. In this document the FASB finally begins to follow the definitions specified in its own conceptual framework. Recall that assets are “probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events” and liabilities are “probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.” As leases grant lessees probable future economic benefits and generate probable future sacrifices, lessees have assets and liabilities they need to account for.

Let us remind ourselves of how important this topic is by examining the case of CVS Caremark. Like most retailers, this corporation leases many of its stores throughout the country. The lease structures utilized by CVS Caremark allow it to categorize most of its leases as operating leases and thereby not disclose a significant amount of its liabilities.

While this accounting is permitted under current FASB and IASB rules, it supplies not-so-little white lies to investors and creditors. It is time for corporate America (and the rest of the world) to tell the truth about leased assets and lease obligations. It would be a way of practicing ethics instead of just preaching about them.

Employing the data disclosed in its last 10-K (2008), I recast the numbers as if the entity employed capital lease accounting. Performing these adjustments generates the following results for CVS Caremark (all numbers in millions of dollars).

2008	Reported	Adjusted
Current assets	$16,256	$16,526
Long-term assets	44,434	53,703
Total assets	$60,960	$70,229
Current liabilities	$13,490	$15,135
Long-term liabilities	12,896	26,700
Stockholder’s equity	34,574	28,394
Total capital	$60,960	$70,229

The leased assets are included in the assets of the business enterprise, so long-term assets and total assets increase by $9.269 billion. This amount is clearly a significant amount of property rights not to include on the balance sheet.

The current liabilities increase by $1.645 billion and the long-term liabilities by $13.804 billion. That’s a lot of debt to conceal from shareholders, creditors, and the general public.

The stockholders’ equity has gone down because depreciation costs and interest expense replace rental charges. For this firm and this period, the cumulative depreciation and interest would have exceeded rental fees.

In terms of some common ratios, the changes are also significant. The current ratio for reported numbers is 1.21 and for adjusted numbers 1.09. The ratio debt-to-capital is 43% for reported numbers, but jumps to 60% for adjusted numbers. Long-term-debt-to-capital is 21% for reported numbers, but almost doubles to 38% for adjusted numbers.

However you slice it, these are some huge assets and liabilities playing hide-and-seek with the investment community.

I am happy to report that the FASB and the IASB are leaning toward requiring business entities to report these assets and liabilities. I am not so happy with the discussions pertaining to options, lease terms, contingencies, and guaranteed and unguaranteed residual values. The FASB and the IASB should forget all of the minutiae dealing with implicit interest rates versus incremental borrowing rates, residual values, and contingencies. As they construct a new standard for lessee accounting, the FASB and the IASB need to forget all of the garbage in FAS 13 and IAS 17.

Let the standard be simple: measure the capitalized asset at its fair value and measure the lease obligation at its present value. There is no need for the other trivia; let the auditors sort out the details. And let plaintiffs’ attorneys monitor the auditors.

This approach would prove simple and rational. Companies would then supply relevant and reliable financial information. And it really would be principles-based.

Jensen Comment
Golly Ned! It's getting harder and harder to hide debt and manage earnings. But there's hope.

Got to read deeper into that "onerous" provision in IAS 37.

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

A grandmother who "oversees a team of 13 who track every penny spent
on the massive effort [to fight California's wildfires] --- Cost Accounting

From The Wall Street Journal Accounting Weekly Review on September 17, 2009

In Fighting Wildfires, They Also Serve Who Keep the Books
by Tamara Audi
Sep 16, 2009
Click here to view the full article on WSJ.com

TOPICS: Cost Accounting, Cost Management, Cost-Basis Reporting, Governmental Accounting

SUMMARY: The story details the activities of a grandmother who "oversees a team of 13 who track every penny spent on the massive effort [to fight California's wildfires], from a rolling medical center ($2,900 a day), to an outdoor bank of 12 sinks ($2,600 a day). They also make sure every firefighter is paid. The bean counters live and work alongside firefighters in sprawling fire camps, sleeping, waking before dawn and showering in a tractor-trailer."

CLASSROOM APPLICATION: The article highlights an unusual accounting position and can be used to help students in introductory accounting classes to think about the ways that all talents can be used in emergencies and volunteer service.

QUESTIONS: 
1. (Introductory) Why is an accounting function, or 'bean counter' to use the derogatory term, needed in fighting California's wildfires?

2. (Introductory) What expenditures are the accounting clerks controlling?

3. (Introductory) What revenues are used to cover those expenditures?

4. (Advanced) How do the accountants use the records maintained to determine which revenues must be allocated to cover which costs?

5. (Advanced) Do you think you would be able to volunteer services in this way? Why or why not?

Reviewed By: Judy Beckman, University of Rhode Island

"In Fighting Wildfires, They Also Serve Who Keep the Books:  Mrs. Fork's Band of Bean Counters Lives, Works in Firefighter Camps; 'Mommy, Nana's at a Fire'," by Tamara Audi, The Wall Street Journal, September 16, 2009 ---
http://online.wsj.com/article/SB125304485991513201.html?mod=djem_jiewr_AC

Hours before sunrise, Teresa Fork rolled out of her tent, laced up her boots and got to work on the biggest fire in Los Angeles County history.

There were glitches to fix in a new expense-tracking computer program, two land-use contracts to renegotiate and a colorful pie chart to review.

Mrs. Fork is in fire finance.

Since it erupted on Aug. 26, the Station fire -- named for the Angeles National Forest ranger station near where it started -- has consumed 160,577 acres and $95.9 million. At the fire's peak, more than 4,500 firefighters and support people from as far away as Tennessee were working on it. As of Tuesday, the fire was 91% contained and firefighters were hoping to extinguish it by Saturday.

Hundreds of firefighters hacked through the wilderness to create firebreaks and beat back the blaze at its southern edge in order to protect houses. Two firefighters were killed; thousands of homes were evacuated. A menacing plume of white smoke hung over Los Angeles for days, and flames created an ominous orange glow just beyond the city.

Back at fire base camp, Mrs. Fork's U.S. Forest Service team calculated the laundry bill. On Sept. 5, 1,914 pounds of clothes were washed, at a cost of $1 a pound, plus $2,150 a day for washers and dryers.

Mrs. Fork oversees a team of 13 who track every penny spent on the massive effort, from a rolling medical center ($2,900 a day), to an outdoor bank of 12 sinks ($2,600 a day). They also make sure every firefighter is paid. The bean counters live and work alongside firefighters in sprawling fire camps, sleeping in tents, waking before dawn and showering in a tractor-trailer.

"Long after the fire is out, you'll still be dealing with the finance side," said Station fire commander Mike Dietrich. "Bills have to be paid. And you have to figure out who's paying."

On the Station fire, finances are especially complicated. A big map in a finance trailer shows green straight lines outlining the boundary of the Angeles National Forest, which is the responsibility of the U.S. Forest Service. A jagged black line shows the fire, which has spilled outside the forest and into county, city and state territories. Who pays often depends on where the fire is burning.

With dozens of crews from different agencies, untangling the fire's cost requires some intricate accounting. Moreover, local fire departments facing tight budgets are eager to collect for their services. For example, Los Angeles sent an ambulance to the fire camp and the U.S. Forest Service agreed to reimburse the city.

California has already burned through $123.7 million of its $182 million fire-suppression budget for the 2009-10 fiscal year. It plans to get some of that money back through grants from the federal government.

Mrs. Fork trudges through dusty, mostly male fire camps wearing glasses and a gold heart pendant around her neck that says "Nana" -- a gift from her 5-year-old grandson. One of her chores is getting the exhausted, soot-covered firefighters to fill out time cards as they exit a burning forest. Many are from federal "hotshot" crews -- firefighters dropped into the hottest and most dangerous fire zones.

"These are our problem children," she says, pointing to a white poster board with a list of names written in black marker -- firefighters who have not filled out time cards, or whose handwriting is difficult to read.

Nathan Stephens, captain of the Blue Ridge hotshot crew based in Happy Jack, Ariz., stepped into the finance trailer fresh off the fire line to fill out time cards for his crew. His face was coated with ash from three days in the burning wilderness, where the crew slept in "the black" -- burnt-out areas close to the active fire.

For many firefighters and private contractors, fire season is an economic lifeline. "Our time and pay is pretty much the most important thing for my crew," said Mr. Stephens. Federal firefighter salaries range from around $12 an hour to more than $22. Many firefighters work just part of the year. "We don't really make a whole lot of money so we look forward to the overtime through the summer," he said.

Each firefighter on Mr. Stephens's crew of 22 made 125 hours of overtime fighting the Station fire, Mr. Stephens said.

"I wasn't thinking about cost or anything like that when I was out there cutting a line and sleeping by the fire. You're hot, you're sweaty, you're tired," said Kim Ann Parsons, who has fought forest fires herself and now generates the daily pie chart breaking down costs. As of Tuesday, $14.8 million, or 15% of the total budget, has been spent on aircraft.

The finance team is at times exposed to hazards when fire has roared close to their camps. In case they need to flee quickly, they keep all the files in storage containers near the door. Like the thousands of firefighters at the Station camp, the finance team sleeps in tents crowded over the vast lawn of the Santa Fe Dam Recreation Area. Ants have been a problem lately.

Continued in article

Jensen Comment
Without trying to throw a wet blanket over Grandma Fork's efforts, she does face the daunting task of dealing with the systemic problems of accounting, particularly joint and indirect costs --- http://www.trinity.edu/rjensen/FraudConclusion.htm#BadNews

Systemic Problem:  All Aggregations Are Arbitrary Systemic Problem:  All Aggregations Combine Different Measurements With Varying Accuracies Systemic Problem:  All Aggregations Leave Out Important Components Systemic Problem:  All Aggregations Ignore Complex & Synergistic Interactions of Value and Risk Systemic Problem:  Disaggregating of Value or Cost is Generally Arbitrary Systemic Problem:  Systems Are Too Fragile Systemic Problem:  More Rules Do Not Necessarily Make Accounting for Performance More Transparent Systemic Problem:  Economies of Scale vs. Consulting Red Herrings in Auditing Systemic Problem:  Intangibles Are Intractable

September 18, 2009 reply from Richard.Sansing [Richard.C.Sansing@TUCK.DARTMOUTH.EDU]

On Sep 18, 2009, at 8:18 AM, Jensen, Robert wrote:

A grandmother who "oversees a team of 13 who track every penny spent on the massive effort [to fight California's wildfires] --- Cost Accounting

This reminds of a former military officer who was in the accounting Ph. D. program at Texas in the 1980s. I asked him once what his assignment was if the Warsaw Pact countries were to launch a conventional invasion of Western Europe. He said his job was to report to Fort Hood and teach accounting classes! "Good generals talk about strategy; great generals talk about logistics."

Richard Sansing

September 18, 2009 reply from Bob Jensen

Great quote Richard. z
Napoleon was a great general because he placed logistics above all else. But be that as it may, the GAO has refused to sign off on audits of the Pentagon for years. The Pentagon budgets are in fact deemed unauditable. Maybe that’s the secret of logistical success.

I love the logistical picture of a helicopter carrying jeeps --- http://www.cs.trinity.edu/~rjensen/temp/ThankYouAmerica.PPS 
I understand that patriotism is no longer politically correct, but the above slide show repeatedly brings tears to my eyes even if the auditing effort is hopeless.

Bob Jensen

September 18, 2009 reply from Roger Collins [Rcollins@TRU.CA]

I have the following letter pinned to the notice board outside my office...

 

///////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////

Central Spain, August 1812

 Gentlemen,

While marching from Portugal to a position which commands the approach to Madrid and the French forces, my officers have been diligently complying with your requests which have been sent by H.M. ship from London to Lisbon and thence by dispatch to our headquarters.

We have enumerated our saddles, bridles, tents and tent poles, and all manner of sundry items for which His Majesty's Government holds me accountable. I have dispatched reports on the character, wit, and spleen of every officer. Each item and every farthing has been accounted for, with two regrettable exceptions for which I beg your indulgence.

 Unfortunately, the sum of one shilling and ninepence remains unaccounted for in one infantry battalion's petty cash and there has been a hideous confusion as to the number of jars of raspberry jam issued to one cavalry regiment during a sandstorm in western Spain.This reprehensible carelessness may be related to circumstance, since we are at war with France, a fact which may come as a bit of a surprise to you gentlemen in Whitehall.

This brings me to my present purpose, which is to request elucidation of my instructions from His Majesty's Government so that I may better understand the reason why I am dragging an army over these barren plains. I construe that perforce it must be one of two alternative duties, as given below. I shall pursue either one with the best of my ability, but I cannot do both.

1. To train an army of uniformed British clerks in Spain for the benefit of the accountants and copy-boys in London or perchance.

2. To see that the forces of Napoleon are driven out of Spain.

Your most obedient servant,

 Wellington

 

"Letting Non-Profits Act Like Businesses: One Foundation's Brave Act of Leadership,"
by Dan Pollota, Harvard Business Publishing, September 18, 2009 --- Click Here

Yesterday the Boston Foundation unveiled major changes in its grantmaking strategy and announced that "the most dramatic change is a shift of emphasis to unrestricted operating support." You're not hallucinating, and it's not a typo. As if the emphasis on operating support were not jaw-dropping enough, it's going to be unrestricted. This is not a narrow experiment. It involves the "majority of the Boston Foundation's competitive grants." And this is not a bunch of well-intentioned, innovative MBAs starting a little experimental social venture fund. It's a major institutional funder with a $700 million endowment that was founded in 1915.

Hallelujah. This is the nonprofit sector equivalent of the fall of the Berlin Wall. I remember when the Red Sox won the World Series in 2004. I didn't cheer. I just kept saying over and over "The Red Sox just won the World Series" to convince myself that it was real. It was the same experience yesterday. I'm an optimist, but even I am so used to the hyper-incrementalism that defines the sector that I found myself in a state of disbelief.
The Foundation went ever further. They will start making larger grants, they are removing term limits so grants can be made over five years or longer, and they are removing deadlines so nonprofits can operate on their own timelines. The White House could learn a thing or two about hope and change from these people.
The announcement is striking and material on several levels.

First, it is an important voice making a declaration that real change will come from strengthening the capacity of good organizations; that as good as it may feel to fund programs, the greatest good can be achieved by funding organizations. Our mantra on poverty for decades has been, "instead of giving a man a fish, give him a fishing rod and teach him to fish." But the institutional funding approach with nonprofits has been to deny fishing rods and hand out fish for a year or two and then tell the organizations to go find some new fish somewhere else. The Boston Foundation has said in no uncertain terms that it is in the fishing rod business.

Second, in a culture where a misinformed donating public has a prejudice against "overhead," it recognizes the unique responsibility that institutional funders who know better have to act on their better knowledge.

Third, in a relationship where for years nonprofit organizations have been saying that what they need most is general operating support, it demonstrates respect, listening, empathy, understanding, and real commitment to their success.

Fourth, in a sector desperate for encouragement it demonstrates the ability of boldness and daring to excite and inspire, and it demonstrates the value of excitement and inspiration themselves. This is a new day, and the dawn of a new day moves people.

Fifth, it shows that the oldest institutions can rise up and surprise us. That disrupts the syndrome of predictability that so suffocates our sense of possibility.

Sixth, it is a demonstration of trust.

Last and most important, it is a demonstration of brave leadership. It challenges all major players to follow suit - not only to rewrite funding strategies, but to be bold, to lead, and to surprise. Today let us salute the Boston Foundation. They have just changed the world.

A Case on Mergers, Acquisitions, and Valuation

From The Wall Street Journal Accounting Weekly Review on September 17, 2009

Adobe to Buy Web-Tracking Firm Omniture
by Don Clark and Suzanne Vranica
Sep 16, 2009
Click here to view the full article on WSJ.com

TOPICS: Advanced Financial Accounting, Mergers and Acquisitions, Revenue Forecast, Revenue Recognition

SUMMARY: "Adobe Systems Inc. agreed to buy software company Omniture Inc. for $1.8 billion....Adobe said it will pay $21.50 a share in cash for Omniture, a 24% premium to Tuesday's 4 p.m. price....Omniture offers advertisers data that show how much time each visitor spends on a site, the number of pages visited, the number of elements downloaded and what makes people leave a Web page. The company also has technology that allows marketers to automatically change their ad mix based on the computer analysis of the data....Adobe...said it hopes to combine its content-creation technology with Omniture's services, which will help its customers create Web site that are more effective and generate more revenue....Adobe CEO Shantanu Narayen called the Omniture deal a 'game changer.'"

CLASSROOM APPLICATION: The article is useful to introduce business combinations and to introduce revenue generation from internet web pages.

QUESTIONS: 
1. (Introductory) How do companies such as Adobe and even Dow Jones, whose WSJ pages you read on the web to answer these questions, generate revenue from their web pages?

2. (Introductory) How can Adobe "content" and Omniture technology combine to improve these revenues from web pages?

3. (Advanced) Why is Adobe willing to pay 24% more than the closing price for Omniture stock two days before the announcement of this acquisition agreement? In your answer, describe analytical tools that might be used to decide on an appropriate price to pay. Also, include in your answer the impact of factors you discussed in answers to questions 1 and 2 above.

4. (Advanced) What is the impact of the fact that "Omniture...has a mixed record in meeting Wall Street estimates" on your answer to question 1 above?

5. (Introductory) How did Omniture and Adobe shareholders react to announcement of this deal? What other factors may be part of the stock price reaction to this announcement?

Reviewed By: Judy Beckman, University of Rhode Island

"Adobe to Acquire Omniture in $1.8 Billion Deal," by Don Clark and Suzanne Vranica, The Wall Street Journal, September 16, 2009 --- http://online.wsj.com/article/SB125304615573813275.html?mod=djem_jiewr_AC

Adobe Systems Inc. agreed to buy software company Omniture Inc. for $1.8 billion, a deal designed to help customers track and make money from Web sites that were created with Adobe's programs.

Adobe said it will pay $21.50 a share in cash for Omniture, a 24% premium to Tuesday's 4 p.m. price. Omniture shares surged 25% in after-hours trading on the news, while Adobe shares declined 4.2%.

The announcement came as Adobe reported its profit fell 29% and revenue slid 21% in its latest quarter as the continuing downturn in media markets slows demand for its traditional software, such as Photoshop and InDesign.

Omniture, based in Orem, Utah, specializes in a field known as Web analytics. It provides to advertisers, media companies and other customers information about user activity, such as what Web pages they visit, how much time they spend there and what ads they click on. Customers may change their ads or Web sites based on such data, including data about the effectiveness of ads based on terms users type into search engines.

Deal Journal Omniture Deal May Not Bring Change Adobe Wants Companies such as Ford Motor Co., Ameritrade Holding Corp. and Xerox Corp. pay monthly fees to access Omniture's services. The amount they pay typically reflects the Web traffic occurring on their sites.

Adobe, San Jose, Calif., said it plans to build code into its content-creation programs to help them exchange data with Omniture services, eliminating time-consuming programming by customers and helping more of them make money on their Web sites. "We really think that we can actually tranform how digital content is created," said Shantanu Narayen, Adobe's chief executive officer.

Web analytics generates about $600 million in world-wide annual revenue now, but the industry is expected to grow to $2.2 billion by 2011, according to a June 2008 estimate by J.P. Morgan.

Companies that compete with Omniture include Webtrends Inc. and Coremetrics. Google Inc., the search giant, also offers some analytic services.

Scott Kessler, an analyst at Standard & Poor's who tracks Omniture, said it has grown by buying smaller players in the market. But Omniture's business has been squeezed by the recession and the company has a mixed record of meeting Wall Street estimates, he said. It reported a loss of $44.8 million last year even as its revenue nearly doubled to $295.6 million. Partly for those reasons, Mr. Kessler remains skeptical about how quickly Adobe could benefit from the deal.

Suresh Vittal, an analyst at market researcher Forrester Research, was more optimistic. He said many aspects of Web sites aren't reliably measured now, and Adobe's ability to include such capabilities with its software could give site creators valuable new information.

Adobe said Omniture will become a new business unit. Omniture CEO Josh James will join Adobe as senior vice president of the new unit, reporting to Mr. Narayan.

The deal is expected to close in the fourth quarter of Adobe's 2009 fiscal year, which ends in November.

For the quarter ended Aug. 28, Adobe reported a profit of $136 million, down from $191.6 million a year earlier. Revenue was $697.5 million.

Bob Jensen's threads on valuation:

• http://www.trinity.edu/rjensen/roi.htm
  
   
• http://www.trinity.edu/rjensen/theory01.htm#FairValue

At the FASB (Financial Accounting Standards Board), Bob Herz says he thinks "lease accounting is probably an area where people had good intentions way back when, but it evolved into a set of rules that can result in form-over substance accounting."  He cautions that an overhaul wouldn't be easy:  "Any attempts to change the current accounting in an area where people have built their business models around it become extremely controversial --- just like you see with stock options."
Jonathan Weil, "How Leases Play A Shadowy Role In Accounting" (See below)  
By the phrase form over substance, Bob Herz is referring to the four bright line tests of requiring leases to be booked on the balance sheet.  Over the past two decades corporations have been using these tests to skate on the edge with leasing contracts that result in hundreds of billions of dollars of debt being off balance sheets.  The leasing industry has built an enormously profitable business around financing contracts that just fall under the wire of each bright line test, particularly the 90% rule that was far too lenient in the first place.  One might read Bob's statement that after the political fight in the U.S. legislature over expensing of stock options, the FASB is a bit weary and reluctant to take on the leasing industry.  I hope he did not mean this.

PJ O’Rourke’s Parliament of Whores --- http://snipurl.com/parliamentwhores  

"They Left Fannie Mae, but We Got the Legal Bills," by Grechen Morgenson, The New York Times, September 5, 2009 ---
http://www.nytimes.com/2009/09/06/business/economy/06gret.html?_r=1&scp=2&sq=gretchen morgensen&st=cse

PRECISELY one year ago, we lucky taxpayers took over Fannie Mae and Freddie Mac, the mortgage finance giants that contributed mightily to the wild and crazy home-loan-boom-turned-bust. In that rescue operation, the Treasury agreed to pony up as much as $200 billion to keep Fannie in the black, coughing up cash whenever its liabilities exceed its assets. According to the company’s most recent quarterly financial statement, the Treasury will, by Sept. 30, have handed over $45 billion to shore up the company’s net worth.

It is still unclear what the ultimate cost of this bailout will be. But thanks to inquiries by Representative Alan Grayson, a Florida Democrat, we do know of another, simply outrageous cost. As a result of the Fannie takeover, taxpayers are paying millions of dollars in legal defense bills for three top former executives, including Franklin D. Raines, who left the company in late 2004 under accusations of accounting improprieties. From Sept. 6, 2008, to July 21, these legal payments totaled $6.3 million.

With all the turmoil of the financial crisis, you may have forgotten about the book-cooking that went on at Fannie Mae. Government inquiries found that between 1998 and 2004, senior executives at Fannie manipulated its results to hit earnings targets and generate $115 million in bonus compensation. Fannie had to restate its financial results by $6.3 billion.

Almost two years later, in 2006, Fannie’s regulator concluded an investigation of the accounting with a scathing report. “The conduct of Mr. Raines, chief financial officer J. Timothy Howard, and other members of the inner circle of senior executives at Fannie Mae was inconsistent with the values of responsibility, accountability, and integrity,” it said.

That year, the government sued Mr. Raines, Mr. Howard and Leanne Spencer, Fannie’s former controller, seeking $100 million in fines and $115 million in restitution from bonuses the government contended were not earned. Without admitting wrongdoing, Mr. Raines, Mr. Howard and Ms. Spencer paid $31.4 million in 2008 to settle the litigation.

When these top executives left Fannie, the company was obligated to cover the legal costs associated with shareholder suits brought against them in the wake of the accounting scandal.

Now those costs are ours. Between Sept. 6, 2008, and July 21, we taxpayers spent $2.43 million to defend Mr. Raines, $1.35 million for Mr. Howard, and $2.52 million to defend Ms. Spencer.

“I cannot see the justification of people who led these organizations into insolvency getting a free ride,” Mr. Grayson said. “It goes right to the heart of what people find most disturbing in this situation — the absolute lack of justice.”

Lawyers for the three executives did not returns calls seeking comment.

An additional $16.8 million was paid in the period to cover legal expenses of workers at the Office of Federal Housing Enterprise Oversight, Fannie’s former regulator. These costs are associated with defending the regulator in litigation against former Fannie executives.

This tally of taxpayer legal costs took several months for Mr. Grayson to extract. On June 4, after Congressional hearings on the current and future status of Fannie and Freddie, he requested the information from the Federal Housing Finance Agency, now their regulator. He got its response on Aug. 26.

A spokeswoman for the agency said it would not comment for this article.

THE lawyers’ billable hours, meanwhile, keep piling up. As the F.H.F.A. explained to Mr. Grayson, the $6.3 million in costs generated by 10 months of legal defense work for Mr. Raines, Mr. Howard and Ms. Spencer includes not a single deposition for any of them. Instead, those bills covered 33 depositions of “other parties” relating to the shareholder suits and requiring the presence of the three executives’ counsel.

One of Mr. Grayson’s questions about these payments remains unanswered — whether placing Fannie Mae into receivership, rather than conservatorship, would have negated the agreement to cover the former executives’ legal costs. Choosing conservatorship allowed Fannie to stabilize and meant that it was going to continue to operate, not wind down immediately.

But, Mr. Grayson pointed out: “If these companies had gone into receivership instead of conservatorship, the trustee in bankruptcy or the receiver would have been free, legally, to reject these contracts that called for indemnification. Raines, Howard and Spencer would have had to pay their own fees.”

When asked about this, Fannie’s regulator, the F.H.F.A., waffled. “Whether these costs could have been avoided would depend on the facts and circumstances surrounding any receivership,” it said. “It is possible that receiverships could have reduced the costs of the litigation, but by no means certain.”

Mr. Grayson said he intended to find out whether there are any legal options under the conservatorship to stop paying for the defense of the Fannie Mae three. “When did Uncle Sam become Uncle Sap?” he said. “In a situation where billions of losses have already occurred, is it really asking too much that people pay their own legal fees?”

While the $6.3 million paid to defend Mr. Raines, Mr. Howard and Ms. Spencer is a pittance compared with other bills coming due in the bailout binge, it is still disturbing for these costs to be covered by those who had nothing to do with the problems and certainly did not benefit from them. The money may be small, but the episode’s message looms large: those who presided over this debacle aren’t being held accountable.

“It is wrong in a very deep sense,” Mr. Grayson said. “The essence of our society is that people who do good things are rewarded and people who do bad things are punished.

Where is the punishment for Raines, Howard and Spencer? There is none.”

Continued in article

I Saw Maxine Kissing Franklin Raines --- http://www.youtube.com/watch?v=vbZnLxdCWkA
Before Franklin Raines resigned as CEO of Fannie Mae and paid over a million dollar fine for accounting fraud to pad his bonus, he was the darling of the liberal members of Congress. Frank Raines was creatively managing earnings to the penny just enough to get his enormous bonus. The auditing firm of KPMG was accordingly fired from its biggest corporate client in history --- http://www.trinity.edu/rjensen/Theory01.htm#Manipulation

Video on the efforts of some members of Congress seeking to cover up accounting fraud at Fannie Mae ---
http://www.youtube.com/watch?v=1RZVw3no2A4 

Mortgage Fraud Increasing
Despite the attention paid to mortgage fraud committed by borrowers and lenders since declines in the real estate values and the subprime loan crisis triggered severe problems in the banking industry, the number of Federal Bureau of Investigation’s (FBI) investigations of mortgage fraud and associated financial crimes is increasing. “The FBI has experienced and continues to experience an exponential rise in mortgage fraud investigations,” John Pistole, Deputy Director, told the Senate Judiciary Committee in April.
AccountingWeb, August 18, 2009 --- http://www.accountingweb.com/topic/mortgage-loan-fraud-increasing
Jensen Comment
I think mortgage fraud will continue to rise as long as remote third parties like Fannie Mae, Freddie Mac, and FHA continue to buy up mortgages negotiated by banks and mortgage companies basking in moral hazard. The biggest hazards are fraudulent real estate appraisals and lies about income in mortgage applications. We need to bring back George Bailey (James Stewart) in It's a Wonderful Life --- http://en.wikipedia.org/wiki/It%27s_a_Wonderful_Life
The banks that negotiate the mortgages should have to hang on to those mortgages.
Watch the video at http://www.youtube.com/watch?v=MJJN9qwhkkE

Barney's Rubble --- http://www.trinity.edu/rjensen/2008Bailout.htm#Rubble

The Disastrous Bailout --- http://www.trinity.edu/rjensen/2008Bailout.htm

When will auditors learn about complexities of financial risk?

"Did Wells Fargo's Auditors Miss Repurchase Risk?" by Francine McKenna, ClusterStock, September 20, 2009 --- http://www.businessinsider.com/john-carney-did-wells-fargos-auditors-miss-repurchase-risk-2009-9

On Friday, the Business Insider worried that Wells Fargo may be making the same fatal mistake AIG did – underestimating, or worse, naively ignoring Collateral Call Risk. 

The concern was focused on potential exposure from the credit default swaps portfolio they inherited from Wachovia. In WFC's annual report the Buiness Insider saw limited discussion of this risk and no details of the reserves for it.

There are two possible ways to account for the lack of discussion of Collateral Call Risk.  Either Wachovia wrote its derivative contracts in ways that don’t permit buyers to demand more collateral or Wells Fargo is not disclosing this risk. (A third possibility—that they don't even seem aware that they have this risk — seems remote after AIG.)

When I read that, I saw eerie parallels with New Century, all the more so because of the auditor connection – both Wells Fargo and Wachovia and New Century (now in Chapter 11) are audited by KPMG.  New Century was not too transparent either and, as a result, many people, including some very sophisticated investors were caught with their pants down. KPMG is accused in a $1 billion dollar lawsuit of not just being incompetent, but of aiding, abetting, and covering up New Century’s fraudulent loan loss reserve calculations just so they could keep their lucrative client happy and viable.

From the lawsuit:

KPMG’s audit and review failures concerning New Century’s reserves highlights KPMG’s gross negligence, and its calamitous effect — including the bankruptcy of New Century.  New Century engaged in admittedly high risk lending.  Its public filings contained pages of risk factors…New Century’s calculations for required reserves were wrong and violated GAAP. For example, if New Century sold a mortgage loan that did not meet certain conditions, New Century was required to repurchase that loan.  New Century’s loan repurchase reserve calculation assumed that all such repurchases occur within 90 days of when New Century sold the loan, when in fact that assumption was false.

In 2005 New Century informed KPMG that the total outstanding loan repurchase requests were $188 million.  If KPMG only considered the loans sold within the prior 90 days, the potential liability shrank to $70 million.  Despite the fact that KPMG knew the 90 day look-back period excluded over $100 million in repurchase requests, KPMG nonetheless still accepted the flawed $70 million measure used by New Century to calculate the repurchase reserve.  The obvious result was that New Century significantly under reserved for its risks.

How does the New Century situation and KPMG’s role in it remind me of Wells Fargo now?  Well, in both cases, there’s no disclosure of the quantity and quality of the repurchase risk to the organization. Back in March of 2007, I wrote about the lack of disclosure of this repurchase risk in New Century’s 2005 annual report:

There are 17 pages of discussion of general and REIT specific risk associated with this company, but no mention of the specific risk of the potential for their banks to accelerate the repurchase of mortgage loans financed under their significant number of lending arrangements….it does not seem that reserves or capital/liquidity requirements were sufficient to cover the possibility that one of or more lenders could for some reason decide to call the loans. Did the lenders have the right to call the loans unilaterally? It does say that if one called the loans it is likely that all would. Didn’t someone think that this would be a very big number (US 8.4 billion) if that happened.

Some have been writing since 2005 about the elephant in the room that is mortgage loan repurchase risk:

Even if a lender sells most of the loans it originates, and, theoretically, passes the risk of default on to the buyer of the loan, there remains an elephant lurking in the room: the risk posed to mortgage bankers from the representations and warranties made by them when they sell loans in the secondary market… in bad times, the holders of the loans have been known to require a second "scrubbing" of the loan files, looking for breaches of representations and warranties that will justify requiring the originator to repurchase the loan. …A "pure" mortgage banker, who holds and services few loans, may think he's passed on the risk (absent outright fraud). Sophisticated originators know better…When the cycle turns (as it always does) and defaults rise, those originating lenders who sacrificed sound underwriting in return for fee income will find the grim reaper knocking at their door once again, whether or not they own the loan.

Clusterstock quoted Wells Fargo from page 127 of their 2008 Annual Report (emphasis added):

In certain loan sales or securitizations, we provide recourse to the buyer whereby we are required to repurchase loans at par value plus accrued interest on the occurrence of certain credit-related events within a certain period of time. The maximum risk of loss…In 2008 and in 2007, we did not repurchase a significant amount of loans associated with these agreements.

But earlier, on page 114, there is a footnote to a chart representing loans in their balance sheet that have been securitized--including residential mortgages and securitzations sold to FNMA and FHLMC--where servicing is their only form of continuing involvement. 

However, the delinquencies and charge off figures do not include sold loans. Wells Fargo tells us these numbers do not represent their potential obligations for repurchase if FNMA and FHLMC decide their underwriting standards were not up to par.

Delinquent loans and net charge-offs exclude loans sold to FNMA and FHLMC. We continue to service the loans and would only experience a loss if required to repurchasea delinquent loan due to a breach in original representations and warranties associated with our underwriting standards.

So where are those numbers?  Where is the number that correlates to the $8.4 billion dollar exposure that brought down New Century?  Wells Fargo saw an almost 300% increase from 2007 to 2008 in delinquencies and 200% increase in charge offs from commercial loans and a 300% increase in delinquencies and 350% increase in charge offs on residential loans they still hold. Can anyone say with certainty that we won’t see FNMA and FHLMC come back and force some repurchases on Wells Fargo for lax underwriting standards?

This is all we get from Wells Fargo in the 2008 Annual Report:  

During 2008, noninterest income was affected by changes in interest rates, widening credit spreads, and other credit and housing market conditions, including… 

• ($847) million in write-downs of loans in the mortgage warehouse due to changes in liquidity and other spreads, and additions to the mortgage repurchase reserve…

The lack of disclosure of this issue here mirrors the lack of disclosure in New Century and perhaps in other KPMG clients such at Citigroup, Countrywide ( now inside Bank of America) and others.  How do I know there could be a pattern? Because the inspections of KPMG by the PCAOB, their regulator, tell us they have been called on auditing deficiencies just like this.  Do we have to wait for a post-failure lawsuit to bring some sense, and some sunshine, to the system?

Francine McKenna is Editor of Re: The Auditors.

Will auditors survive the huge lawsuits concerning their negligence in estimating loan losses in the subprime mortgage and CDO crisis? http://www.trinity.edu/rjensen/2008Bailout.htm#Auditors

Bob Jensen's threads on auditing firm lawsuits --- http://www.trinity.edu/rjensen/Fraud001.htm

Question
What is hyperbolic discounting?

"Psychology of poverty and temptation," by Chris Blattman, September 2009 ---
http://chrisblattman.com/2009/09/15/psychology-of-poverty-and-temptation/

Some people are impulsive and impatient; they prefer a dollar or a donut today far more than a dollar or a donut tomorrow, so much so that they’re willing to give up shocking amounts of dollars and donuts tomorrow for just one today. This is one reason, some say, that we see such high interest rates for short-term borrowing, from New York to Calcutta.

Some people are not only impulsive and impatient, but inconsistently so. they care a lot about a dollar today versus tomorrow, but could care less between getting a dollar either 10 or 11 days from now. Economists call this ‘hyperbolic discounting’.

Both behaviors–impatience and time inconsistency–could be a source of persistent poverty.

Or not. Abhijit Banerjee presented a new paper here yesterday, written with MIT colleague Sendhil Mullainathan. They look at a number of seemingly unusual behaviors by the very poor–from exorbitant rates of short-term borrowing to the low take-up of small, high-return investments. Impatience cannot explain the patterns, they say. The impatience approach also requires the poor think differently than the rest of the population.

Another view: we’re all impulsive and impatient in the same way, but over a narrow range of goods that are quickly and cheaply satisfied. If you’re poor, these temptations are a big fraction of your income. If you’re even somewhat wealthy, they are not. Temptations are declining in income.

The paper runs through half a dozen perplexing patterns of behavior, and shows that these simple assumptions can explain a great deal.

This approach has a great deal in common with hyperbolic discounting, but is empirically distinct (and has very different policy implications). Parsing out and testing these subtleties strikes me as one of the most important frontiers in the study of poverty. Declining temptation, if true, could explain all sorts of odd behaviors. With more than a few Uganda and Liberia surveys on the horizon, I’m now scheming ways to test whether it’s true.

It’s a difficult paper, especially for those uninitiated in micro-economic theory. Even if that sounds like you: the subtle points are worth the slog.

For an intro to the subfield, see Senthil’s essay, Development economics through the lens of psychology. Another great resource is Stefano Dellavigna’s recent JEL article on evidence from the field. Both are ungated.

 Behavioral and Cultural Economics and Finance --- http://www.trinity.edu/rjensen/theory01.htm#Behavioral

78% of former NFL players have gone bankrupt or are under financial stress because of joblessness or divorce.
Championship Rings in pawn shops, IRS vaults, Ponzi schemer stashes offshore, or in the clutches of ex-wives

What on earth did athletes learn in college?

Pros seem especially susceptible to Ponzi schemes. Some recent examples --- Click Here

10 Ways Sports Stars (multi-millionaires) Go From Riches To Rags," by Lawrence Delevingne, Business Insider, September 18, 2009 --- http://www.businessinsider.com/10-ways-sports-stars-destroy-their-finances-2009-9

 Sports Illustrated article this year showed how shockingly common financial ruin is:

• By the time they have been retired for two years, 78% of former NFL players have gone bankrupt or are under financial stress because of joblessness or divorce.
• Within five years of retirement, an estimated 60% of former NBA players are broke.
• Numerous retired MLB players have been similarly ruined.

If that's not bad enough, the recession has made things even worse. Too much money in real estate; investments in Ponzi schemes; and poor financial advising have been exposed with the down economy.

A sign of the times? More former stars are selling their championship rings for money than ever. "It's amazing that I heard the recession was over," says Timothy Robins, owner of Championshiprings.net, who buys bling from current and former pros and has seen a 36% increase in sales during the past year. "I'm getting more calls from players than ever. They're having a really hard time."

While just about everyone has lost money over the past year, athletes tend to make particularly bad financial decisions, and it's not just reckless spending.

How they lose their wealth --- Click Here
http://www.businessinsider.com/10-ways-sports-stars-destroy-their-finances-2009-9#put-cash-in-a-ponzi-scheme-1

The 10 ways sports pros blow their cash >>

Jensen Comment
The same goes for many, many movie stars like Debbie Reynolds who, very late in their lives, are "willing to work for food."

The boots in Hollywood's Boot Hill are not stuffed with savings.

Bob Jensen's helpers in personal finance ---
http://www.trinity.edu/rjensen/Bookbob1.htm#InvestmentHelpers

How to avoid losing your money to fraud ---
http://www.trinity.edu/rjensen/FraudReporting.htm

Behavioral and Cultural Economics and Finance --- http://www.trinity.edu/rjensen/theory01.htm#Behavioral

FASB Okays Project to Overhaul Lease Accounting
The Financial Accounting Standards Board voted unanimously to formally add a project to its agenda to "comprehensively reconsider" the current rules on lease accounting. Critics say those rules, which haven't gotten a thorough revision in 30 years, make it too easy for companies to keep their leases of real estate, equipment and other items off their balance sheets. As such, FASB members said, they're concerned that financial statements don't fully and clearly portray the impact of leasing transactions under the current rules. "I think we have received a clear signal from the investing community that current accounting standards are not providing them with all the information they want," FASB member Leslie Seidman said before the vote.
"FASB Okays Project to Overhaul Lease Accounting," SmartPros, July 20, 2006 --- http://accounting.smartpros.com/x53931.xml

July 21 reply from Bob Jensen

Hi Pat,

I agree entirely with you and the new IASB/FASB standard that recognizes that for assets that depreciate, the lessees were gaming the system under either FAS 13 or IAS 17 so as to hide debt and reduce leverage. I’m all for the changes in the standards for depreciable assets.

I have a bit more of a problem with such things as leased land or leased air space for a store inside a mall. Compare a 20-year lease on an airliner versus a 20-year lease on a shoe store in a Galleria. Even though the airline’s lease was gamed so as not be a capital lease under FAS 13, for all practical purposes the airline has used up much of the aircraft after 18 years. There’s not much difference between leasing and ownership in this case.

But what has the shoe store used up after 18 years? A cube of air that regenerates every second of every day. The shoe store can never own that air space except in the unlikely event that the Galleria decides to sell all of its rentals as condos. Then the condo terms would all have to be written fresh anyway.

The big distinction in my mind is the expected amount that would be a cash flow loss to the lessor if the lessee breaks the lease after 18 years. In the case of the aircraft, the loss is very, very substantial. In the case of the cube of air, the loss is minimal assuming the Galleria has equivalent rental opportunities when the lease is broken.

Is there some type of distinction that should be made on the balance sheet between leased airliners and leased cubes of air?

Bob Jensen

July 21, 2009 reply from John Brozovsky [jbrozovs@VT.EDU]

Probably no distinction should be made. The shoestore has purchased the right to park their hat in a prime location. In real estate it is location, location, location. The right to use an exclusive location is certainly an asset and the future payments a liability.

John

July 21, 2009 reply from Bob Jensen

Hi John,

One distinction arises if the shoe store can simply walk away from the lease contract with a trivial penalty payment. The airline probably will incur a non-trivial penalty for walking away from an aircraft lease before the lease contract matures.

Perhaps this distinction is not important to modern accountants, but us old geezers still think the distinction is important on the balance sheet reporting of lease obligations. Interestingly, the exit value of the shoe store lease may be nearly zero even though the present value of remaining lease payments is sizeable. We may have to think differently about fair value accounting for air space leases if we broaden fair value accounting requirements.

Exit value surrogates for fair value accounting may work better for aircraft than for air space. Or put another way, booking air space leases at present value of remaining cash flow payments may not be consistent with fair value accounting under FAS 157 where Level 1 estimation is the high God relative to inferior Level 3 present value estimation of fair value.

If we book air space leases at exit values we may in effect be (gasp) accounting for them as operating leases.

Thanks John,

Bob Jensen

Lessor (Nope) Versus Lessee (Yup) Accounting Rules

From WebCPA, July 31, 2008 --- http://www.webcpa.com/article.cfm?articleid=28636

The Financial Accounting Standards Board has decided to defer the development of a new accounting model for lessors, saying the project will now only address lessee accounting.

FASB also agreed with taking an overall approach to generally apply the finance lease model in International Accounting Standard 17, "Leases," adapted where necessary for all leases.

The move is the latest in a long-running project for the board in setting standards for lease accounting. As FASB moves toward convergence of U.S. generally accepted accounting principles with International Financial Reporting Standards, it is also trying to make sure any new standards it approves match up as much as possible with the international ones.

In the new lessee standards, FASB has decided to include options to extend or terminate the lease in the measurement of the right-of-use asset and the lease obligation based on the best estimate of the expected lease term. The board also agreed that contractual factors, non-contractual factors and business factors should be considered when determining the lease term.

The board decided to require lessees to include contingent rentals in the measurement of the right-of-use asset and the lease obligation based on their best estimate of expected lease payments.

FASB also decided that both the right-of-use asset and the lease obligation should be initially measured at the present value of the best estimate of expected lease payments for all leases. The board decided to require the best estimate of expected lease payments to be discounted using the lessee's secured incremental borrowing rate.

FASB members discussed the subsequent measurement of both the right-of-use asset and the lease obligation, but the board was not able to reach a decision. The board also discussed whether there should be criteria to distinguish between leases that are in-substance purchases and leases that are a right to use an asset, but it was not able to reach a decision on that matter either.

The German Parliament has passed the Act to Modernise Accounting Law (in German: Bilanzrechtsmodernisierungsgesetz). A goal of the legislation is to reduce the financial reporting burden on German companies. The accounting requirements under the Act are described as an alternative to International Financial Reporting Standards for small and medium-sized companies that do not participate in capital markets. In announcing the new law, the German Federal Ministry of Justice (which administers the Commercial Code (ComC) in Germany) said: The modernised ComC accounting law is also an answer to the International Financial Reporting Standards (IFRS), published by the International Accounting Standards Board (IASB). The IFRS are geared to suit capital market oriented enterprises; in other words, they also serve information needs of financial analysts, professional investors and other participants in the capital markets. By far the majority of those German enterprises that are required by law to keep accounts and records do not take part in the capital market at all. For this reason, there is no justification for committing all the enterprises that are required to keep accounts and records to the cost-intensive and highly complex IFRS. Also the draft recently discussed by the IASB of a standard IFRS for Small and Medium-Sized Entities is not a good alternative for drawing up an informative annual financial statement. Practitioners in Germany have strongly criticised the IASB draft because its application – compared with ComC accounting law – would still be much too complicated and costly. The law exempts 'sole merchants' (prorietorships) with less than €500,000 turnover and Euro 50,000 profit from any obligation to keep accounts and records. Small companies (less than 50 employees, assets of €4.8 million, and annual turnover of €4.8 million) need not have an audit and may publish only a balance sheet. Medium-sized companies (less than 250 employees, assets of €19.2 million, and annual turnover of €38.5 million) have reduced disclosure requirements and may combine balance sheet items. Among the new accounting provisions of the ComC: Companies will be permitted to capitalise internally generated intangible assets, while getting an immediate tax deduction for the costs. Financial institutions will measure financial instruments designated as 'held for trading' at fair value, with value changes recognised in a 'special reserve'. The Ministry of Justice press release states: 'This special reserve has to be built up from part of the enterprise's trading profits when times are good and can then be used to offset trading losses when times get worse. Hence this special provision has an anticyclical effect. Here the necessary steps have been taken in order to respond to the financial markets crisis.' Special purpose entities that are controlled must be consolidated. The new law takes effect 1 January 2010, with early application for 2009 permitted. Click for Ministry of Justice Press Release (PDF 41k). Information about the German Accounting Law on the MoJ website.

Hi David,

I think it’s more apt to be a gain resulting from buying up one’s own debt under traditional accounting. However, if buying up debt causes an improved credit rating, your fair value accountant may have a stroke.

There’s a fair value accounting problem that arises from raising a credit rating. Becoming more credit worthy can force a hit to the bottom line. Conversely, getting a lower credit rating can boost the bottom line in fair value accounting. This causes fair value accounting advocates to get red in the face and hyperventilate.

"The Fair-Value Deadbeat Debate Returns: On hiatus while other fair-value questions were debated, the hotly-contested issue of why companies can book a gain when their credit rating sinks has returned to center stage," by  Marie Leone, CFO.com, June 29, 2009 --- http://www.cfo.com/article.cfm/13932186/c_2984368/?f=archives

A new discussion paper released last week by the staff of the International Accounting Standards Board has revived an old, but still fiery fair-value controversy.

At issue: the role of credit risk in measuring the fair value of a liability. According to the paper's opening statement: the topic has "arguably ... generated more comment and controversy than any other aspect of fair value measurement."

At the heated core of the dispute is the question of why accounting rules allow companies to book a gain when their credit rating actually sinks. The accounting convention, which opponents contend is counterintuitive if not ridiculous, has prompted "a visceral response to an intellectual issue," says Wayne Upton, the IASB project principal who authored the discussion paper.

For all the hubbub around it, the rule is rather simple: When a company chooses to use the fair value method of accounting, it must mark its liabilities as well as its assets to market. As a company's credit rating goes down, so does the price of its debt, which therefore must be re-measured by marking the liability to market. The difference between the debt's carrying value and its so-called fair value is then recorded as a debit to liabilities, and a credit to income.

Consider an oversimplified example to clarify the accounting treatment. A company records a $100 liability for a bond it has issued. Overnight, the company's credit rating drops from A to BB. That drop causes the price of the bond trading in the market to decrease from $100 to $90. The $10 difference, under current accounting rules, is recorded as a $10 debit to liabilities on the balance sheet and a $10 credit to income on the income statement.

As the company's credit rating and the price of the bond rise — to, say, $100 again — the accounting is reversed. Income takes a $10 hit, while the liability account is credited.

That accounting oddity has been a lingering problem since 2000, when the Financial Accounting Standards Board introduced Concept Statement 7, which includes a general theory on credit standing and measuring liabilities. The notion was hotly debated again in 2005, when IASB revised IAS 39, its measurement rule for financial instruments and in 2006 when FASB issued FAS 157, its fair-value measurement standard.

Addison Everett, the practice leader for global capital markets at PricewaterhouseCoopers, notes that the debate cooled down over the last 18 months as the liquidity crisis bubbled up. The crisis spotlighted more politically charged fair-value topics such as asset valuation in illiquid markets, classification of financial assets, asset impairment, and financial disclosures, he says.

But the credit risk quandary is back, demanding the attention of investors, regulators, and lawmakers who were carefully watching ailing financial institutions as they posted their first-quarter earnings results. As financial results were disclosed this year, it became clear that IAS 39 and FAS 157 were being used to boost income as banks and insurance companies became less creditworthy. For example, in the first quarter, Citigroup benefited from its credit rating downgrade by posting a $30 million gain on its own bond debt.

A Credit Suisse report looking back to last year, flagged a similar trend. The bank examined the first-quarter 2008 10-Qs of the 380 members of the S&P 500 with either November or December year-end closes, the first big companies to adopt FAS 157. For the 25 companies with the biggest liabilities on their balance sheets measured at fair value, widening credit spreads-an indication of a lack of creditworthiness-spawned first-quarter earnings gains ranging from $11 million to $3.6 billion.

Those keen on keeping the rules intact and allowing companies to book a gain when credit ratings worsen give several reasons for their stance. Most are laid out neatly in the IASB discussion paper. Consistency is one argument. "Accountants accept that the initial measurement of a liability incurred in an exchange for cash includes the effect of the borrower's credit risk," according to the paper. There's "no reason why subsequent current measurements should exclude changes."

There's a practical problem with that argument, however. Not all liabilities are financial in nature. Non-financial liabilities, such as those tied to plant closings (asset removal), product warranties, pensions, insurance claims, and obligations linked to sales contracts, are not as easily marked to market as a clear-cut borrowing. Often non-financial liabilities represent a transaction with an individual counterparty that has already placed a price on the chance of not being repaid. For many of those liabilities, "accounting standards differ in their treatment of credit risk," notes the paper.

One cure is to use a risk-free discount rate for all liabilities in order to apply a consistent measurement approach. But applying a blanket discount rate to the initial measure of debt leaves accountants with the problem of what to do with the debit. That is, for financial liabilities, should the debit be treated as a borrowing penalty and therefore as a charge against earnings? Or should the debit be subtracted from shareholder's equity and amortized into earnings over the life of the debt? For non-financial debt, should the debit be the recognized warranty or plant-closing expense?

Continued in article

Capital Structure plus M&M Theory --- http://en.wikipedia.org/wiki/Capital_Structure

"Capital Structure Decisions Around the World:  Which Factors are Reliably Important? by Ozde Oztekin, University of Kansas, SSRN --- March 5, 2009 --- http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1464471

Abstract:
This paper examines which leverage factors are consistently important for capital structure decisions of firms around the world. The most reliable determinants are past leverage, tangibility, firm size, research and development, depreciation expenses, industry median leverage, and liquidity. The signs of the reliable determinants give consistent support to the dynamic trade off theory. The impact of leverage factors on capital structure are systematically driven by cross-country differences in the quality of institutions that affect bankruptcy costs, agency costs, tax benefits of debt, agency costs of equity, and information asymmetry costs.

The late Nobel laureate Merton Miller and I, although good friends, long debated whether this kind of capital-structure management is an essential job of corporate leaders. Miller believed that capital structure was not important in valuing a company's securities or the risk of investing in them. My belief -- first stated 40 years ago in a graduate thesis and later confirmed by experience -- is that capital structure significantly affects both value and risk. The optimal capital structure evolves constantly, and successful corporate leaders must constantly consider six factors -- the company and its management, industry dynamics, the state of capital markets, the economy, government regulation and social trends. When these six factors indicate rising business risk, even a dollar of debt may be too much for some companies.
Michael Milken, "Why Capital Structure Matters Companies that repurchased stock two years ago are in a world of hurt," The Wall Street Journal, April 21, 2009 --- http://online.wsj.com/article/SB124027187331937083.html

Thirty-five years ago business publications were writing that major money-center banks would fail, and quoted investors who said, "I'll never own a stock again!" Meanwhile, some state and local governments as well as utilities seemed on the brink of collapse. Corporate debt often sold for pennies on the dollar while profitable, growing companies were starved for capital.

If that all sounds familiar today, it's worth remembering that 1974 was also a turning point. With financial institutions weakened by the recession, public and private markets began displacing banks as the source of most corporate financing. Bonds rallied strongly in 1975-76, providing underpinning for the stock market, which rose 75%. Some high-yield funds achieved unleveraged, two-year rates of return approaching 100%.

The accessibility of capital markets has grown continuously since 1974. Businesses are not as dependent on banks, which now own less than a third of the loans they originate. In the first quarter of 2009, many corporations took advantage of low absolute levels of interest rates to raise $840 billion in the global bond market. That's 100% more than in the first quarter of 2008, and is a typical increase at this stage of a market cycle. Just as in the 1974 recession, investment-grade companies have started to reliquify. Once that happens, the market begins to open for lower-rated bonds. Thus BB- and B-rated corporations are now raising capital through new issues of equity, debt and convertibles.

This cyclical process today appears to be where it was in early 1975, when balance sheets began to improve and corporations with strong capital structures started acquiring others. In a single recent week, Roche raised more than $40 billion in the public markets to help finance its merger with Genentech. Other companies such as Altria, HCA, Staples and Dole Foods, have used bond proceeds to pay off short-term bank debt, strengthening their balance sheets and helping restore bank liquidity. These new corporate bond issues have provided investors with positive returns this year even as other asset groups declined.

The late Nobel laureate Merton Miller and I, although good friends, long debated whether this kind of capital-structure management is an essential job of corporate leaders. Miller believed that capital structure was not important in valuing a company's securities or the risk of investing in them.

My belief -- first stated 40 years ago in a graduate thesis and later confirmed by experience -- is that capital structure significantly affects both value and risk. The optimal capital structure evolves constantly, and successful corporate leaders must constantly consider six factors -- the company and its management, industry dynamics, the state of capital markets, the economy, government regulation and social trends. When these six factors indicate rising business risk, even a dollar of debt may be too much for some companies.

Over the past four decades, many companies have struggled with the wrong capital structures. During cycles of credit expansion, companies have often failed to build enough liquidity to survive the inevitable contractions. Especially vulnerable are enterprises with unpredictable revenue streams that end up with too much debt during business slowdowns. It happened 40 years ago, it happened 20 years ago, and it's happening again.

Overleveraging in many industries -- especially airlines, aerospace and technology -- started in the late 1960s. As the perceived risk of investing in such businesses grew in the 1970s, the price at which their debt securities traded fell sharply. But by using the capital markets to deleverage -- by paying off these securities at lower, discounted prices through tax-free exchanges of equity for debt, debt for debt, assets for debt and cash for debt -- most companies avoided default and saved jobs. (Congress later imposed a tax on the difference between the tax basis of the debt and the discounted price at which it was retired.)

Issuing new equity can of course depress a stock's value in two ways: It increases the supply, thus lowering the price; and it "signals" that management thinks the stock price is high relative to its true value. Conversely, a company that repurchases some of its own stock signals an undervalued stock. Buying stock back, the theory goes, will reduce the supply and increase the price. Dozens of finance students have earned Ph.D.s by describing such signaling dynamics. But history has shown that both theories about lowering and raising stock prices are wrong with regard to deleveraging by companies that are seen as credit risks.

Two recent examples are Alcoa and Johnson Controls each of which saw its stock price increase sharply after a new equity issue last month. This has happened repeatedly over the past 40 years. When a company uses the proceeds from issuance of stock or an equity-linked security to deleverage by paying off debt, the perception of credit risk declines, and the stock price generally rises.

The decision to increase or decrease leverage depends on market conditions and investors' receptivity to debt. The period from the late-1970s to the mid-1980s generally favored debt financing. Then, in the late '80s, equity market values rose above the replacement costs of such balance-sheet assets as plants and equipment for the first time in 15 years. It was a signal to deleverage.

In this decade, many companies, financial institutions and governments again started to overleverage, a concern we noted in several Milken Institute forums. Along with others, including the U.S. Chamber of Commerce, we also pointed out that when companies reduce fixed obligations through asset exchanges, any tax on the discount ultimately costs jobs. Congress responded in the recent stimulus bill by deferring the tax for five years and spreading the liability over an additional five years. As a result, companies have already moved to repurchase or exchange more than $100 billion in debt to strengthen their balance sheets. That has helped save jobs.

  The new law is also helpful for companies that made the mistake of buying back their stock with new debt or cash in the years before the market's recent fall. These purchases peaked at more than $700 billion in 2007 near the market top -- and in many cases, the value of the repurchased stock has dropped by more than half and has led to ratings downgrades. Particularly hard hit were some of the world's largest companies (i.e., General Electric, AIG, Merrill Lynch); financial institutions (Hartford Financial, Lincoln National, Washington Mutual); retailers (Macy's, Home Depot); media companies (CBS, Gannett); and industrial manufacturers (Eastman Kodak, Motorola, Xerox).

Without stock buybacks, many such companies would have little debt and would have greater flexibility during this period of increased credit constraints. In other words, their current financial problems are self-imposed. Instead of entering the recession with adequate liquidity and less debt with long maturities, they had the wrong capital structure for the time.

The current recession started in real estate, just as in 1974. Back then, many real-estate investment trusts lost as much as 90% of their value in less than a year because they were too highly leveraged and too dependent on commercial paper at a time when interest rates were doubling. This time around it was a combination of excessive leverage in real-estate-related financial instruments, a serious lowering of underwriting standards, and ratings that bore little relationship to reality. The experience of both periods highlights two fallacies that seem to recur in 20-year cycles: that any loan to real estate is a good loan, and that property values always rise. Fact: Over the past 120 years, home prices have declined about 40% of the time.

History isn't a sine wave of endlessly repeated patterns. It's more like a helix that brings similar events around in a different orbit. But what we see today does echo the 1970s, as companies use the capital markets to push out debt maturities and pay off loans. That gives them breathing room and provides hope that history will repeat itself in a strong economic recovery.

It doesn't matter whether a company is big or small. Capital structure matters. It always has and always will.

Michael Milken is chairman of the Milken Institute.

Bob Jensen's threads on debt versus equity --- http://www.trinity.edu/rjensen/theory01.htm#FAS150

From: http://www.harrisinteractive.com/harris_poll/pubs/Harris_Poll_2009_08_04.pdf

Firefighters, Scientists and Doctors Seen as Most Prestigious Occupations

Real estate brokers, Accountants and Stockbrokers are at the bottom of the list

ROCHESTER, N.Y. – August 4, 2009 – Every year at this time, The Harris Poll asks whether an occupation can be considered to have very great prestige or hardly any prestige at all. This year there are some changes as well as some stability in what occupations are considered prestigious and what ones are not. These are some of the results of a nationwide telephone survey conducted by Harris Interactive among 1,010 U.S. adults between July 8 and 13, 2008.

Most Prestigious Occupations

The occupations at the top of the list are:
· Firefighter (62% say “very great prestige”),
· Scientist (57%),
· Doctor (56%),
· Nurse (54%),
· Teacher (51%), and
· Military officer (51%).

Least Prestigious Occupations

Looking at the other side of the list, only 15% or fewer adults regard the following occupations as having very great prestige:

· Real estate agent/broker (5%),
· Accountant (11%),
· Stock broker (13%),
· Actor (15%).

Substantial majorities of adults (from 65% to 80%) believe that these occupations have “hardly any” or only “some” prestige. Additionally, several occupations are regarded as “very prestigious” by more people this year than they were last year:

· Business executive, up six points to 23%,
· Military office, up five points to 51%, and
· Firefighter, up five points to 62%.

 

September 3, 2009 reply from Bob Jensen

I'm not certain that our image as clerks and bookkeepers affected the recent Harris Poll integrity surveys, because if that were the case we would've come out much higher.

I think this survey was affected by the image of the CPA who "audited" Bernie Madoff's investment fund and the large CPA audit firms that supposedly never knew (ha ha) the banks' loan portfolios were loaded with toxic poison. Where were the auditors? ---
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms

At one time CPAs were at the top or near the top of these Harris Poll surveys of perception of integrity. When he was President of the AICPA, Bob Elliott repeatedly referred to Harris Poll integrity surveys and forcefully claimed that integrity was the only thing auditors had to sell --- while he was out beating the drum for CPA firms to sell other types of assurance services that relied on image of integrity.

As an executive partner at KPMG, Bob Elliott viewed auditing as a low profit or even loss-leader commodity that was not differentiated among the large international CPA firms. His best analogy was that auditing was to CPA firms what rails and locomotives were to railroads before 1950. Railroads declined because they did not invest in the new world of transportation (trucks and airplanes). Bob beat the drums for a “New Vision” of Assurance Services Firms --- http://www.cpavision.org/pathfind/profiles/relliott.cfm

He was behind the proposed new Certified Cognitor concept for assurance services.

If fact, I think the AICPA, under Bob’s leadership, paid an advertising/promotion firm hundreds of thousands of dollars to find a new assurance services certification to promote --- the advertising/promotion firm settled on Cognitor --- http://accounting.smartpros.com/x25904.xml


NASBA supposedly would’ve cranked up a Uniform Cognitor Examination for all 50 states. Then the AICPA was clobbered by a grass roots movement among CPA firms to resist providing assurance services for things we had no comparative advantage selling and no unique training to sell. You can’t sell integrity without also being an expert in what you’re trying to sell.

As fate and luck and lobbying would have it, after Bob faded from the scene, Sarbanes-Oxley (SOX) emerged to save the profitability of CPA financial auditing services.

The public's opinion of CPA firms commenced to plunge after the disaster revelations about foul Andersen audits (Waste Management, Sunbeam, Worldcom, Enron, etc.). Then came huge lawsuits lost or otherwise settled by all leading CPA firms --- http://www.trinity.edu/rjensen/Fraud001.htm

CPA firms have since never recovered in these Harris Poll integrity opinion polls. We are, however, keeping our SOX up. Marlon Brando made the following line famous in Teahouse of the August Moon ---"SOX up boss!"
http://en.wikipedia.org/wiki/Teahouse_of_the_August_Moon

Bob Jensen

History from http://www.pollingreport.com/values.htm

The Saga of Auditor Professionalism and Independence ---
http://www.trinity.edu/rjensen/Fraud001.htm#Professionalism

Systems for Delivering, Administering, and Archiving Accounting CPE

September 17, 2009 message from Tom Selling [tom.selling@GROVESITE.COM]

I have had some experience using LearnLive ( http://www.learnlive.com/cpe_compliance.html ), which is a comprehensive system for delivering/administering live and archived accounting CPE. It works very well, but is quite pricey.

Does anyone know of other systems that I can investigate for suitability. Although LearnLive is an all-in-one solution, I would be interested in other products that provide specialized pieces of the puzzle. In particular, I don’t know of any other software systems for tracking participation and automatically issuing CPE certificates.

Thanks very much,
Tom Selling

September 17, 2009 reply from Richard Campbell [campbell@RIO.EDU]

Tom:
Adobe Captivate 4 does quizzes and completion certificates. You also need a LMS like Moodle.

Another alternative to webex is www.ilinc.com  - they also have a "training room" capability. The key phrase to watch for in LMSs - is it SCORM compliant?

Richard J. Campbell
mailto:campbell@rio.edu

Bob Jensen’s threads on course authoring, management, and delivery (including ToolBook 10) ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#Publish

History of Accounting, Ethics and  The Sex of a Hippopotamus

September 18, 2009 question from Richard Bernstein [richard12815@GMAIL.COM]

What are the sources for CPA ethics, is it the state or the AICPA.

What guides a CPA's ethical obligations
_________________________________
Richard Bernstein
richard12815@gmail.com

September 18, 2009 reply from Paul Bjorklund [PaulBjorklund@AOL.COM]

Strict interpretation . . . State board of accountancy for all CPAs. And then, if you are a member of a voluntary organization, e.g., AICPA, their canons.

Paul Bjorklund, CPA
Bjorklund Consulting, Ltd.
Flagstaff, Arizona

September 18, 2009 reply from Bob Jensen

Since the Codes of Ethics are adopted in each state, the states, the states are clearly a major factor.

You might look in particular at the book

The Sex of a Hippopotamus: A Unique History of Taxes and Accounting  
by Jay Starkman
Twinset Inc., 2008, 456 pp.

You can read a Journal of Accountancy review of the book at
http://www.journalofaccountancy.com/Issues/2009/Apr/Hippopotamus

 The Sex of a Hippopotamus by Jay Starkman is a well-documented and interesting read for professionals in the accounting and tax fields. In particular, this book is appealing to instructors, retirees, recent accounting graduates and the hard-to-buy-for CPA.

The book begins with anecdotes of accounting careers, then documents the role of accounting in the world (with special emphasis on U.S. history), and ends with tax anecdotes of the rich and famous. Career chapters address accounting and pop culture myths such as the long hours (“in every 24 hours, there are three perfectly good eighthour chargeable days”), strict dress code, charitable requirements and difficult work environment. From Harry Potter to the Beatles song “Taxman,” artistic depiction of accountants ranges from boring to oppressive. Separating myth from reality takes experience and perspective.

Starkman would know. He is a recognized, practicing CPA in Atlanta with nearly 40 years of work experience in the field including audit, fraud and tax. Having worked for most of the Big Four firms and currently running his own public accounting firm, Starkman can be controversial. He compares the hours of a career in public accounting to the Japanese concept of karoshi, which loosely translates to “death from overwork,” repeating the saying, “Let’s go home while it’s still dark.” He addresses abusive tax shelters and internal control weaknesses for electronic tax filing. He evaluates changes to professional ethics over time, including changes in the ability to accept referral fees, continuing education requirements and the reliability of prepackaged tax software.

Similarly, the history of tax and accounting is not sugarcoated. He includes a discussion of California’s 1850 tax on foreign laborers (primarily Chinese and Latinos), highlights Russian ruler Peter the Great’s tax levied on beards, and European taxation of Jews from medieval times through World War II. For better or worse, Starkman names names.

Underneath it all, though, is a strong ethical reckoning. “Can an honest accountant succeed?” asks Starkman (implying the answer is, “Yes, but not without being tested”). Nearly every reader will find some parts of the book drier than others. Accounting historians may trivialize some of the personal experiences, whereas practitioners may only be generally interested in the Turkish capital tax. But there is enough of each area of accounting to make buying this book worthwhile and its reading enjoyable.

 

One place to include in your search for this answer is http://maaw.info/EthicsMain.htm

By the way, MAAW is a great site for finding accounting literature ---
http://maaw.info/

 Bob Jensen

September 19, 2009 reply from Becky Miller [itsyourmom@HOTMAIL.COM]

Are you looking looking for the technical rules? CPAs who practice tax are to follow the guidance of Circular 230 of the Treasury Department and the AICPA Statements of Standards for Tax Services. You can find Circular 230 at the IRS's web page and the SSTS's on the AICPA web page. The ethical standards for all licensed CPAs that are of particular impact on auditors are found on the AICPA web page at: http://www.aicpa.org/Professional+Resources/Professional+Ethics+Code+of+Professional+Conduct/Professional+Ethics/

The States have the first level of enforcement and issue their own sets of ethics standards. At one time I was licensed in 19 states and I can tell you from that experience, in general, the state rules followed the AICPA's rules with some differences in the interpretation of solicitation, what falls within the practice of accounting, etc.

Hope this helps - Becky Becky Miller 22339 510 Street Pine Island, MN 55963

And that's the way it was on September 30, 2009 with a little help from my friends.

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

International Accounting News (including the U.S.)

Some Accounting Blogs

Paul Pacter's IAS Plus (International Accounting) --- http://www.iasplus.com/index.htm
International Association of Accountants News --- http://www.aia.org.uk/
AccountingEducation.com and Double Entries --- http://www.accountingeducation.com/
Gerald Trites'eBusiness and XBRL Blogs --- http://www.zorba.ca/
AccountingWeb --- http://www.accountingweb.com/   
SmartPros --- http://www.smartpros.com/
Management and Accounting Blog --- http://maaw.info/

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

AccountingEducation.com and Double Entries --- http://www.accountingeducation.com/
        Upcoming international accounting conferences --- http://www.accountingeducation.com/events/index.cfm
        Thousands of journal abstracts --- http://www.accountingeducation.com/journals/index.cfm
 

Deloitte's International Accounting News --- http://www.iasplus.com/index.htm
 

Association of International Accountants --- http://www.aia.org.uk/ 

Wikipedia has a rather nice summary of accounting software at http://en.wikipedia.org/wiki/Accounting_software
Bob Jensen’s accounting software bookmarks are at http://www.trinity.edu/rjensen/Bookbob1.htm#AccountingSoftware

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

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

AccountingWeb --- http://www.accountingweb.com/
AccountingWeb Student Zone --- http://www.accountingweb.com/news/student_zone.html

Introducing the New journalofaccountancy.com  (free) --- http://www.journalofaccountancy.com/Issues/2008/Nov/NovSmartStops.htm

SmartPros --- http://www.smartpros.com/

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

Financial Rounds (from the Unknown Professor) --- http://financialrounds.blogspot.com/

Professor Robert E. Jensen (Bob) http://www.trinity.edu/rjensen
190 Sunset Hill Road
Sugar Hill, NH 03586
Phone:  603-823-8482 
Email:  rjensen@trinity.edu  

August 31, 2009

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

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

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

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

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

Cool Search Engines That Are Not Google --- http://www.wired.com/epicenter/2009/06/coolsearchengines

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

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

Federal Revenue and Spending Book of Charts (Great Charts on Bad Budgeting) ---
http://www.heritage.org/research/features/BudgetChartBook/index.html

The Master List of Free Online College Courses --- http://universitiesandcolleges.org/

Free Online Textbooks, Videos, and Tutorials --- http://www.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks
Free Tutorials in Various Disciplines --- http://www.trinity.edu/rjensen/Bookbob2.htm#Tutorials
Edutainment and Learning Games --- http://www.trinity.edu/rjensen/000aaa/thetools.htm#Edutainment
Open Sharing Courses --- http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI
The Master List of Free Online College Courses --- http://universitiesandcolleges.org/

Bob Jensen's threads for online worldwide education and training alternatives ---
http://www.trinity.edu/rjensen/Crossborder.htm

"U. of Manitoba Researchers Publish Open-Source Handbook on Educational Technology," by Steve Kolowich, Chronicle of Higher Education, March 19, 2009 --- http://chronicle.com/wiredcampus/index.php?id=3671&utm_source=wc&utm_medium=en

Social Networking for Education:  The Beautiful and the Ugly
(including Google's Wave and Orcut for Social Networking and some education uses of Twitter)
Updates will be at http://www.trinity.edu/rjensen/ListservRoles.htm

Humor Between August 1 and August 31, 2009
http://www.trinity.edu/rjensen/book09q3.htm#Humor083109 

Humor Between July 1 and July 31. 2009
http://www.trinity.edu/rjensen/book09q3.htm#Humor073109 

Humor Between June 1 and June 30. 2009
http://www.trinity.edu/rjensen/book09q2.htm#Humor063009  

Humor Between May 1 and May 31, 2009 ---
http://www.trinity.edu/rjensen/book09q2.htm#Humor053109    

Humor Between April 1 and April 30, 2009 ---
http://www.trinity.edu/rjensen/book09q2.htm#Humor043009   

Humor Between March 1 and March 31, 2009 --- http://www.trinity.edu/rjensen/book09q1.htm#Humor033109  

Humor Between February 1 and February 28, 2009 --- http://www.trinity.edu/rjensen/book09q1.htm#Humor022809   

Humor Between January 1 and January 31, 2009 --- http://www.trinity.edu/rjensen/book09q1.htm#Humor01310

Suggestions for Writing and Using Cases

The number one thing that leads to great cases is access to information inside a corporation or not-for-profit organization. It’s here where the most prestigious universities with powerful alumni (e.g., Harvard, Wharton, Stanford, etc. have a valuable edge). The rest of us have to do the best we can.

Of course the prestigious schools also have professional case writing experts who work alongside faculty, such that professors who really want to write successful cases also have an edge when being on the faculty of prestigious universities like Harvard, Wharton, and Stanford.

Having said this, there are countless cases that emerge from Cactus Gulch Colleges of this world. Much depends upon the dedication to case writing and case writing organizations ECCH --- http://www.ecch.com/

My hero in this regard in Marilyn Taylor who got me involved in a number of NACRA teaching workshops (my job was only to make presentations on education technology). Marilyn is a management professor (UK in Kansas City) who has been very active in the North American Case Research Association. Among other things NACRA meets to critique each others’ cases, and critique they do. This can lead to much better case writing if you’ve got a tough skin for constructive criticism.
The NACRA home page is at http://www.nacra.net/nacra/

Most really active faculty in NACRA have made a career choice to concentrate writing efforts on cases. As a result they are great writers who seldom appear in TAR, JAR, or JAE. But they do get their case published and enjoy each others’ company.

NACRA reminds me of the annual poet critiquing conference that meets for a couple of weeks every summer down the road from where I live --- in the Robert Frost farmhouse museum. See my photograph and commentary on this way of learning to write poetry --- http://www.trinity.edu/rjensen/tidbits/2007/tidbits070905.htm

The top case writers from Harvard, Stanford, and Wharton are not likely to be active in NACRA, Active people in NACRA are more apt to come from Babson, Bentley, Northeastern, and state universities like South Carolina.

Over the last four years in my capacity as the Associate Editor of the Case Research Journal I have reviewed numerous cases. Many of them had considerable potential but were poorly developed. This is unfortunate because even though there is no standard formula for writing effective cases there are certain guidelines which I believe consistently lead to better cases. Therefore, at the request of the North American Case Research Association, the purpose of this paper is to discuss some of the guidelines I use when reviewing cases. I will organize my discussion around the four criteria the Case Research Journal uses for evaluating cases: (1) case focus, (2) case data, (3) case organization, and (4) writing style.

"WRITING A PUBLISHABLE CASE: SOME GUIDELINES," by  James J. Chrisman ---
 http://www.wacra.org/Writing%20a%20Publishable%20Case%20-%20Some%20Guidelines.pdf

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

American Accounting Association members may want to view the David Walker videos featured on the opening page of the AAA Commons --- https://commons.aaahq.org/signin

David Walker is a former Anderson partner who became Chief Accountant of the United States Government. He now is with the Peterson Foundation (as CEO) and tours the U.S. informing everybody he can about the entitlements funding time bomb of the United States. His message is bipartisan and began long before Barack Obama was elected president.

Here is an excerpt from my Website at http://www.trinity.edu/rjensen/Entitlements.htm

The US government is on a “burning platform” of unsustainable policies and practices with fiscal deficits, chronic healthcare underfunding, immigration and overseas military commitments threatening a crisis if action is not taken soon.
David M. Walker, Former Chief Accountant of the United States --- http://www.financialsense.com/editorials/quinn/2009/0218.html
Also see his dire warnings on CBS Sixty Minutes on the unbooked national debt for entitlements (See below)

Question
What former Andersen partner, who watched the Andersen accounting firm implode alongside its client Enron, has been traveling for years around the United States warning that the United States economy will implode unless we totally come to our senses?
Hints:
David Walker is was the top accountant, Controller General, of the United States Government.
He was a featured plenary speaker a few years back at an annual meeting of the American Accounting Association.
See his "State of the Profession of Accountancy" piece in the October 2005 edition of the Journal of Accountancy.
Also see http://www.aicpa.org/pubs/jofa/jul2006/walker.htm

Videos About Off-Balance-Sheet Financing to an Unimaginable Degree
Truth in Accounting or Lack Thereof in the Federal Government (Former Congressman Chocola) --- http://www.youtube.com/watch?v=NWTCnMioaY0 
Part 2 (unfunded liabilities of $100 trillion plus) --- http://www.youtube.com/watch?v=1Edia5pBJxE
Part 3 (this is a non-partisan problem being ignored in election promises) ---
http://www.youtube.com/watch?v=lG5WFGEIU0E

Watch the Video of the non-sustainability of the U.S. economy (CBS Sixty Minutes TV Show Video) ---
http://www.youtube.com/watch?v=OS2fI2p9iVs 
Also see "US Government Immorality Will Lead to Bankruptcy" in the CBS interview with David Walker --- http://www.youtube.com/watch?v=OS2fI2p9iVs
Also at Dirty Little Secret About Universal Health Care (David Walker) ---
http://www.youtube.com/watch?v=KGpY2hw7ao8

 

I.O.U.S.A.:  A Fact-Filled Documentary
"Another Inconvenient Truth," The Economist, August 16, 2008, pp 69-69 --- http://www.economist.com/finance/displaystory.cfm?story_id=11921663

AMERICA’S infamous debt clock, near New York’s Times Square, was switched off in 2000 after the national burden started to fall thanks to several years of Clinton-era budget restraint. However, it was reactivated two years later as the politically motivated urge to splurge once again took over. The debt has since swollen to $9.5 trillion, with the value of unfunded public promises (if you include entitlements such as Social Security and Medicare) nudging $53 trillion—or $175,000 for every American—and rising. On current trends, these will amount to some 240% of GDP by 2040, up from a just-about-manageable 65% today.

David Walker, who until recently ran the Government Accountability Office, has made it his mission to get the nation to acknowledge and treat this “fiscal cancer”. His efforts form the core of a new documentary, “I.O.U.S.A.”, out on August 21st. The message is simple enough: America’s financial condition is a lot worse than advertised, and dumping it on future generations would be not only economically reckless but also immoral.

The biggest deficit of all, the film contends, is in leadership: politicians continue to duck hard choices. It hints at dark consequences. As America has become more reliant on foreign lenders, it warns, so it has become more vulnerable to “financial warfare”, of the sort America itself threatened to wage on Britain, a big debtor, during the Suez crisis. Warren Buffett, America’s investor-in-chief, pops up to warn of potential political instability.

The film is part of a broader effort to popularise the issue. In 2005 Mr Walker set off on a “fiscal wake-up tour” of town halls; sparsely attended at first, it now attracts hundreds to each meeting (though some may be turned off by the giant pie chart strapped to the side of his tour van). The young are being drawn in too, even forming campaign groups; Concerned Youth of America’s activists “crusade against our leveraged future” wearing prison suits. Mr Walker is talking to MTV, a music broadcaster, about a tie-up. His profile has been lifted by a segment on CBS’s “60 Minutes” and an appearance on “The Colbert Report”, a satirical TV show, which dubbed him the “Taxes Ranger”.

Promisingly, the new film was well received at the Sundance Film Festival. Some even wonder if it might do for the economy what Al Gore’s “An Inconvenient Truth” did for the environment—perhaps with this comparison in mind, Mr. Walker and his supporters talk of a “red-ink tsunami” and bulging “fiscal levees”. But, unlike the former vice-president, he is no heavy-hitter. And, even jazzed up with fancy graphics, punchy one-liners and a splash of humour, courtesy of Steve Martin, tales of fiscal folly are an acquired taste. Still, “I.O.U.S.A” is a bold attempt to highlight a potentially huge problem. “The Dark Knight” it may not be, but for those who care about economic reality as much as cinematic fantasy, it might just be the scariest release of the summer.

 

Computer Fraud Casebook: The Bytes that Bite --- http://www.journalofaccountancy.com/Issues/2009/Sep/BookshelfReview3.htm

"CPAs are Aflutter About Twitter," by Kristin Gentry, SmartPros, August 10, 2009 ---
http://accounting.smartpros.com/x67355.xml

"CPAs Embrace Twitter Brief messages leave powerful impressions," by Megan Pinkston, The Journal of Accountancy, August 2009 --- http://www.journalofaccountancy.com/Issues/2009/Aug/20091828.htm 

"50 Ways to Use Twitter in the College Classroom" Online Colleges, June 6, 2009
 http://www.onlinecolleges.net/2009/06/08/50-ways-to-use-twitter-in-the-college-classroom/

Top Ten Tweets to Date in Academe
Keep in mind that none of these hold a candle to such globally popular twitterers such as Britney Spears
"10 High Fliers on Twitter:  On the microblogging service, professors and administrators find work tips and new ways to monitor the world ," by Jeff Young, Chronicle of Higher Education, April 10, 2009 --- http://chronicle.com/weekly/v55/i31/31a01001.htm?utm_source=wb&utm_medium=en

August 18, 2009 reply from Steven Hornik [shornik@BUS.UCF.EDU]

I recently created a wikipage for the CTLA workshop I did at the AAA in NYC. Its short and sweet (I think) so if anyone is looking for more info about twitter (terminology, links to applications, a few use cases) feel free to check it out at:

http://reallyengagingaccounting.wikispaces.com/Twitter 

Dr. Steven Hornik University of Central Florida Dixon School of Accounting 407-823-5739 Second Life: Robins Hermano
http://mydebitcredit.com 
Yahoo ID: shornik

 

An Accounting Love Song
One of Tom Oxner's former students (Travis Matkin) wrote and recorded this song a couple of years ago. It has now made it to U Tube --- http://www.cfo.com/blogs/index.cfm/detail/13525940?f=search
 

Hard Times:  What hard times?
NYC Annual Meetings of the American Accounting Association set attendance records

Congratulations to the 2009 officers and staff of the AAA.
In the gloom of economic crisis, accounting educators have found a bright spot.

We’ve broken our attendance record well before members started arriving today in New York City for the 2009 Annual Meeting. With a couple of days to go we have 3062 registrations – more than 250 more than last year at this point. Attendees come from 53 countries, about 26% from outside the U.S. About 400 new members will be attending.
Tracey Sutherland, Executive Director of the AAA --- http://commons.aaahq.org/posts/83f8fd9df8
Only AAA members may access the Commons Website.

New free accounting textbook from a generous accounting professor ---
http://www.ibtimes.com/prnews/20081218/ny-flat-world-knowldg.htm
Also see http://www.flatworldknowledge.com/Joe-Hoyle-Podcast 

--Each chapter opens with a video to explain the importance of the material and get the student interested in reading the chapter before they even start.

--The material (all 17 chapters) is written in a question and answer (Socratic) format to engage and guide the students through each area.   The subjects are broken down into a manageable and logical size.  Faculty often complain that students do not read the textbooks.  I think this format can change that trend.

--Embedded multiple-choice questions are included on virtually every page to provide immediate feedback for the students.  CJ and I wrote the multiple choice questions ourselves as we wrote the manuscript to ensure that they would tie together logically.

--Each chapter ends with a review video where we challenge the students to pick the five most important areas from the chapter.  I firmly believe that students need to learn to evaluate what they are reading.  We then provide our own “Top Five” list so that they can see where we agree and where we disagree.

Yes, professors do get hard copy versions.

Joe is also behind the free CPA Review course that was once commercial but then became a freebie to the world.
Free CPA Review Course --- http://cpareviewforfree.com/  

Thanks for open sharing Joe!

 -----Original Message-----
From: Hoyle, Joe [mailto:jhoyle@richmond.edu] 
Sent: Monday, August 17, 2009 8:09 AM
To: Undisclosed recipients
Subject: Help

I am sending this note to a wonderful group of college teachers that I have come in contact with over the years.  I sent the following note to my own faculty about my new financial accounting textbook.  I thought I would just forward it to other folks that I knew.  Okay, I know most of you don’t teach accounting but maybe you know someone who does.  I am really excited about the textbook.  In some ways, I feel that I have taught in college for 38 years in preparation to write this book.  Anyway, I’d love for you to pass along the info if you know someone who might be interested.

Hope life goes well for you and that you are gearing up, once again, to start teaching.  On August 24th, I enter the classroom for the 39 year.  I can hardly wait.

Joe Hoyle
University of Richmond

To:  Richmond Accounting Faculty
From:  Joe

As some of you know, I (along with C. J. Skender of UNC) will be coming out with a brand new Introduction to Financial Accounting textbook in the fall.  It is being published by Flat World Knowledge and is quite literally a free textbook.  The company makes its money by selling supplements to the students.  But, the on-line version is absolutely free.

We often complain about the cost of textbooks but, as faculty, we rarely actually do anything about it.  This is one opportunity.

So, do me a favor if you don't mind.  Flat World is a start-up company (created by two editors at Prentice Hall) and competing against the big publishers is extremely difficult.  Here is the URL for a podcast (about 10 minutes) that I did last week to explain the unique features of the textbook (and it IS a unique textbook). 

http://www.flatworldknowledge.com/Joe-Hoyle-Podcast

 I wish the sound quality were better but it was done over the phone lines.

If you know friends, acquaintances, enemies, total strangers at other schools who teach financial accounting, would you pass along the URL just to start getting the word out?  You don’t need to recommend it – just tell them it will be free and has been getting excellent reviews (certainly the best that I have ever received).

 I already know the first question:  Yes, professors do get hard copy versions.

People talk about wanting something different in textbooks.  Over the last two years, CJ and I have tried to produce what we believe the textbook of the 21st century should look like.  It has 17 chapters and covers all the traditional stuff:  receivables, inventory, fixed assets, contingencies, bonds, statement of cash flows, etc.

--Each chapter opens with a video to explain the importance of the material and get the student interested in reading the chapter before they even start.

--The material (all 17 chapters) is written in a question and answer (Socratic) format to engage and guide the students through each area.   The subjects are broken down into a manageable and logical size.  Faculty often complain that students do not read the textbooks.  I think this format can change that trend.

 

--Embedded multiple-choice questions are included on virtually every page to provide immediate feedback for the students.  CJ and I wrote the multiple choice questions ourselves as we wrote the manuscript to ensure that they would tie together logically.

 

--Each chapter ends with a review video where we challenge the students to pick the five most important areas from the chapter.  I firmly believe that students need to learn to evaluate what they are reading.  We then provide our own “Top Five” list so that they can see where we agree and where we disagree.

 

If you have any questions, please let me know.

 

You can get more information about the company at www.flatworldknowledge.com

Joe Hoyle

August 18, 2009 reply from Jim Fuehrmeyer [jfuehrme@nd.edu]

Bob,

Larry Walther at Utah State has also done an on-line text book that is available at no charge. Here’s the link: http://www.principlesofaccounting.com/ 

Jim Fuehrmeyer

Bob Jensen's threads on free accounting, finance, economics, statistics, and other textbooks and videos are at
http://www.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks

Comment Letter from 80 Harvard University Professors Regarding Corporate Governance
I submitted to the SEC yesterday a comment letter on behalf of a bi-partisan group of eighty professors of law, business, economics, or finance in favor of facilitating shareholder director nominations. The submitting professors are affiliated with forty-seven universities around the United States, and they differ in their view on many corporate governance matters. However, they all support the SEC’s “proxy access” proposals to remove impediments to shareholders’ ability to nominate directors and to place proposals regarding nomination and election procedures on the corporate ballot. The submitting professors urge the SEC to adopt a final rule based on the SEC’s current proposals, and to do so without adopting modifications that could dilute the value of the rule to public investors.
Lucian Bebchuk, Harvard Law School, on Tuesday August 18, 2009 --- Click Here
 

A copy of the comment letter filed with the SEC is available here --- http://blogs.law.harvard.edu/corpgov/files/2009/08/comment-letter-file-number-s7-10-09.pdf

Jensen Comment
No doubt these professors got a lot of these ideas when visiting former students in prison or on probation.

Bob Jensen's threads on Corporate Governance are at
http://www.trinity.edu/rjensen/Fraud001.htm#Governance

Is convergence of FASB and IFRS possible bankers ask?
American Banking Association Critical of FASB and IASB Pace and Divergence between the Two
The American Bankers Association has released a white paper expressing concern about The Current Pace and Direction of Accounting Standard Setting (PDF 266k). The paper notes that while the IASB and the FASB are working on many similar projects, including financial instruments, they are moving toward 'different solutions and at different speeds, which may make international convergence impossible'.
IAS Plus, August 14, 2009 --- http://www.iasplus.com/index.htm
Jensen Comment
The big issue with bankers is fair value accounting, and the allegations of "different solutions" is probably overstated. What is clear is that bankers are going to put up political stumbling blocks to what standard setters want in the way of fair value accounting for financial instruments. The impact has already been seen in the FASB's fine tuning of FAS 157 --- http://www.trinity.edu/rjensen/theory01.htm#FairValue
U.S. banks have used the FASB's staff positions to dress up their financial statements filled with toxic assets and boost reported earnings by coloring book accounting of toxic asset losses.

The FASB and IASB Won't Care For This Case
The Moral Hazard of Fair Value Accounting

From Lexis/Nexis
Credit Risk Management --- http://risk.lexisnexis.com/assess-customer-risk

August 20, 2009 message from Roger Debreceny [roger@DEBRECENY.COM]

Stephanie Farewell at the University of Arkansas at Little Rock, Skip White at the University of Delaware and Ernie Capozzoli at Kennesaw State University and myself are collaborating to bring eleven cases, class exercises and other learning resources on XBRL to the accounting and auditing curricula. These learning resources can be used in undergraduate introductory and intermediate accounting, auditing, information systems auditing and accounting information systems as well as graduate auditing and accounting information systems courses. The cases and class exercises are designed for both US and international adoption.

Much of this material was developed for the recent AAA XBRL bootcamp held prior to the AAA Annual Meeting. Some materials have been developed jointly, some individually,

We seek faculty who will be interested in adopting the cases and learning resources, particularly for the coming semester. We need input and feedback so that the cases can be further improved and enhanced. A description of each case or learning resource, together with contact information is at tinyurl.com/xbrlcases.

Aloha,
Roger D

August 19, 2009 reply from Bob Jensen

In the meantime, I have two older videos that might be useful.

My Korean Stock Exchange video on the use of XBRL (2005) ---
http://www.cs.trinity.edu/~rjensen/video/Tutorials/XBRLdemos2005.wmv
Note that the Korean Stock Exchange illustration is in the latter part of the clip.

You can read about KOSDAQ and XBRL at http://www.xbrl.org/nmpxbrl.aspx?id=92

My video on a defunct demo that PwC, Microsoft, and NASDAQ cooperated in developing in 2001.
It illustrates the use of Excel software for XBRL applications  (note that the demo comes late in the video clip) ---
http://www.cs.trinity.edu/~rjensen/video/Tutorials/XBRLdemos.wmv
PS:  This video may be the only public record of this original XBRL demo. From that standpoint it is useful for history buffs.

Bob Jensen

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

Will Auditors Appropriately Insist on Non-Going Concern Accounting?
"FDIC List of Problem Banks Surges, Putting Reserve Fund at Risk," by Alison Vekshin, Bloomberg.com, August 24, 2009 --- http://www.bloomberg.com/apps/news?pid=20601087&sid=ajDHMyQ5oDKs

Bob Jensen's threads on audit failures of failed banks --- http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms

August 28, 2009 message from Becky Miller [itsyourmom@HOTMAIL.COM]

http://www.pcaobus.org/Enforcement/Disciplinary_Proceedings/2009/08-27_Moore.pdf

I read the above PCAOB report with a combination of shock, horror and amazement at the sheer audacity of the guy.  But, it made me wonder.  Clearly, the PCAOB can and does sanction the auditor who does such work or lack thereof.  But, is there an associated sanction of the registrant who hires such an auditor.  Clearly, these firms should have known that the audit firm was doing basically no work.  I did several Google searches to see what the follow up was by the SEC when the PCAOB concluded that the audits were completely deficient.  I did not find any clear responses. I may simply be unable to word the search request properly, but I decided to reach out to you. 
 
I am attempting to introduce a discussion of ethics and responsibility into my principles classes and thought this would be a humorous case study.  But, I know that the brighter students are going to want to know if the "johns" get disciplined too.
 
Thanks -
Becky

August 28, 2009 reply from Bob Jensen

The PCAOB sure beats the days when CPA societies regulated their own members. Note that the date on the Tidbit below is 2002 --- http://www.trinity.edu/rjensen/Fraud001.htm

Self Regulation Really Works in New York --- It Kept a Few Drunks From Performing Bad Audits
Out of roughly 50,000 accountants licensed in New York, only 16 were disciplined by the state last year-most of them for drunk driving. In fact, only one was reprimanded on professional grounds.
NEW YORK, March 18, 2002 (Crain's New York Business) — http://www.smartpros.com/x33351.xml 

Jensen Comment
Virtually all of the 16 CPA’s disciplined were automatic due to DWI convictions. All that the NY CPA Society managed to do was keep some drunks out of the auditing profession. Some of these might’ve been good auditors when they were sober, which is why DWI convictions almost never lead to disciplinary action in the U.S. Congress.

"KPMG accountancy chief fiddled £545,000 to pay for his new wife's luxury tastes," by Julie Moult, Daily Mail, August 26, 2009 --- Click Here

A director who stole more than half a million pounds from global accountancy firm KPMG was trying to keep up with his second wife's extravagant demands, a court heard yesterday.

Andrew Wetherall, 49, claimed he was under pressure to add to his six-figure salary because 'he did not want her lifestyle to suffer'.

His wife of four years, Catherine, cost him an astonishing £15,000 a month to keep happy, and without the expenditure he feared a divorce, he told police on his arrest.

And last night when the Daily Mail sought to approach Mrs Wetherall, 47, for comment, her husband said: 'She's out shopping.'

Wetherall, who pleaded guilty to false accounting and fraud, was warned to expect a prison term when he is sentenced next month.

To the undoubted embarrassment of bosses at KPMG, whose business is to spot other companies' fraudulent activity, he was able to steal from under their noses for six years, Southwark Crown Court heard.

He made false claims totalling £545,620 so he could splash out on expensive cars, designer watches and five-star holidays.

Samantha Hatt, prosecuting, said: 'He didn't want to go through a second divorce so he started up the fraud.

'He felt the pressure of his current wife's financial expectations which were in the sum of £15,000 a month. He didn't want her lifestyle to suffer so he turned to crime to ensure that it didn't.'

Judge Gregory Stone asked: 'Did you really say £15,000 a month?' before shaking his head in disbelief.

The court heard how father-of-two Wetherall, a director of the worldwide company, used his knowledge of the expenses system to steal.

He kept each item of fraudulent activity under £5,000, meaning he did not need authorisation from his bosses.

He claimed for hundreds of flights worth a total of £480,000, of which at least £243,000 was supported with fake documents.

He altered bills, created false invoices, made multiple claims for legitimate expenses and submitted bills for luxury holidays he took with his wife, claiming they were business trips.

However last year a colleague began to raise questions about his claims for air travel.

Initially Wetherall said he had made a simple mistake and offered to pay back £18,000, but an investigation was started which unravelled the full extent of the fraud.

During a disciplinary hearing Wetherall owned up to his crimes and handed bosses a cheque for £305,000, but police were called in.

Miss Hatt continued: 'Claims had been made for flights and expenses when such trips were not in fact made. Further, the claims were supported by falsely created invoices or genuine ones that had been altered.

'He also made multiple claims for legitimate trips and claimed personal expenditure as business expenditure including holidays to Singapore and Thailand, a £4,000 watch, a £2,000 camera and high value computer equipment.'

Wetherall explained he had put most of the money in a savings account and the 'shortfall was due to paying for his lifestyle'.

Miss Hatt said: 'He attributed this to legal costs from his divorce from his first wife, the purchase of a motor vehicle for himself for £60,000 and the part payment of a motor vehicle for his current wife for £14,000.'

When he was arrested he told investigators that his financial worries began when his second wife's ex-husband tried to reduce maintenance payments to her.

He told officers once he started stealing it became easier and easier as there were few controls or restrictions upon him, and he became cavalier in his approach.

A spokesman for KPMG said yesterday its system had since been tightened up.

'Mr Wetherall's frauds were detected via our own internal checks and he was dismissed in 2008. Since this case, KPMG has made changes to its internal expenses procedures to prevent fraud of the type committed by Mr Wetherall being perpetrated today. No client funds were involved.'

The disgraced executive has paid back £337,228.60, but still owes more than £200,000.

Judge Gregory Stone QC adjourned sentence until September 15 for further financial investigations to be carried out, but warned Wetherall that jail was the likely outcome.

'Mr Wetherall has got to understand there is likely to be a prison sentence at the end of the day,' he said.

Bob Jensen's threads on KPMG are at http://www.trinity.edu/rjensen/Fraud001.htm#KPMG

The good news is that, without having replication studies, TAR is 99.9999% more accurate than virtually all other science journals. There is no fraud or error in accountics research. That’s the bliss that comes with being a pseudo science.

“Accounting Research Farmers Are More Interested in Their Tractors Than in Their Harvests,”
Bob Jensen --- http://www.trinity.edu/rjensen/theory01.htm#Replication

Interestingly, in his reply to Paul Williams, Steve backs up my assertion above:

“Yes, I have biases, as I freely acknowledge.  I like research that puts the method before the message, meaning that if the conclusion comes first, as in much of what I perceive under the “critical perspectives” banner, I view that to be advocacy for a cause, not research.”
Steve Kachelmeier, University of Texas and current Editor of The Accounting Review
In a letter to Paul Williams in August 2009 following the American Accounting Association annual meetings. I wish that I had permission to post the entire and lengthy exchange between these two scholars.

What I think Steve is saying is that if we don't have an acceptable method (tractor) for studying a particular problem we should not publish research for which methods are weak, such as case studies and anecdotal evidence.

What I find interesting is that Steve along with virtually all accountics researchers not only place their tractors ahead of their harvests, they have no interest in independently authenticating (replicating) reports of their harvests (a few of which are about as honest as a Madoff financial report) ---
http://www.trinity.edu/rjensen/theory01.htm#Replication

Accountics researchers will, in my eyes, always be pseudo scientists until their research findings are independently verified against error and fraud.

By the way, I admire Paul William’s philosophic and historical scholarship greatly, but in this exchange he personalized his arguments too much with respect to his own submissions to TAR. And he rambles on this to distraction. We’ve nearly all have had positive and negative TAR referees and editors. I once had TAR flatly reject a paper (in 2007) in which one referee refused to even put his remarks in writing. When the paper was published in the Accounting Historians Journal it even won a monetary prize. But I don’t blame the editor of TAR, because editors are beholding to their often-biased referees, and my paper indeed centered on criticisms of TAR over the past four decades ---
http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm


The above submission to TAR was not something I ever expected TAR to publish, but at least I tried. My co-author up front thought we were just wasting time by submitting it to TAR. He was correct --- the referee comments that were put into writing were virtually worthless.

My point is that an accept/reject decision on any particular submission is too anecdotal to be of much use. Paul’s complaint of a six-month lag in the decision process also does not disturb me. I once had a paper acceptance decision delayed (not by TAR) for over three years. When the editor at last published the paper it was embarrassingly obsolete. The AHJ referees, however, were in some ways tougher but highly constructive toward improving the paper.

I was also disappointed in that Steve has taken it upon himself to stop inviting and/or publishing commentaries in TAR. It seems to me that this is a return to TAR at its acccountics worst.

And yes I do think it is the prerogative of a journal editor to inject personal biases into decisions regarding invited and randomly submitted papers/commentaries. Steve Zeff certainly had some biases when he was editor of TAR. Anthony Hopwood is suspectingly biased regarding AOS. Who would not accuse Tony Tinker of bias in Critical Perspectives? I wish Steve would inject more bias into TAR by inviting commentaries that are likely to reflect his own biases.

I’m not afraid of your biases Steve. But I’m disappointed that you have not taken any initiative to encourage replication in accountics research findings.

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

Since I sent out the Paul versus Steve message above to the AECM, I’ve had some interesting private messaging with Steve. I admire Steve because he’s willing to share his thoughts privately with Paul and me (at least) more than any TAR editor I can think of since Steve Zeff.

I don’t think Steve is yet ready to share his comments publically with all of you on the AECM. However, think my ideas can be shared with you.

Hi Steve,

Science journals invite replications to a point where it’s often easier to get replication studies published (maybe in abbreviated form). And science journals will publish positive (supportive) replications so as not to discourage researchers from investing time and money in research that may only have a 50% chance of turning out negative (which of course is the most important finding to be published).

If TAR, JAR, and JAE do not invite replications and rarely, if ever, publish a positive or negative replication, what’s the incentive to conduct a replication study that cannot be published?

TAR, JAR, and JAE editors have cut replication researchers off at the pass for the past four decades.

Leaving it up to referees to decide to publish a replication is the wrong point in time in the replication system. If TAR does not actively encourage submissions of replications, you’re referees are going to get a replication submission on very, very rare occasions.

I did publish one back of sorts back in 1970, but that was a long time ago:
"Empirical Evidence from the Behavioral Sciences: Fish Out of Water," The Accounting Review, Vol. XLV, No. 3, July 1970, 502-508.
But these type of articles virtually disappeared for the next 40 years.

 

Earlier message from Bob Jensen

If you can’t decide which of two research attempts is truth, would you leave the original study hanging as truth because referees can’t decide about the replication failed effort and decide not to publish the replication?

In science there’s little doubt about what happens when one team is unable to replicate the original team’s findings (sometimes with different methods). For example, I doubt whether Eric Lie’s empirical findings on options backdating would’ve had much impact if so much anecdotal evidence commenced to verify Lie’s findings, especially the mounting court cases.

What happens in science when one team is unable to replicate the original work it inspires a raft of other teams to attempt replications. Eventually the truth emerges such that I don’t think that scientists leave many unanswered questions about the original harvest.

You might note one of my frustrating examples at http://www.trinity.edu/rjensen/theory01.htm#Replication 

The BAMBERs
I was responsible for an afternoon workshop and enjoyed the privilege to sit in on the tail end of the morning workshop on journal editing conducted by Linda and Mike Bamber. (At the time Linda was Editor of The Accounting Review). I have great respect for both Linda and Mike, and my criticism here applies to the editorial policies of the American Accounting Association and other publishers of top accounting research journals. In no way am I criticizing Linda and Mike for the huge volunteer effort that both of them are giving to The Accounting Review (TAR).

Mike’s presentation focused upon a recent publication in TAR based upon a behavioral survey of 25 auditors. Mike greatly praised the research and the article’s write up. My question afterwards was whether TAR would accept an identical replication study that confirmed the outcomes published original TAR publication. The answer was absolutely NO!

Now think of the absurdity of the above policy on publishing replications. Scientists would shake their heads and snicker at accounting research. No scientific experiment is considered worthy until it has been independently replicated multiple times. Science professors thus have an advantage over accounting professors in playing the “journal hits” game for promotion and tenure, because their top journals will publish replications. Scientists are constantly seeking truth and challenging whether it’s really the truth.

Thus I come to my main point that is far beyond the co-authorship issue that stimulated this message. My main point is that in academic accounting research publishing, we are more concerned with the cleverness of the research than in the “truth” of the findings themselves. Have I become too much of a cynic in my old age? Except in a limited number of capital markets events studies, have accounting researchers published replications due to genuine interest by the public in whether the earlier findings hold true? Or do we hold the findings as self-evident on the basis of one published study with as few as 25 test subjects? Or is there any interest in the findings themselves to the general public apart from interest in the methods and techniques of interest to researchers themselves?

This is replication effort eventually did its job: In Accounting We Need More of This Purdue University is investigating “extremely serious” concerns about the research of Rusi Taleyarkhan, a professor of nuclear engineering who has published articles saying that he had produced nuclear fusion in a tabletop experiment, The New York Times reported. While the research was published in Science in 2002, the findings have faced increasing skepticism because other scientists have been unable to replicate them. Taleyarkhan did not respond to inquiries from The Times about the investigation. Inside Higher Ed, March 08, 2006 --- http://www.insidehighered.com/index.php/news/2006/03/08/qt  The New York Times March 9 report is at http://www.nytimes.com/2006/03/08/science/08fusion.html?_r=1&oref=slogin 

If TAR, JAR, and JAE do not invite replications and rarely, if ever, publish a positive or negative replication, what’s the incentive to conduct a replication study that cannot be published?

 

Earlier Message From Bob Jensen

I think part of the problem is lack of imagination of the TAR with respect to the publishing medium. In this day in age everything does not have to be restrained by costly hard copy. Replications, commentaries and case (small sample) studies could be online-only with short summaries in TAR hard copy.

Everything does not have to be refereed and rewritten my two or three reviewers if the submission is indeed a commentary. And TAR can have biased editors --- ergo Steve Zeff.

And I strongly believe, as do many other true scholars like Anthony Hopwood in our profession, that getting too hung up on the tractors leads to failure to harvest crops that may only be amenable to non-mechanized farming. Judy Rayburn, as President of the AAA, strongly expressed an opinion that the harvests of TAR may not be all that nourishing to anybody, as witnessed in part by the low citation rates in the academy. I cite other scholars who feel the same way at http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm

Have you seen any recent readership survey about TAR beyond merely subscribing to TAR? Have you surveyed the membership of TAR to see how many members of the AAA would like to see TAR evolve? Have you ever noted how Accounting Horizons has utterly failed in its appeal to practitioners (as was originally intended when Jerry Searfoss seeded the funding of AH)?

I'm severely critical of TAR over the last four decades for barely, I mean hardly ever, giving any attention to accounting history or trying to appeal to submissions from historians. Case studies are published more often, but more of these could be published in electronic format apart from hard copy.

The AECM is made up mostly of accounting educators around the world who've become more and more cynical about accountics research harvests (not just the tractors) that rigorously conclude the obvious or "a who cares attitude" toward TAR, JAR, and JAE.

Since Jerry Zimmerman got hammered pretty bad (in some very scholarly papers), I think the attitude of the authors in TAR, JAR, and JAE, along with the editors, as been a "take it or leave" kind of "we're better than you snobbery" because they had something accepted in an accountics journal. And they almost never enter debates of interest to teachers of accounting or practitioners.

What we really need is somebody besides Richard Sansing on the AECM trying to convince us that we should at least read the abstracts of TAR (I actually read them but am seldom inspired by them). And for two decades I mostly published OR-type articles. See the "Ones That Got Away" links at http://www.trinity.edu/rjensen/default4.htm

It would really help if authors and or editors of JAR sent out messages on the AECM about particular new articles that should be of great interests to teachers of undergraduate and masters courses.

It would really help if authors and or editors of JAR sent out messages on the CPA-L listserv about particular new articles that should be of great interests to practitioners. Like the song in My Fair Lady, Show Me!.

And you're being able to point to one or two or ten replications hardly impresses me out of the thousand or more papers published by TAR in the past four decades.

Has anybody ever replicated a single behavioral experiment published by TAR?

Has anybody replicated some of the very top empirical studies just to check on data errors. Once a young faculty member at FSU tried to replicate one of Bill Beaver's classics. She gave up in disgust for Bill Beaver --- my hero and long-time friend Bill Beaver. 

PS
Your colleagues Bill Kenney and Bob May both took my doctoral seminars at MSU, which in those days were mostly directed toward mathematical programming

The best thing that ever happened to me was losing out to Gary Sundem in the choice of a TAR editor. Be careful! TAR editors are seldom loved, must have very thick skin, and often decline into poor health while in service. I do understand what a personal sacrifice you're making to provide this service to the AAA.

Please, please, please, however, try to take some initiative for publishing replications, history articles, case studies, and commentaries on various topics.

Bob Jensen

Follow up message from Bob Jensen

Hi David,

The good news is that, without having replication studies, TAR is 99.9999% more accurate than virtually all other science journals. There is no fraud or error in accountics research. That’s the bliss that comes with being a pseudo science.

Steve did not carry on the TAR policy of refusing to referee research replications, and I suspect future TAR editors will send replication research papers to TAR referees.

Steve tells me the decision to publish replication research is entirely up to referees. This assumes that replication research studies are conducted in the first place. I think almost all research replication studies are cut off at the pass before even being conducted.

It’s important to encourage replication research even if it is supportive of original findings
The present TAR policy suggests that it probably improves the very slim odds of having a replication study published if the replication negates the findings of the original study and/or points to gaping errors in the original study. Off the top of his head Steve pointed out a publication that pointed to gaping errors of an earlier study and another  publication in forthcoming (next May) that also reveals gaping errors in an earlier study.

But I wonder if TAR would’ve accepted the above two replication papers had those papers instead found no gaping errors in the original studies and supported the findings of those original studies? My guess is that positive replication findings cannot be published in TAR. The cost, however, is that researchers are not motivated to conduct replication research in the first place if the odds are very, very high of being positive rather than negative with respect to the original studies. Science journals encourage replication research by publishing positive as well as negative findings. The purpose is to encourage the conducting of replication research.

The problem with the policies of TAR, JAR, JAE, and other leading international accounting research journals to not openly encourage replication research submissions means that over 99.9999% of the possible replications research never gets conducted in the first place. If the odds are one in 10,000 of getting a replication research paper published, what’s the incentive to do replication research? Given the thousands of articles published by TAR, JAR, JAE, and the other leading academic accounting research journals over the past four decades, how many are replication studies? One, two, ten, or even 30 will not impress me.

Capital markets studies are sometimes inter-related and supported by anecdotal evidence (such as the anecdotal evidence supporting the award-winning options backdating study of Eric Lie), but if you really want to irritate an editor of TAR and JAR, ask if there is any replication verification of behavioral research experiments that they’ve published.

My main point to Steve is that times have changed in academic publishing. Not every submission to TAR need be submitted for hard copy publishing. It might be that replications, case studies, and history studies could be invited to be published as TAR publications without having to be promised hard copy publishing. The importance to many researchers is the TAR stamp of approval that can transcend hard copy.

My second point to Steve is that what TAR editors view as acceptable methods (tractors) means that the most interesting research problems are cut off at the pass if there are no acceptable accountics methods (that exclude hoes and hand planting and hand harvesting).

Not everything that can be counted, counts. And not everything that counts can be counted.
Albert Einstein

For a long time, elite accounting researchers could find no “empirical evidence” of widespread earnings management. All they had to do was look up from the computers where their heads were buried.

The good news is that, without having replication studies, TAR is 99.9999% more accurate than virtually all other science journals. There is no fraud or error in accountics research. That’s the bliss that comes with being a pseudo science.

Bob Jensen

The rise of accountics research ---
http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm

Bob Jensen's longtime rant about replication can be found at http://www.trinity.edu/rjensen/theory01.htm#Replication

"Investment Research: How Much is Enough," by Bradford Cornell California Institute of Technology, SSRN, June 2009

Abstract:     
Aside from the decision to enter the equity market, the most fundamental question an investor faces is whether to passively hold the market portfolio or to do investment research. This thesis of this paper is that there is no scientifically reliable procedure available which can be applied to estimate the marginal product of investment research. In light of this imprecision, investors become forced to rely on some combination of judgment, gut instinct, and marketing imperatives to determine both the research approaches they employ and the capital they allocate to each approach. However, decisions based on such nebulous criteria are fragile and subject to dramatic revision in the face of market movements. These revisions, in turn, can exacerbate movements in asset prices.

Assorted difficulties in measuring gains to fundamental research.

• The difficulty in measuring "abnormal" performance", given the stochastic (i.e. random) nature of stock returns
• The time-varying nature of any possible gains to analysis (funds and strategies change over time).
• Given the needs for sample size and duration necessary to get high levels of statistical significance, most findings are of pretty low confidence
• The ad hoc nature of many analysis strategies and the role that judgment plays

August 29, 2009 reply from Richard.Sansing [Richard.C.Sansing@TUCK.DARTMOUTH.EDU]

Some evidence suggests that the value of investment research was lower than its costs, at least when comparing actively managed mutual funds to index funds.The paper making that claim is also on SSRN.

Luck versus Skill in the Cross Section of Mutual Fund Alpha Estimates
Tuck School of Business Working Paper No. 2009-56 , Chicago Booth School of Business Research Paper
Working Paper Series

Eugene F. Fama University of Chicago - Booth School of Business

Kenneth R. French Dartmouth College - Tuck School of Business

Abstract:
The aggregate portfolio of U.S. equity mutual funds is close to the market portfolio, but the high costs of active management show up intact as lower returns to investors. Bootstrap simulations produce no evidence that any managers have enough skill to cover the costs they impose on investors. If we add back costs, there is suggestive evidence of inferior and superior performance (non-zero true alpha) in the extreme tails of the cross section of mutual fund alpha estimates. The evidence for performance is, however, weak, especially for successful funds, and we cannot reject the hypothesis that no fund managers have skill that enhances expected returns.

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

August 20, 2009 message from  Malcolm J. McLelland,

 Hi Bob,

I agree: Math is a formal language for a (semi-)informal world. So it's always possible to find examples where a mathematical expression doesn't make perfect sense. But, again, when I talk to AIS programmers they essentially tell me they are programming mathematical functions. Should we use the same (mathematical) language as them, or should they use the same (natural) language we use? Programming is a little outside my area of expertise, but I think they'd have a pretty hard time programming revenue recognition in non-math programming languages.

Also, we can always allow the parameters to change over time as well:

REV(k,t) = min[ %earned(k,t), %realizable(k,t) ] * HEP(k,t)

(Notice HEP was the only parameter in the function as previously. Allowing HEP to change over time is essentially allowing renegotiation of contract price, which happens all the time of course in long-term contracts; e.g., Halliburton DOD contracts.)

I guess my most basic point to all this is that--setting aside very clear special cases--there's likely nothing wrong with the revenue recognition principle, per se, as it stands presently (even though I've never seen a clear statement of it that didn't lack specificity from a math/programming perspective). The mathematical statement of the principle gets us to focus on the three most important things: (1) what the contract price is, (2) how much of it has been "earned" and what "earned" means, and (3) how much of it is "realizable" and what "realizable" means.

I have my own definitions of these things that no one cares about (for good reason). For example, is a "realizable" receivable the mean, the median, or the mode (present) value of the uncertain, future payoff? To apply the principle, we kind of need to know these things: We can't estimate something we're uncertain of unless we're clear on the estimation objective.

But why is it really so difficult to come to a consensus on what "earned" and "realizable" mean and then formulate a clear, concise statement of the principle including a definition of such terms? Sometimes I think people simply don't want to reach a consensus. It adds gravitas to our discussions somehow.

Sorry to rant. This is a digression from the discussion and I apologize.

Best regards,

Malcolm

August 20, 2009 reply from Bob Jensen

Not everything that can be counted, counts. And not everything that counts can be counted.
Albert Einstein

For a long time, elite accounting researchers could find no “empirical evidence” of widespread earnings management. All they had to do was look up from the computers where their heads were buried.

Hi Malcomb,

You're making the fatal assumption that we know the distribution of outcomes so that we can compute such things as means, median, modes, quartiles, etc. For a few things we do indeed have actuarial distributions that might be functional, but in most instances the underlying probability distributions are unknown and/or unstable. For about two decades we thought Bayesian subjective probability would solve our accounting problems, but that turned into a bummer. Who cares about Bayes anymore?

For several decades we thought Box Jenkins time series would solve our problems such as bad debt estimation. I no longer read much about Box Jenkins in the accounting world, and I doubt if anybody at the FASB or IASB gives two hoots about BJ models. BJ models were just too demanding with unrealistic assumptions.

For a time auditors thought statistical sampling was going to allow them to estimate financial risk with precision. Statistical sampling has its place, but it is not the panacea we hoped it would be and on countless occasions selective sampling has beat statistical sampling every which way.

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 --- http://en.wikipedia.org/wiki/LTCM

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

Can the 2008 investment banking failure be traced to a math error?
Recipe for Disaster:  The Formula That Killed Wall Street --- http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=all
Link forwarded by Jim Mahar ---
http://financeprofessorblog.blogspot.com/2009/03/recipe-for-disaster-formula-that-killed.html 

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 -- -
http://www.trinity.edu/rjensen/FraudRotten.htm#LTCM  


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

We thought our VaR models measured the financial risks of banks, but the sophisticated VAR models exploded in the recent banking crisis.

We do know that normal distributions are the exception rather than the rule and face enormous problems of skewness and Black Swan fat tails in unknown underlying distributions. We may think we have some pretty good distribution knowledge for bad debts or warranties, but then something upset the apple cart like subprime lending fraud and mortgage frauds.

The real problem with time series models and statistics in general is that these models assume stationarity that seldom exists for long, if ever, in the real world. Accountants/auditors on the line are forced to deal with these non-stationarities. We cannot assume homoscedasticity in a heteroscedastic world. We cannot assume variable independence in a covarying world. We try to build models and then discover that the most important variables are either unknown or cannot be reliably measured.

The fact of the matter is that the world of accounting with all its complicated nexus of contracts and non-stationarities is just too complicated for mathematical and statistical precision. The more we depend upon models the more we have to leave out of our analysis.

But we do have people still thinking they can design an AIS accounting system based on simple algebra and probability parameters. These people are often called sophomores (no offense intended, honestly).

You can read about Value at Risk (VaR) at http://en.wikipedia.org/wiki/Value_at_Risk

"Don't Blame it on VaR," by Peter Ainsworth, Funds Europe, August , 2009 --- Click Here
http://www.funds-europe.com/August-2009/BACK-OFFICE-Don%E2%80%99t-blame-it-on-VaR/menu-id-228.html

VaR is simply a financial weather forecast. A high VaR suggests stormy weather and the risk of big losses, while a low VaR indicates a balmy day and rain, in the form of big losses, is not likely. But VaR, using its full name, has a misleading description. ‘Value at risk’ sounds like it is communicating the maximum rainfall rather than just an idea of whether a rainstorm is likely. Indeed, in a recent speech, the FSA’s Lord Turner implied that even he had been mislead when he said: “We know that [VaR ..is] praised as a mathematically precise measure of risk.” But no professional statistician would describe VaR that way.

Continued in article

August 24, 2009 reply from Mc Lelland, Malcolm J [mjmclell@INDIANA.EDU]

Thank you Bob and Pat,

Fortunately, my doctoral program experience gave me an extremely thick skin; many attacks seemed quite personal. That is, criticism of an argument can be based on its ethos (character of the "arguer"), pathos (emotional content of the argument), or logos (logic of the argument). I found that criticism of arguments in accounting research was often directed at ethos and sometimes at pathos, with surprisingly little effort at examining the logic of the argument. From my reading of past AECM discussions, I think people often disregarded what Richard Sansing said largely because "he's just one of those analytical modeling types"; they don't like the econ theorist ethos/pathos. So, many people disregard an argument the moment it's framed in mathematical language. But That Which Does Not Kill Us Makes Us Stronger ...

So in relation to the original topic, some of the fundamental questions that remain perennially open, at least in my mind, are:

(1) Is it useful to regard accounting variables, in general, as random variables?
(2) What are accountants trying to measure when they measure accounting random variables: mean, median, mode, something else ... ?
(3) Are statistical methods useful in estimating whatever it is accountant's are trying to estimate, or is "professional judgment" adequate?
(4) What exactly is "professional judgment" if the estimation objective for the accounting random variable is not specified, at least in principle?

I deeply believe many of our discussions in accounting and auditing are unlikely to be fruitful if we don't carefully answer these questions first.

Cheers,

Malcolm

August 21, 2009 reply from Bob Jensen

Hi Malcomb,

I really like thick skinned activists on the AECM. And I never ignore a message by Richard Sansing just because he’s an accountics researcher. I only wish we had more accountics researcher activists on the AECM. I’m always thankful for Richard.

I don’t think I can answer your specific questions with a broad paint brush. To consider each question I would first need to have you narrow down to particular measurements of accounting variables and purposes of the those measurements.

In terms of fundamental theory of measurement, accounting scholars, many of whom were outstanding mathematicians and some wannabe mathematicians, addressed the fundamental problems of measurement in accountancy. One of the best-known and respected attempts is the “Theory of Accounting Measurement” by Hall of Fame accounting professor Yuji Ijiri, (Studies in Accounting Research #10, American Accounting Association, 1975) --- http://aaahq.org/market/display.cfm?catID=5
Among other things, Yuji developed an axiomatic structure of accounting that I think was mostly or completely ignored in the development of the FASB and the IASB Conceptual Frameworks. The point is that the mathematical axiomatic structures of Ijiri, Mattesich, and others were not deemed to have value added or sufficient engineering details in the derivation of the official conceptual frameworks.

By the way, Yuji is, and always was, a staunch supporter of historical cost accounting because it was the closest measurement system to have mathematical purety --- See Chapter 6 which also develops his axiom of "fair value."

Probably the closest thing that Yuji developed of interest to you is his "multidimensional bookkeeping" extension where he analogizes accounting for first derivative variations in account balances --- stocks and flows. His simple illustrations fit nicely into his theory but died an early death due to total impracticality and unrealistic assumptions in the real world of accounting. Still Yuji's work remains a classic in theory to which I think Paul Williams built an alter in his home.

If you, Malcomb, want to use your mathematical background to make new contributions to the mathematics of accounting, I suggest that you build on the above monograph of Professor Ijiri. I'm certain that Professor Ijiri would be honored. He was a terrific innovator of ideas in accounting thought but not so much an engineer who designed bridges that were ever built.

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

Now let me turn to another grand effort that is elegant but fundamentally flawed. For this you should turn to Chapter 4 entitled "Decomposition Analysis of Financial Statement" in Financial Statement Analysis:  A New Approach by Baruch Lev (Prentice-Hall, 197f4). Baruch attempted an elegant extension of homeostasis relating living organisms to business organizations. He then attempted to decompose Lockheed's assets and liabilities for 1969 and 1970 via a decomposition formula using log functions of ratios. The weighted logarithmic functions of ratios had an important property of additivity that allowed analysts to disaggregate and computer weighted averages of decomposition measures. The analysis is beautiful except that Baruch overlooked the fact that the variables forming his ratios were not independent but were in fact highly interdependent in double entry accounting.

Interestingly, I sat beside my Stanford mentor, Yuji Ijiri, at a University of Chicago conference when Baruch Lev presented his Chapter 4 theory. Yuji downed two aspirins and held his head. He was, however, too polite to destroy the paper in Chicago style. Unfortunately, Lev's research went on to become part of his monograph (Chapter 4) that, in my viewpoint, never should have been included in the monograph. I don't know of any scholar that ever followed up on the Decomposition Analysis proposed by Baruch in the early 1970s.

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

One point where I think we differ, Malcomb, is the definition of “unrealized.” I think you were thinking more along the lines of “unrealized sales revenue” or “unrealized construction revenue for partially completed contracts.”

I was thinking more along the lines of a fair value interim valuation of a mortgage payable. If the value of a fixed rate mortgage goes up in one period (due to a change in interest rates), that change in value is never if the mortgage is never settled before maturity.

If the mortgage is held to maturity all historic “unrealized fair value adjustments” over the life of the mortgage will never be realized in the same sense that unrealized construction revenue will eventually be collected. My point is that securities designated as held-to-maturity are almost certain to henceforth and forever more never realized the fair market value adjustments to carrying values before the mortgage matures.

Bob Jensen

August 22, 2009 reply from Bob Jensen

Hi Again Malcomb,

I knew I should have spent more time before answering your questions off the top of my head.

My digression into bankruptcy prediction models was probably more confusing than helpful.

Let's begin with bad debt estimation in large companies like Sears or JC Penney that have their own charge cards. In most instances your concern over whether mean, median, or mode is used is irrelevant because each risk pool assumes a uniform probability distribution where mean, median, and mode are identical numbers. The typical first step in bad debt estimation is to partition outstanding accounts into overdue classes of time. Then these are sub-partitioned as to overdue account balances. It is possible to further subdivide on the basis of information in each customer's credit application form (residence location, age, income, marital status, credit score, etc.) but I don't think this is common across all companies. A lot of that information is subject to change such as change in marital status.

Now consider receivables Pool D for accounts outstanding 31-60 days overdue and balances due between $501-$1000. We assume that the bad debt probability distribution in Pool D is a uniform probability distribution. We then look at the recent history of Pool D and conclude that on average 10% of the total outstanding balance in Pool D is ultimately written off as bad debt. For next month, September 2009, the total balance due in Pool D is $64 million. We then estimate that $6.4 million of Pool D accounts will ultimately be declared bad debts.

The only place we used an "average" was to examine the recent history of Pool D each month for a period of time such as the last two years. And in doing so we have assumed stationarity. If something important happened in such as a change in our credit-granting policy or an economic meltdown where 20% of our steady customers lost their jobs, then we will most likely resort to a much more qualitative estimation of bad debts. Back in the 1970s, the large department store chain known as WT Grant got caught up in a sudden recession where it badly estimated bad debts. Sudden increases in bad debt risks that were not impounded in past pool estimates and further granting of credit to overdue customers contributed to the demise of WT Grant.  

I used the following paper year after year in one of my accounting theory courses:

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

Largay and Stickney found operating cash flows from the WT Grant annual reports. Their main point was that the operating cash flow plunge preceded the plunges in working capital and earnings by over one year. The reason, of course, was that accounts receivable and inventories ballooned as the U.S. economy entered into a severe post-Viet Nam recession. WT Grant never recovered.

Now consider receivables in Pool X for accounts outstanding 91-120 days with overdue balances between $11 million and $15 million. There are only 12 these huge accounts in Pool X such that the estimation process illustrated above is nonsense. This is where we might resort to Altman-like bankruptcy prediction models --- http://en.wikipedia.org/wiki/Bankruptcy_prediction
Our Bill Beaver (Stanford) made some contributions to the early efforts to predict bankruptcy as did an obscure CPA back in 1932 when there were a lot of failing companies. But Edward Altman is credited with the most widely used bankruptcy prediction models that have withstood the test of time since around 1970 in practice.

Of course any multivariate statistical model such as Altman’s discriminant analysis has its own limiting assumptions. The most limiting assumption is that of stationarity. If there is a meltdown in the economy, some of this meltdown might be captured in the input variables to the model. But with the recent meltdown with its TARP, stimulus payments, cash-for-clunkers program, etc. bad debt estimation may shift to an entirely new ball park.

I also digressed into why I think the FASB did not pay a whole lot of attention to the axiomatic frameworks of Ijiri and Mattessich in developing a conceptual framework. I might elaborate a bit about the FASB’s Conceptual Framework. The initial team leader, Mike Alexander, was a friend of mine. The FASB did not dip into a pool of academic scholars for development of the Conceptual Framework. Mike Alexander was a young and hard-nosed, no-nonsense, partner with Touche Ross in Montreal. Of course Mike studied the contributions of Sprouse and Moonitz to postulates and axioms, but I think Mike wanted to root the Conceptual Framework more in the practice of accountancy than in its academic theories.

When you formally study the concepts of accountancy, Malcomb, you really should focus on the Conceptual Frameworks of the FASB and IASB. Both standard setting bodies make a concerted effort to root new standards in those frameworks, although there are research studies that show where this policy did not always hold for certain standards. Such is life in the real world of complicated and evolving types of financing and sales contracts.

Hope this helps.

 Robert E. (Bob) Jensen
Trinity University Accounting Professor (Emeritus)
190 Sunset Hill Road
Sugar Hill, NH 03586
Tel. 603-823-8482
www.trinity.edu/rjensen

-----Original Message-----
From: Jensen, Robert
Sent: Friday, August 21, 2009 6:00 PM
To: 'AECM, Accounting Education using Computers and Multimedia'
Subject: RE: Insurers Biggest Writedowns May Be Yet to Come

Hi Malcomb,

I should be smart and think about your questions for a longer time. But here goes off the top of my head in CAPS below.

 

Robert E. (Bob) Jensen
Trinity University Accounting Professor (Emeritus)
190 Sunset Hill Road
Sugar Hill, NH 03586
Tel. 603-823-8482
www.trinity.edu/rjensen

-----Original Message-----

From: AECM, Accounting Education using Computers and Multimedia [mailto:AECM@LISTSERV.LOYOLA.EDU] On Behalf Of Mc Lelland, Malcolm J

Sent: Friday, August 21, 2009 5:22 PM

To: AECM@LISTSERV.LOYOLA.EDU

Subject: Re: Insurers Biggest Writedowns May Be Yet to Come

 

Bob,

I see your point, but mine is much more basic I think.  Let me make my questions concrete in the context of a special case; i.e., FAS 5 applied to uncollectible receivables:

(1) Is it useful to regard uncollectible receivables as a random variable?

 

OF COURSE IT IS COMMON TO TREAT BAD DEBT ESTIMATED LOSS OF AN AGING POOL OF SIMILAR ACCOUNTS AS A RANDOM VARIABLE. EDWARD ALTMAN, FOR ONE, DEVELOPED A MULTIVARIATE DISCRIMINANT ANALYSIS SYSTEM FOR ESTIMATING BAD DEBTS PROVIDED STRINGENT ASSUMPTIONS ARE MET, NOT THE LEAST OF WHICH IS THE SIZE OF THE POPULATION. OBVIOUSLY IF WE ONLY HAVE 30 ACCOUNTS RECEIVABLE, STATISTICAL ANALYSIS IS NONSENSE. IF WE HAVE 12,000 ACCOUNTS RECEIVABLE, THEN MAYBE ALTMAN OR SOME SIMPLER MODEL CAN BE CALLED INTO PLAY.

(2) What precisely are accountants trying to measure when they measure uncollectible receivables: their mean, median, mode, or something else ... ?

 

I THINK THEY ARE TRYING TO MEASURE THE DOLLAR AMOUNT OF EXPECTED LOSS IN A GIVEN POOL OF ACCOUNTS.

 

(3) Are statistical methods useful in estimating whatever that thing is, or is "professional judgment" about uncollectible receivables adequate?

EMPIRICAL STUDIES OF BANKRUPTCY DISCRIMINANT ANALYSIS ARE VERY GOOD IN CIRCUMSTANCES THAT MEET THE ASSUMPTIONS OF THE MODEL. BUT ONCE AGAIN SUBJECTIVE JUDGMENT MUST BE USED REGARDING NON-STATIONARITY. SEE http://en.wikipedia.org/wiki/Bankruptcy_prediction

IF WE ARE GETTING SIGNALS THAT RISK FACTORS HAVE CHANGED (SUDDEN ECONOMIC DOWNTURN THAT HITS OUR CUSTOMERS LIKE A HURRICANE) OR SUDDEN BAD NEWS SIGNALS THAT HIT OUR CUSTOMERS SUCH AS THEIR PRODUCTS CAUSE CANCER, WE NO LONGER CAN RELY UPON OLD MODELS THAT DO NOT TAKE INTO ACCOUNT CHANGED CONDITIONS.

STATISTICAL MODELS OF MOST ANY TYPE MUST BE "TRAINED" UNDER A GIVEN SET OF CONDITIONS ASSUMED TO BE STABLE. JUDGMENT IS CALLED FOR IN ASSESSING STABILITY VIS-À-VIS UNDERLYING ASSUMPTIONS OF THE MODEL, INCLUDING VARIABLE INDEPENDENCE, HOMOSCEDASTICITY, RELEVANT RANGE, ETC.

(4) What exactly is "professional judgment" if no one has stated the estimation objective for uncollectible receivables?

PROFESSIONAL JUDGMENT IS A DEEP AND ABIDING KNOWLEDGE OF OUR CUSTOMERS AND THEIR STRENGTHS AND WEAKNESSES AS IT APPLIES TO CREDIT THAT WE HAVE EXTENDED TO THEM. ONE OF THE HUGE PROBLEMS OF FANNIE MAE AND FREDDIE MAC COMMENCED WHEN THEY WERE FORCED TO BUY UP MORTGAGES OF HOME BUYERS WITH ALMOST NO COLLATERAL AND LOW INCOMES AND UNSTEADY WORK. IF A LOCAL BANK HAD TO CARRY THE MORTGAGE THE BANK WOULD PROBABLY HAVE A FAR BETTER UNDERSTANDING OF EACH CUSTOMER AND THE LOCAL ECONOMY THAN FANNIE WITH OVER 100 MILLION CUSTOMERS.

I'm familiar with the provisions of FAS 5: We recognize uncollectible receivables as expense when it's "probable" they are impaired at the balance sheet date and the loss can be "reasonably estimated".  Let's say both conditions are met so we can focus on the above questions, rather than on the standard.  Is FAS 5 telling us to recognize the mean, the median or the mode of the uncollectible accounts?  Without loss of generality, assume the distribution over uncollectibles is both non-stationary and skewed (and this is a very reasonable assumption).  Now then, if the distribution is skewed as many accounting variable distributions are, then it makes a difference whether we're supposed to estimate the mean, the median, or the mode (or something else).  So what precisely is FAS 5 (not) telling us the estimation objective is?

I DON'T THINK OUR TRADITIONAL MODELS DEAL WELL WITH EXTREME KURTOSIS. IF WE CAN SPECIFY THE APPROPRIATE DISTRIBUTIONS AND THESE DISTRIBUTIONS ARE STABLE, THEN OUR TECHIES CAN DEVISE MODELS TO ESTIMATE THE DOLLAR LOSSES OF BAD DEBTS IN A HOMOGENIOUS POOL OF CUSTOMERS. ONCE AGAIN ISSUES OF STATIONARITY ARE ALWAYS HANGING OVERHEAD LIKE BLACK CLOUDS.

CURRENTLY LARGE AUDITING FIRMS ARE PLEADING IGNORANCE OF CHANGES IN LOAN LENDING RISKS OF THEIR CUSTOMERS (DELOITTE IS NOW EMBROILED IN ONE OF THE LARGEST LAWSUITS IN HISTORY OVER ISSUES OF UNDERESTIMATING LOAN LOSSES IN WASHINGTON MUTUAL BANK. IT SEEMS TO BE POOR JUDGMENT ON BOTH SIDES OF THE COIN --- EITHER DELOITTE TRULY WAS CAUGHT OFF GUARD OR DELOITTE DECIDED TO GO ALONG WITH WaMu's HORRIBLY UNDERESTIMATED LOAN LOSSES THAT EVENTUALLY DESTROYED THE BANK --- http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms

BOB JENSEN

 

________________________________________

From: AECM, Accounting Education using Computers and Multimedia [AECM@LISTSERV.LOYOLA.EDU] On Behalf Of Jensen, Robert [rjensen@TRINITY.EDU]

Sent: Friday, August 21, 2009 4:40 PM

To: AECM@LISTSERV.LOYOLA.EDU

Subject: Re: Insurers Biggest Writedowns May Be Yet to Com 

I tried to point out that Ijiri did take a broad brush approach in his stocks and flows model for accounting measurement.

I still cannot visualize a broad brush answer to your questions without at least one illustration or frame of reference for your line of thinking, which might well entail singling out a particular type of business transaction to be accounted for using what you envision as a better approach to setting standards.

Broad accounting concepts and principles are built upon micro-level thinking about transactions and often upon basic postulates and axioms (as is the case in science and mathematics). First there were attempts to generate postulates and axioms without mathematics (Sprouse and Moonitz in particular) and then mathematics (Ijiri and Mattesich). But I think the FASB's Conceptual Framework team went back to Square One.

Principles do require formalized concepts even though the Conceptual Framework was not fully formalized before the FASB commenced to generate standards.

What we found is that financial engineers devised increasingly new and complex contracts such as synthetic leasing and variable interest entities (FAS 141) and interest rate swaps (FAS 133) that did not fit neatly on top of existing concepts, principles, and standards.

I doubt if we'll ever resolve issues of debt versus equity or revenue recognition principles that fit neatly into any set of concepts and principles. Today we deal with Bill and Hold contracts and embedded derivatives, and tomorrow who knows what? One thing is certain, U.S. financial engineers are clever at creating off-balance sheet financing and dispersed financial risks that can come back an butt bite.

Bob Jensen

"Assessing the Allowance for Doubtful Accounts:  Using historical data to evaluate the estimation process," by Mark E. Riley and William R. Pasewark, The Journal of Accountancy, September 2009 --- http://www.journalofaccountancy.com/Issues/2009/Sep/20091539.htm
Jensen Comment
The biggest problem with estimating from historical data is identification of shocks to the system that create non-stationarities that make extrapolation from the past hazardous.

Bob Jensen's threads on recent bank failures are at http://www.trinity.edu/rjensen/2008Bailout.htm

From The Wall Street Journal's Accounting Weekly Review on August 27, 2009

Firms Move to Scoop Up Own Debt
by Serena Ng
Aug 21, 2009
Click here to view the full article on WSJ.com

TOPICS: Bond Prices, Bonds, Debt, Debt Covenants, Early Retirement of Debt, Financial Accounting, Financial Analysis, Financial Statement Analysis

SUMMARY: The article describes early extinguishments of debt by five firms at rates between 22 and 88 cents on the dollar. Questions in the review focus on Harrah's Entertainment, Inc., and analyzing the source for the information in the article from footnotes in the company's quarterly filing for June 30, 2009.

CLASSROOM APPLICATION: The article can be used to introduce the motivations behind early extinguishments of debt and the resulting accounting and disclosure. The article also lends itself to focusing on financial statement analysis procedures as well as the initial preparation of accounting for these transactions.

QUESTIONS: 
1. (Introductory) How must companies account for and disclose early extinguishments of debt as discussed in this article? Under what circumstances are gains recorded in these transactions?

2. (Introductory) Access the Harrah's Entertainment, Inc. Form 10-Q filing for the quarter ended June 30, 2009 available at http://www.sec.gov/Archives/edgar/data/858339/000119312509174432/d10q.htm (Note that the live link in the online article to the Harrah's Entertainment company information on the WSJ site does not work.) How much of a gain on extinguishments of debt did Harrah's recognize in this quarter? Where is this information found?

3. (Advanced) Compare the gain on extinguishments of debt to Harrah's overall operations in this quarter; describe your assessment of this comparison, clearly stating your references to other financial statement items.

4. (Advanced) In the article, the author refers to Harrah's having paid "an average of 48 cents on the dollar to purchase $788 million in debt, during the second quarter, according to Harrah's filings." Access the discussion on Debt and Liquidity, Open Market Repurchases and Other Retirements, page 41 of the 10-Q filing obtained above. How is this information reported in the WSJ article obtained from this note? Clearly explain your calculations.

5. (Advanced) How does the summarization of Harrah's debt extinguishment from their footnote discussed above allow comparison to other companies cited in the WSJ article?

6. (Introductory) What other debt transaction by Harrah's contributed to the gain on extinguishment reported in the quarter ended June 30, 2009, and discussed in answer to question two, above?

7. (Advanced) Return to your analysis of the note discussed in answer to question four above. How do the extinguishment results differ between two Harrah's subsidiaries' debt repurchases? What factors do you think contribute to that difference?

8. (Introductory) What are debt covenants? According to the article, what actions are companies taking to distance themselves from the impact of debt covenants? Why do you think that step is necessary particularly during these economic times?

Reviewed By: Judy Beckman, University of Rhode Island

"Firms Move to Scoop Up Own Debt," by Serena Ng, The Wall Street Journal, August 24, 2009 ---
http://online.wsj.com/article/SB125080949684547827.html?mod=djem_jiewr_AC

A number of corporations are quietly buying back bonds on the cheap in the open market as the financial system works its way out of crisis mode.

They are taking advantage of depressed prices to save millions of dollars in interest and debt-repayment costs.

In the recent round of second-quarter financial filings, companies including Beazer Homes USA Inc., Hexion Specialty Chemicals Inc., Harrah's Entertainment Inc. and Tenet Healthcare Corp. disclosed they had bought slugs of their bonds from the market at discounts to the debt's face, or par, value. Until the disclosures, investors were mostly in the dark about the purchases.

Bankers said the trend could signal that corporate executives think the worst of the credit crisis is over and are feeling better about the economic outlook, because they are using cash to buy back debt instead of hoarding it.

But the moves also reflect how companies and private-equity firms are coming to grips with the new reality. Companies with below-investment-grade credit ratings have roughly $1.4 trillion in debt coming due through 2014, according to Standard & Poor's data. With markets unlikely to allow them to easily refinance most of that debt, companies are doing whatever they can now to pay some of it down or buy extra time to repay.

"The real issue for companies now is how they delever, and every little bit counts," says Judith Fishlow Minter, a managing partner at North Sea Partners LLC, a private investment bank in New York.

While many companies are purchasing bonds through publicly announced tender offers, those that conduct buybacks without formal notification can often do so without driving prices higher.

"No one wants to announce a bond or loan buyback until they have to, as that will move prices," said Tom Newberry, head of leveraged finance at Credit Suisse in New York. "Those firms that can do this quietly and under the radar screen can buy more cheaply and chip away at their maturities."

Chemicals producer Hexion, which is controlled by Apollo Management LP, spent $26 million in the first quarter buying back notes with a face value of $196 million, paying an average of 13 cents on the dollar.

Between April and August, Hexion spent another $37 million purchasing $92 million in debt at an average of 40 cents on the dollar. While the buyback enabled Hexion to book a gain of $182 million, the company still has $3.5 billion in outstanding debt. An Apollo spokesman declined to comment.

In addition to open-market bond buybacks, others are getting lenders' consent to push out the maturity dates of loans. Many also are selling secured junk bonds to replace bank loans that impose strict financial-performance standards known as covenants.

But while buybacks and bond tenders are helping companies shrink debt loads at the margin, the challenges ahead are immense.

Buying back debt cheaply also is advantageous because a company can record accounting gains, reflecting the difference between what it paid and the value of the bond on its books, boosting bottom lines.

"You can rearrange the deck chairs all you want, but these are mostly short-term fixes," said Daniel Toscano, a former Wall Street banker. "At some point, something's got to give and someone in the food chain will lose money."

Most of the debt buybacks took place between March and August, a period in which average high-yield-bond prices rose from 59 cents to 85 cents for every dollar of debt. Leveraged loans issued by companies with speculative-grade ratings traded between 66 cents and 86 cents, according to Standard & Poor's Leveraged Commentary & Data.

The run-up in prices will make it more expensive for companies to repurchase debt, but with many bonds still trading well below par value, firms still may find it a worthwhile move.

Continued in article

Jensen Comment
It's generally more difficult for firms to "scoop up" their own secured debt since the historical cost amortized book value (payoff) is usually less than the value of the collateral plus foreclosure costs. In 2009, however, there is a breakdown of some collateral markets such that firms might even find scoop-up deals on their debt. But in the case of home mortgages, borrowers have the backing of government pressure for Fannie, Freddie, and their local banks to renegotiate terms advantageous to borrowers and costly to lenders.

In-Substance Defeasance
In-substance defeasance used to be a ploy to take debt off the balance sheet. It was invented by Exxon in 1982 as a means of capturing the millions in a gain on debt (bonds) that had gone up significantly in value due to rising interest rates. The debt itself was permanently "parked" with an independent trustee as if it had been cancelled by risk free government bonds also placed with the trustee in a manner that the risk free assets would be sufficient to pay off the parked debt at maturity. The defeased (parked) $515 million in debt was taken off of Exxon's balance sheet and the $132 million gain of the debt was booked into current earnings --- http://www.bsu.edu/majb/resource/pdf/vol04num2.pdf

Defeasance was thus looked upon as an alternative to outright extinguishment of debt until the FASB passed FAS 125 that ended the ability of companies to use in-substance defeasance to remove debt from the balance sheet. Prior to FAS 125, defeasance became enormously popular as an OBSF ploy.

 

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

"Microsoft Office to Go Online for Free," Fortune, July 13, 2009 --- Click Here
This will not be the full-featured version of Office that you can purchase, but it will compete head on with Google Office.
Free Alternatives to/for MS Office (Word, Excel, PowerPoint, etc.) --- http://www.trinity.edu/rjensen/Bookbob4.htm#MSofficeAlternatives

Unfortunately none of the free alternatives to MS Office will have all the new and supposedly wonderful features of the 2010 Version of MS Office
Richard Campbell forwarded this link describing the new features to look forward to with the MS Office 2010 --- http://download.cnet.com/8301-2007_4-10284013-12.html?tag=smallC
Also see http://reviews.zdnet.co.uk/software/productivity/0,1000001108,39674807,00.htm

"An Intuitive Explanation of Bayes':  Theorem:  Bayes' Theorem for the curious and bewildered; an excruciatingly gentle introduction," by Eliezer S., Yudkowsky, August 2009 --- http://yudkowsky.net/rational/bayes

Your friends and colleagues are talking about something called "Bayes' Theorem" or "Bayes' Rule", or something called Bayesian reasoning. They sound really enthusiastic about it, too, so you google and find a webpage about Bayes' Theorem and...

It's this equation. That's all. Just one equation. The page you found gives a definition of it, but it doesn't say what it is, or why it's useful, or why your friends would be interested in it. It looks like this random statistics thing.

So you came here. Maybe you don't understand what the equation says. Maybe you understand it in theory, but every time you try to apply it in practice you get mixed up trying to remember the difference between p(a|x) and p(x|a), and whether p(a)*p(x|a) belongs in the numerator or the denominator. Maybe you see the theorem, and you understand the theorem, and you can use the theorem, but you can't understand why your friends and/or research colleagues seem to think it's the secret of the universe. Maybe your friends are all wearing Bayes' Theorem T-shirts, and you're feeling left out. Maybe you're a girl looking for a boyfriend, but the boy you're interested in refuses to date anyone who "isn't Bayesian". What matters is that Bayes is cool, and if you don't know Bayes, you aren't cool.

Why does a mathematical concept generate this strange enthusiasm in its students? What is the so-called Bayesian Revolution now sweeping through the sciences, which claims to subsume even the experimental method itself as a special case? What is the secret that the adherents of Bayes know? What is the light that they have seen?

Soon you will know. Soon you will be one of us.

While there are a few existing online explanations of Bayes' Theorem, my experience with trying to introduce people to Bayesian reasoning is that the existing online explanations are too abstract. Bayesian reasoning is very counterintuitive. People do not employ Bayesian reasoning intuitively, find it very difficult to learn Bayesian reasoning when tutored, and rapidly forget Bayesian methods once the tutoring is over. This holds equally true for novice students and highly trained professionals in a field. Bayesian reasoning is apparently one of those things which, like quantum mechanics or the Wason Selection Test, is inherently difficult for humans to grasp with our built-in mental faculties.

Or so they claim. Here you will find an attempt to offer an intuitive explanation of Bayesian reasoning - an excruciatingly gentle introduction that invokes all the human ways of grasping numbers, from natural frequencies to spatial visualization. The intent is to convey, not abstract rules for manipulating numbers, but what the numbers mean, and why the rules are what they are (and cannot possibly be anything else). When you are finished reading this page, you will see Bayesian problems in your dreams.

And let's begin.

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Here's a story problem about a situation that doctors often encounter:

1% of women at age forty who participate in routine screening have breast cancer. 80% of women with breast cancer will get positive mammographies. 9.6% of women without breast cancer will also get positive mammographies. A woman in this age group had a positive mammography in a routine screening. What is the probability that she actually has breast cancer?

What do you think the answer is? If you haven't encountered this kind of problem before, please take a moment to come up with your own answer before continuing.

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Next, suppose I told you that most doctors get the same wrong answer on this problem - usually, only around 15% of doctors get it right. ("Really? 15%? Is that a real number, or an urban legend based on an Internet poll?" It's a real number. See Casscells, Schoenberger, and Grayboys 1978; Eddy 1982; Gigerenzer and Hoffrage 1995; and many other studies. It's a surprising result which is easy to replicate, so it's been extensively replicated.)

Do you want to think about your answer again? Here's a Javascript calculator if you need one. This calculator has the usual precedence rules; multiplication before addition and so on. If you're not sure, I suggest using parentheses.

Continued in article

The June 30, 2009 edition of Fraud Updates is available at http://www.trinity.edu/rjensen/FraudUpdates.htm

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

An Accounting Love Song
One of Tom Oxner's former students (Travis Matkin) wrote and recorded this song a couple of years ago. It has now made it to U Tube --- http://www.cfo.com/blogs/index.cfm/detail/13525940?f=search

Spotlight Dr, Paul Pacter
Our good friend Paul Pacter (Deloitte in Hong Kong and Michigan State University PhD) who has led a number of IASB projects is featured in the left column of IAS Plus on August 6, 2009 --- http://www.iasplus.com/index.htm
I was on the faculty at MSU when Paul earned his doctorate, but I cannot claim him as one of mine. As a PhD he took the road less traveled by going with the FASB in the early years rather than going down the tenure-track road. Eventually he moved to London to join the IASB. Eventually his grant from the World Bank took him to Hong Kong where he has a passion for Asia, especially China and Tibet. I will also vouch for the fact that he's a tremendous host when his friends visit Hong Kong (if you can find him in town). His digs are to die for!

He's a tremendous professional, dedicated, and tech savvy as the Webmaster of IAS Plus.

Paul Pacter Hong Kong, China +852 2852 5896 Director, Deloitte IFRS Global Office Concurrently, IASB Director of Standards for SMEs Webmaster, www.iasplus.com IASC Project manager on IASs 14, 34, 35, 39, 41 Deputy Director of Research, FASB (USA) CFO of large municipal government (USA) Vice Chairman, GASB Advisory Council (USA) Editorial Advisory Boards: Journal of Accountancy, Accounting Review, CPA Journal, Corporate Accounting, Research in Accounting Regulation Member, FASB consolidations and GASB pensions task forces Co-author, Applying International Financial Reporting Standards and Australian Accounting Standards (both Wiley)

Years ago I persuaded Paul to appear in one of my 1998 FAS 133 and IAS 39 workshops when IAS 39 was still a work in progress under his direction. You can read his tremendous summary of the history of the IASC/IASB in general and IAS 39 in particular --- http://www.trinity.edu/rjensen/acct5341/speakers/pacter.htm

"Large money laundering schemes often go undetected," AccountingWeb, August 12, 2009 --- http://www.accountingweb.com/topic/cfo/large-money-laundering-schemes-often-go-undetected

Identifying and then unraveling money laundering schemes in a global financial network where as much as one trillion dollars is circulating each day amounts to “finding a needle in a haystack of needles,” says Michael Zeldin, global leader, anti-money laundering/trade sanctions services for Deloitte Financial Advisory Services. Adding to the difficulty of tracking illegal asset transfers, he says, is the sophistication of the people for whom money laundering is a business, who charge as much as 20 percent in payment for their services. “They are very clever people who are paid a lot of money to make sure that the source of money goes undetected. As soon as the government or banks identify one activity as suspicious, they stop using it and come up with something else.”

Still, prosecutions for this complex crime are initiated daily by authorities around the world, Zeldin says. Data collected from mandatory financial institution reports combined with law enforcement stings and undercover operations bring money laundering activities to trial. A conviction in the felony crime of money laundering brings a sentence of 20 years in prison.

Financial companies are required by the Bank Secrecy Act (BSA), to file Currency Transaction Reports (CTRs) for transactions in currency that exceed $10,000, and Suspicious Activity Reports (SARs) for suspicious transactions that in aggregate exceed $5,000. The money laundering schemes uncovered in New Jersey recently with the help of an FBI informant involved small sums of money paid to charities by check with sponsors of the charities receiving a percentage of the proceeds, which was then returned in cash.

Financial companies that must submit the CTR and SAR reports now include brokers and dealers in securities, under the USA Patriot Act, and under recent Treasury Department rulings, casinos and money services businesses (MSBs), including money exchangers, sellers of traveler's checks and money transmitters.

These reports, which are filed with the Treasury Department, are “the backbone of money laundering prosecutions,” Zeldin says. Data gathered from numerous reports can point to criminal activity. Foreign Bank Account Reporting (FBAR), also required by the BSA, and currently a focus of the Internal Revenue Service primarily as a source of revenue, can provide important information in money laundering cases.

Most financial institutions have systems that automatically generate CTRs, but SARs are based on observation or red flags. Institutions need to develop Know Your Client (KYC) profiles and risk/rank their clients, Zeldin says. They should have systems that monitor transactional activity. They should be able to investigate any red flag that the system generates, and perform appropriate due diligence to determine whether the activity is true and reportable or false.

Banks and other money service businesses need to audit and test their CTR and SAR systems and train their employees in BSA compliance and reporting. Deloitte Financial Advisory Services Group provides support for financial services clients that are developing or refining their BSA reporting capability.

But not all money laundering schemes are designed by professionals. Some of the problems would-be money launderers face when trying to hide their cash are almost the stuff of comedy. Ex-representative William Jefferson of Louisiana, convicted last week of 11 counts of bribery, racketeering, and money laundering, famously hid $90,000 in cash in his freezer. The informant in the recent case in New Jersey agreed to cooperate with the FBI when he was charged with bank fraud in May 2006. He was arrested when he deposited two $25 million checks, one of them at the drive-up window of a PNC bank, and immediately withdrew $22 million. One check bounced, and the bank refused to accept the second deposit.

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

Bob Jensen's threads on professionalism in auditing are at
http://www.trinity.edu/rjensen/Fraud001.htm#Professionalism

See one of my heroes, Bernie Milano, on Video --- http://www.diversityinc.com/public/3150.cfm

"KPMG Foundation Celebrates 15th Year of Minority Accounting Doctoral Program," SmartPros, August 1, 2009 --- http://accounting.smartpros.com/x67298.xml 

The KPMG Foundation is marking the 15th anniversary of its Minority Accounting Doctoral Scholarship program by announcing today it has awarded a total of $390,000 in scholarships to 39 minority doctoral scholars for the 2009 - 2010 academic year.

Of the awards, eight are to new recipients scheduled to begin their accounting doctoral program this fall, three are to new recipients who have already begun programs, and 28 are renewals of scholarships previously awarded.

Each of the scholarships is valued at $10,000 and renewable annually for a total of five years. The Foundation established the scholarship program in 1994 as part of its ongoing efforts to increase the number of minority students and professors in business schools – and has since awarded $8.7 million to minorities pursuing doctorate degrees.

“We’re proud of the achievements of our program over the last 15 years, and we have seen a healthy increase in the number of minority faculty members at our nation’s business schools, although more work needs to be done,” said Bernard J. Milano, President of the KPMG Foundation and The PhD Project. “That’s why we continue to award new scholarships each year and we remain committed to our mission.”

Together with The PhD Project, a related program whose mission is to increase the diversity of business school faculty, the Minority Accounting Doctoral Scholarship program has helped to more than triple the number of minority business professors in the United States since The PhD Project first began in 1994. Today, there are 985 minority business school professors teaching in the United States. Nearly 400 minority students are currently enrolled in business doctoral programs.

The Minority Accounting Doctoral Scholarship recipients come from a wide variety of cultures and backgrounds. This year’s new recipients are:

Continued in article

Minority Hiring Success Varies Greatly by Discipline:  Law, Business, and Sciences Have the Worst Records
The major cause lies in the supply chain of PhD graduates

One of the reasons for the shortage of minority undergraduate students in accounting has been the lack of role models teaching accounting courses in college.

"Whatever Happened to All Those Plans to Hire More Minority Professors?" by Ben Gose, Chronicle of Higher Education, September 26, 2008
http://chronicle.com/weekly/v55/i05/05b00101.htm?utm_source=at&utm_medium=en

Duke U.: Success rates vary by discipline

The black faculty Strategic Initiative began in 1993, on the heels of the failed effort to add at least one black professor to every department.

As of the fall of 2007, Duke had 62 tenured or tenure-track black professors, accounting for 4.5 percent of the faculty. But while the raw number is double that of 20 years ago, it masks tremendous variation within the university. Black professors remain rare in the law school, which has one black professor, the business school, with two, and the natural sciences, with three.

Karla FC Holloway, an English professor who served as dean of humanities and social sciences from 1999 to 2005, says each unit of the university should be held accountable for its record on diversity. "There has been growth in arts and social sciences, and medicine, but in some ways that growth has arguably allowed other schools or divisions not to work as aggressively with this effort," she says.

Mr. Lange, the provost, concedes that some parts of the university have fallen short. He says he is working closely on the issue with the law school's dean, David F. Levi, and other officials. "They have made offers and have not been successful at times," Mr. Lange says. "They're putting in a lot of effort to do better."

Duke makes sure that when black job applicants visit the campus, they meet other black faculty members — and not just potential colleagues in the department to which they're applying. The university also is taking small steps to widen the pipeline. Duke has financed two postdoctoral positions for minority candidates each year, with the hope that it will eventually hire some of them for tenure-track faculty positions.

In 2003, Duke started yet another faculty initiative related to diversity — but this time the scope was expanded to include women and all underrepresented minority groups. "We needed to recognize that diversity had come to include a substantially broader set of concerns," Mr. Lange says.

Ms. Holloway worries that the broader focus may give deans and department chairs an out: "People can say, 'I've hired enough women, and that makes up for the lack of minorities.'"

Harvard U.: Uneven progress on racial diversity

Harvard created an office of faculty development and diversity, to be headed by a senior vice provost, in 2005, shortly after announcing that it would spend $50-million to help diversify the faculty.

In the more than three years since that commitment, the university has made modest progress in diversifying its faculty, and some professors believe that the new office deserves some of the credit. Kay Kaufman Shelemay, a professor of music and of African and African-American studies, says the office has done a good job compiling statistics related to diversity and working with deans and department chairs to ensure that they cast a wider net in their searches. "There is no doubt that the office established by former President Summers both invigorated and centralized our institutional efforts," Ms. Shelemay says.

Women now make up 16 percent of tenured and tenure-track faculty members in the natural sciences, up from 12 percent in 2004-5. In the humanities, 32 percent of the professors are women, up from 30 percent, and in the social sciences, 31 percent are women, up from 28 percent.

The changes for the professional schools over that period varied — law, engineering, and government all saw significant gains for women, while the proportion of female faculty members actually dropped in the schools of divinity, dentistry, and education.

The university's progress on racial diversity, meanwhile, has been uneven. More than 6 percent of the tenured and tenure-track faculty members in the social sciences are black, but black professors make up 1 percent or less of faculty members in the natural sciences and the humanities. Hispanic professors make up no more than 2 percent of faculty members in each of those three areas.

In 2006, Harvard committed $7.5-million to improve child care on the campus — a primary concern of female faculty members. The university also just completed its third year of a summer program aimed in part at improving the pipeline for female and minority professors. The program allows undergraduates to spend 10 weeks in the research laboratories of science and engineering faculty members. More than half of the 400 participants have been women, and more than 60 percent have been minority students.

Judith D. Singer, a professor of education who became senior vice provost for faculty development and diversity in June, says she was willing to take on the job because the climate "feels different" under Drew Gilpin Faust, Harvard's first female president. But Ms. Singer acknowledges that progress has been uneven among departments and divisions.

"Addressing issues of diversity remains a challenge throughout higher education," she says. "We at Harvard, like our peer institutions, must do better."

U. of Wisconsin at Madison: Progress in fits and starts

The university undertook its Madison Plan in 1988, vowing to double the number of black, Hispanic, and American Indian professors by adding 70 new faculty members within three years.

Progress has come in fits and starts. A Wisconsin official told The Chronicle in 1995 that the university hadn't made the progress it had hoped for. The number of tenured or tenure-track black professors, for example, increased only 61 percent, to 37, in that seven-year span. The total then surged to 60 by 2001, only to stall. Over the six years ending in 2007, the number of black professors dropped to 51.

Mr. Farrell, the provost, argues that part of the challenge is increased competition. While institutions like Wisconsin were among the first to spell out ambitious plans to diversify the faculty, now almost every institution has one. "We compete with everybody else for the pool that exists," he says.

Damon A. Williams, who became vice provost for diversity and climate in August, says Wisconsin and other universities must seek out minority job candidates more aggressively. For example, he wants to see Madison recruit aggressively at the annual Institute on Teaching and Mentoring, sponsored by the Southern Regional Educational Board and attended by hundreds of minority Ph.D. candidates.

"We have to be visible and present at that meeting and be willing to sell ourselves to them," he says.

Wisconsin's record with Hispanic and American Indian faculty members has been stronger. The university had 77 Hispanic professors in 2007, up from 53 in 1998, and 13 American Indian professors, up from four in 1998.

The growth of American Indian studies — in a state that is home to several Indian tribes — has helped attract new American Indian professors to the campus, Mr. Farrell says. "Professors who visit say, 'OK, here's a place where people from our background can thrive, fit in, and have success.'"

Still, Wisconsin and other universities must persuade more minority undergraduates to pursue academic careers, the provost says. The engineering school has developed a fellowship program, aimed primarily at minority graduate students, that encourages them to pursue research immediately. That program is being copied by the College of Letters and Science.

"When students spend their first year or two just on class work," Mr. Farrell says, "they find graduate school is not nearly as interesting as they thought it would be."

Virginia Tech: A bigger faculty role in hiring

The university made an extraordinary effort to diversify its campus starting in the late 1990s, and it paid off: During the three years ending in 2002, the number of black tenured and tenure-track professors in the College of Arts and Sciences rose by more than 50 percent, to 17; the number of Hispanic professors more than doubled, to seven; and the proportion of female professors rose from 20.6 percent to 23.6 percent.

Myra Gordon, an associate dean who left Virginia Tech in 2002, was the architect of the plan. At the time, faculty members complained that she had essentially taken over their role of hiring new professors.

Mark G. McNamee, the provost since 2001, says that while the university remains strongly committed to diversifying the faculty, some of the tactics that were criticized have been reined in or eliminated. Now he and the deans offer input at beginning of the process but for the most part let faculty members have the final say in hiring.

"It was a much more centrally controlled process at the time," Mr. McNamee says. "The deans are still engaged and have responsibilities, but they're not perceived as unduly influencing what the outcome is going to be."

It is difficult to evaluate progress in the College of Arts and Sciences since then, because it was divided into smaller colleges several years ago. Over the four years ending in 2007, the university had a net increase of five black and five Hispanic professors. Black faculty members make up about 3 percent of the tenured and tenure-track professoriate, Hispanic faculty members less than 2 percent, and women 24.3 percent.

In 2006 students protested the university's decision not to grant tenure to a black professor known for his activism on affirmative action and other causes. Mr. McNamee promised to establish a committee to study the role of race at the university. "When someone doesn't get tenure, that doesn't help us, but that's just the way it is sometimes," he says now.

In August the committee released a plan that calls for a cluster of six new hires in Africana studies and race and social policy.

Virginia Tech also frequently invites professors from historically black universities to deliver lectures on the campus, in part to elevate awareness of the university among those lecturers.

"Once people know Virginia Tech," says Mr. McNamee, "they really like it a lot better than they think they're going to like it."

Continued in article

Universities, if they are going to encourage the careers of women (and of everyone), she said, need to be willing to embrace “people with different values” and be sure that they are fully included. To the extent some men “will compete for anything,” Downey said, that should not set a standard where only women who share those values can succeed in academe. The success of women and men, she said, can be judged on their work and not competitiveness. “It’s no longer useful to have a ’sink or swim’ mentality,” she said.
"New Questions on Women, Academe and Careers," by Scott Jaschik, Inside Higher Ed, September 22, 2008 --- http://www.insidehighered.com/news/2008/09/22/women

Bob Jensen's threads on affirmative action in hiring and pay raises are at
http://www.trinity.edu/rjensen/HigherEdControversies.htm#AffirmativeAction

The current conflict about rules for insurance company accounting brings to light once again the conflict between income statement versus balance sheet priorities accounting standard setting.

The matching concept based on historical cost accrual accounting was always favored the income statement in place of the balance sheet, because deferred costs were considered obsolete and often arbitrary on the balance sheet. Payton and Littleton provide one of the best theoretical arguments in favor of the matching concept where revenues deemed realized are matched with expenses (or price-level adjusted expenses) used in generating those revenues --- http://www.trinity.edu/rjensen/theory01.htm#FairValue
Also see mention of Payton and Littleton in
"Research on Accounting Should Learn From the Past," by Michael H. Granof and Stephen A. Zeff, Chronicle of Higher Education, March 21, 2008

In the 1970s, the matching concept lost favor in accounting when the FASB decided the balance sheet was to be the primary financial instrument of concern in standard setting. This was heavily influenced at the time by when the FASB declared war on off-balance sheet financing that companies were using to hide financial risk. The FASB subsequently became concerned with earnings management, but the priority of the balance sheet was never questioned by the FASB.

Today the thrust of the FASB and the IASB into fair value accounting is primarily in the interest of making balance sheets more informative to investors. In the process, fair value accounting greatly confuses the income statement by mixing realized versus unrealized earnings components in the bottom line. This has led some powerful accounting leaders like the current Director of the FASB (Bob Herz) to argue that perhaps income statement components should not be aggregated by companies or auditors into bottom line net income ---
http://www.trinity.edu/rjensen/theory01.htm#ChangesOnTheWay
This is analogous for pharmacies to declare that certain drugs are too dangerous to sell in one pill, but they will sell 100 ingredient pills that you can pick and choose from to get a combined effect.

The current heated debate on what unrealized earnings can be diverted to Comprehensive Income (OCI) instead of being posted to current earnings is rooted in the unresolved problem of what types of unrealized income to keep out of current earnings. This is the black hole of fair value accounting apart from the even more serious problem of how to make fair value estimates cost effective (e.g., having real estate formally appraised every year would not be cost effective for large international hotel or restaurant chains).

The current conflict about rules for insurance company accounting brings to light once again the conflict between income statement versus balance sheet priorities accounting standard setting.

There are accounting theorists (today it's Tom Selling) who argue that historical cost accounting should be replaced by entry value (replacement cost) accounting. Note, however, that replacement cost accounting is not fair value accounting in the sense that it still entails the hated arbitrary cost allocation assumptions of historical cost accounting. When a farmer buys a tractor for $500,000 and puts it on a 15-year double declining balance (DDB) depreciation schedule, the cost allocation is quite arbitrary but still in the spirit of the matching concept. At the end of five years, the replacement cost may now be $800,000, but the farmer cannot book his old tractor at the price of a new tractor. Under replacement cost accounting he must bring the $800,000 on the books net of five years of (arbitrary) depreciation.

Thus replacement cost accounting is not "valuation" accounting. It’s still cost allocation accounting based largely on capital maintenance theory to prevent greedy managers or ignorant farmers from declaring dividends that destroy the farm.

There are even more theorists (Chambers, Sterling, Schuetz, Edwards, Bell, etc.) that favor exit value accounting. This is truly valuation accounting. But exit values sometimes have little to do with value in use. For example, the exit value of that $500,000 tractor may only be $100,000 in the used market but still have a value in use to the farmer far in excess of $400,000. Exit values are particularly problematic for valuable assets in place (like custom factory robots) that are practically worthless in the used equipment market because of the immense cost of tearing them down and re-installing them at a new location.

Hence the main problem of exit value accounting for operating assets in use is that it nearly always values them in their worst possible use (unloading them in a used-asset market) when in fact their best possible use is to continue using them as part of a profitable operation where they have synergy and valuable covariances with other operating assets and skilled employees.

Hence there are no silver bullets in putting numbers on balance sheet items. All have some advantages and disadvantages in terms of potential to mislead passive investors --- http://www.trinity.edu/rjensen/theory01.htm#FairValue

Bob Jensen’s summary of the fair value accounting controversies (including a Days Inn illustration from the past) are at
http://www.trinity.edu/rjensen/theory01.htm#FairValue

Bob Jensen's threads on accounting history ---
http://www.trinity.edu/rjensen/theory01.htm#AccountingHistory

Bob Jensen

This is not the way forward. While regulators and legislators are keen to find simple solutions to complex problems, allowing financial institutions to ignore market transactions is a bad idea.
"2 Nobel Laureates Recommend Disclos[ing] the fair value of complex securities," Simoleon Sense, August 22, 2009 ---
http://www.simoleonsense.com/2-nobel-laureates-recommend-disclosing-the-fair-value-of-complex-securities/

Introduction (Via FT)

Banks and other financial institutions are lobbying against fair-value accounting for their asset holdings. They claim many of their assets are not impaired, that they intend to hold them to maturity anyway and that recent transaction prices reflect distressed sales into an illiquid market, not what the assets are actually worth. Legislatures and regulators support these arguments, preferring to conceal depressed asset prices rather than deal with the consequences of insolvent banks.

Excerpts (Via FT)

Financial assets, even complex pools of assets, trade continuously in markets. Markets function best when companies disclose valid information about the values of their assets and future cash flows. If companies choose not to disclose their best estimates of the fair values of their assets, market participants will make their own judgments about future cash flows and subtract a risk premium for non-disclosure. Good accounting should reduce such dead-weight losses.

Financial assets, even complex pools of assets, trade continuously in markets. Markets function best when companies disclose valid information about the values of their assets and future cash flows. If companies choose not to disclose their best estimates of the fair values of their assets, market participants will make their own judgments about future cash flows and subtract a risk premium for non-disclosure. Good accounting should reduce such dead-weight losses.

"Disclose the fair value of complex securities," by Robert Kaplan, Robert Merton and Scott Richard, Financial Times, August 17, 2009 --- http://www.ft.com/cms/s/0/f206cf68-8b59-11de-9f50-00144feabdc0.html?nclick_check=1 

Banks and other financial institutions are lobbying against fair-value accounting for their asset holdings. They claim many of their assets are not impaired, that they intend to hold them to maturity anyway and that recent transaction prices reflect distressed sales into an illiquid market, not what the assets are actually worth. Legislatures and regulators support these arguments, preferring to conceal depressed asset prices rather than deal with the consequences of insolvent banks.

This is not the way forward. While regulators and legislators are keen to find simple solutions to complex problems, allowing financial institutions to ignore market transactions is a bad idea.

A bank typically argues that a mortgage loan for which it continues to receive regular monthly payments is not impaired and does not need to be written down. A potential purchaser of the loan, however, is unlikely to value it at its origination value. The purchaser calculates a loan-to-value ratio using the current, much lower value of the house. After calculating the likelihood of default, the potential buyer works out a price balancing the risk of default and amount that might be lost – a price well below the carrying value on the bank’s books.

The bank is likely to ignore this offered price, or trades of similar assets, with the claim that unusual market conditions, not a decline in the value of the assets, causes a lack of buyers at the origination price. Its real motive, however, is to avoid recognising a loss. Yet, by keeping assets at their origination value, the bank creates the curious possibility that its traders could buy an identical loan more cheaply and so carry two identical securities in the same not-for-sale account at vastly different prices.

Financial assets, even complex pools of assets, trade continuously in markets. Markets function best when companies disclose valid information about the values of their assets and future cash flows. If companies choose not to disclose their best estimates of the fair values of their assets, market participants will make their own judgments about future cash flows and subtract a risk premium for non-disclosure. Good accounting should reduce such dead-weight losses.

This already happens in another financial sector. Mutual funds in the US now use models, rather than the last traded price, to provide estimates of the fair values of their assets that trade in overseas markets. The models forecast the prices at which these overseas assets would have traded at the close of the US market, based on the closing prices of similar assets in the US market. In this way, the funds ensure that their shareholders do not trade at biased net asset values calculated from stale prices. Banks can similarly use models to update the prices that would be paid for various assets. Trading desks in financial institutions have models that allow them to predict prices to within 5 per cent of what would be offered for even their complex asset pools.

Obtaining fair-value estimates for complex pools of asset-backed securities, of course, is not trivial. But these days it is possible for a bank’s analysts to use recent market transaction prices as reference points and then adjust for the unique characteristics of the assets they actually hold, such as the specific local housing prices underlying their mortgage assets.

For fair-value estimates made by internal bank analysts to be credible, they need to be independently validated by external auditors. Many certified auditors, however, have little training or experience in the models used to calculate fair-value estimates. In this case, auditing firms can use outside experts, much as they do today with actuaries and lawyers who provide an independent attestation to other complex estimates disclosed in a company’s financial statements. The higher cost of using independent experts is part of the price of originating and investing in complex, infrequently traded financial instruments.

Legislators and regulators fear that marking banks’ assets down to fair-value estimates will trigger automatic actions as capital ratios deteriorate. But using accounting rules to mislead regulators with inaccurate information is a poor policy. If capital calculations are based on inaccurate values of assets, the ratios are already lower than they appear. Banks should provide regulators with the best information about their assets and liabilities and, separately, allow them the flexibility and discretion to adjust capital adequacy ratios based on the economic situation. Regulators can lower capital ratios during downturns and raise them during good economic times.

No system of disclosing the fair value of complex securities is perfect. Models can be misused or misinterpreted. But reasonable and auditable methods exist today to incorporate the information in the most recent market prices. Investors, creditors, boards and regulators need not base decisions on biased values of a company’s financial assets and liabilities.

Robert Kaplan and Robert Merton, 1997 Nobel laureate in economics, are professors at Harvard Business School. Scott Richard is a professor at the Wharton School of the University of Pennsylvania

Jensen Comment
I am also in favor of fair value accounting for financial instrument. The unresolved controversy is whether to post unrealized changes in value of these securities to current earnings or accumulated OCI where the changes do not affect earnings until if and when they are realized. In the case of held-to-maturity securities the accumulated value changes wash out and never are realized. If unrealized fair value changes are posted to earnings, bankers especially hate the volatility in earnings that comes about from mixing realized with unrealized revenues. Kaplan, Merton, and Richard due not address this primary concern of bankers.

Bob Jensen's threads on fair value accounting ---
http://www.ft.com/cms/s/0/f206cf68-8b59-11de-9f50-00144feabdc0.html?nclick_check=1

SEC Concerns About the Rush to  IFRS

From IAS Plus on August 4, 2009 --- http://www.iasplus.com/index.htm

Speaking at the annual meeting of the American Accounting Association in New York on 3 August 2009, Wayne Carnall, Chief Accountant of the Division of Corporation Finance of the US Securities and Exchange Commission, discussed issues relating to the use of IFRSs by SEC registrants. Among the points Mr Carnall made:

• In November 2007, the SEC voted to allow foreign registrants to use IFRSs without a reconciliation to US GAAP. Since then, only 137 of the more than 1,000 foreign registrants have chosen to use IFRSs.
• The number of foreign registrants in the United States has been declining over the past few years, including a two-thirds drop in European registrants. Mr Carnall attributed the decline primarily to cost-benefit reasons.
• In November 2008, the SEC invited comment on a proposed Roadmap for the Potential Use of Financial Statements Prepared in Accordance with International Financial Reporting Standards by US Issuers, Mr Carnall pointed out that the draft Roadmap was 'far from being a proposal' and, at this point, there is 'no date certain' regarding use of IFRSs by US domestic registrants. Mr Carnall expressed disappointment that the SEC received fewer than 250 comments on a proposal that could signficantly affect all 12,000 SEC registrants.
• In November 2008, concurrent with the proposed Roadmap, the SEC also proposed to permit voluntary early adoption for a limited group of large US registrants (based on industry and size) for periods ending after 15 December 2009 (filings in 2010). Mr Carnall said the responses 'did not indicate much support for the option'.
• Mr Carnall noted that there continue to be 'significant and fundamental differences between IFRSs and US GAAP' both in terms of the written standards and how the standards are implemented.
• He expressed concern that IFRSs might become regionalised or localised by differing local interpretations or modifications. The goal, he said, should be one common standard around the world.
• Mr Carnall noted that there is no SEC prohibition for a US registrant to publish IFRS financial statements in addition to US GAAP statements – yet no company is doing that. If the market demanded it, or if companies saw that IFRS financial statements might improve their access to capital, they would likely be publishing IFRS financial statements voluntarily. He noted a reluctance of companies to invest resources into IFRSs (systems, training, etc) until the SEC gives a date certain.

Bob Jensen's threads on the controversies of IFRS ---
http://www.trinity.edu/rjensen/theory01.htm#MethodsForSetting

From the Maryland Association of CPAs (MACPA)
"How to Leverage Social Networking," The Journal of Accountancy, August 2009 --- http://www.journalofaccountancy.com/Issues/2009/Aug/20091768.htm 

"CPAs Embrace Twitter Brief messages leave powerful impressions," by Megan Pinkston, The Journal of Accountancy, August 2009 --- http://www.journalofaccountancy.com/Issues/2009/Aug/20091828.htm 

July 24, 2009 reply from Tom Hood [tom@MACPA.ORG]

I think we should also nominate this cat for a Darwin Award (seems to have evolved well ahead of its time)
Keith R. Griffin, of the 3600 block of Northeast Jeannette Drive, was charged Wednesday with 10 counts of possession of child pornography after detectives found more than 1,000 child pornographic images on his computer, according to a news release. Griffin told detectives he would leave his computer on and his cat would jump on the keyboard.
Sun Sentinal, August 6, 2009 ---
http://www.sun-sentinel.com/news/local/breakingnews/sfl-cat-downloads-porn-bn080709,0,6415792.story

Bob,

Thanks for the shout out.

For those interested in Social Media for CPAs we were also featured in these other Journal of Accountancy articles.

Video – Making Social Media Work for You http://www.journalofaccountancy.com/Multimedia/TomHood.htm 

Accounting for Second Life http://www.journalofaccountancy.com/Issues/2008/Jun/AccountingforSecondLife 

We also have created a free self-guided learning tool (using a blog) for social media- everything from Facebook to LinkedIn, Youtube and Second Life. At http://www.cpalearning2.com for educators and students (although it may be too elementary for them).

I would be remiss if I did not mention my professor who fueled my interest in technology as a student and later on the MACPA’s technology committee, E. Barry Rice! See my blog post about Barry here http://www.cpasuccess.com/2009/02/back-to-the-future-macpa-technology.html  He greatly influenced me and the Association and we are eternally grateful.

Hope these are useful

Warmest regards,

Tom

Bob Jensen's threads on social networking, Twitter, blogs, and listservs ---
http://www.trinity.edu/rjensen/ListservRoles.htm

SEC says:  "GE bent the accounting rules beyond the breaking point"

From The Wall Street Journal Accounting Weekly Review on August 6, 2009

GE Settles Civil-Fraud Charges
by Paul Glader and Kara Scannell
Aug 05, 2009
Click here to view the full article on WSJ.com

TOPICS: Accounting, Accounting Changes and Error Corrections, Derivatives, Hedging, SEC, Securities and Exchange Commission

SUMMARY: GE "...agreed to pay a $50 million fine to the Securities and Exchange Commission to settle civil fraud and other charges that GE's financial statements in 2002 and 2003 misled investors....GE agreed to pay the fine without admitting or denying the SEC's allegations." The SEC uncovered the accounting issues from a strategic risk-based identification process followed by specific investigative procedures to determine whether a problem exists at a particular issuer. This case began with investigation into accounting for derivatives and hedging instruments, then ultimately uncovered four problems in three areas of accounting: derivatives and financial instruments; revenue recognition; and accounting for spare parts inventory. GE made restatements for the items found by the SEC in 2002 and 2003. As made clear in the related article, the SEC also is undertaking an effort, under its new Enforcement Director Robert Khuzami, to resolve old cases and make other improvements following criticism for failure to detect the Madoff fraud despite numerous warnings from outsiders. Actions documented in the article are examples of strategies undertaken by Mr. Khuzami, which are modeled after the Justice Department from which he came.

CLASSROOM APPLICATION: The article can be used to understand the role played by the U.S. SEC to improve financial reporting practices despite delegation of its authority to establish accounting standards to the FASB. Though not mentioned in the article, this enforcement role is unique in world markets and emphasizes the need for monitoring over and above the services provided by the auditing profession.

QUESTIONS: 
1. (Introductory) According to the main and related articles, how did the SEC decide to investigate GE's accounting practices? How does this enforcement role by the SEC add to the value created by the audit function over public financial information?

2. (Advanced) In what four accounting areas did GE make restatements as a result of this investigation? How are these areas subject to "bending of accounting rules" and management judgments which may result in earnings management or manipulation?

3. (Advanced) Compare and contrast the reactions to this announcement by two financial analysts. In your answer, comment on how the SEC's role as described in answer to question #1 supports their work in using publicly-available financial information.

4. (Introductory) Again, refer to the last analyst's reaction in stating that these issues were "never material". Define materiality, citing an authoritative source for your definition. In what ways do the GE issues seem material, and in what ways do they not?

5. (Advanced) Refer to the related article and to the statement by SEC's new enforcement director, Robert Khuzami, linked in the online version of that article. (Available at http://s.wsj.net/public/resources/documents/WSJ_KhuzamiSpch090805.pdf ) How do the actions evidenced in this GE case exemplify the "Four Ss" or principles instituted by Mr. Khuzami to improve SEC operations after criticism over its handling of the Madoff fraud case?

Reviewed By: Judy Beckman, University of Rhode Island

RELATED ARTICLES: 
SEC to Give Attorneys More Power
by Kara Scannell
Aug 06, 2009
Online Exclusive

 

"GE Settles Civil-Fraud Charges:  Fine of $50 Million Resolves SEC Probe Into Firm's Accounting Practices," by Paul Glader and Kara Scannell, The Wall Street Journal, August 5, 2009 --- http://online.wsj.com/article/SB124939838428504935.html#mod=todays_us_marketplace

General Electric Co. agreed to pay a $50 million fine to the Securities and Exchange Commission to settle civil fraud and other charges that GE's financial statements in 2002 and 2003 misled investors.

The fine settles a probe that started in 2005 into GE's accounting procedures, including financial hedges and revenue recognition. In a complaint filed with U.S. District Court in Connecticut, the SEC said the Fairfield, Conn., conglomerate used improper accounting methods to boost earnings or avoid disappointing investors.

"GE bent the accounting rules beyond the breaking point," said Robert Khuzami, director of the SEC's Division of Enforcement, in a prepared statement. "Overly aggressive accounting can distort a company's true financial condition and mislead investors."

GE agreed to pay the fine without admitting or denying the SEC's allegations. The SEC noted efforts by GE's audit committee to correct and improve the company's accounting during the probe. GE twice restated its financial results and disclosed other errors. The probe led to several employees being disciplined or fired.

"We are committed to the highest standards of accounting," said GE spokeswoman Anne Eisele. "While this has been a difficult and costly process, our controllership processes have been strengthened as a result, and GE is a stronger company today." GE said it doesn't need to further correct or revise its financial statements related to the investigation.

The SEC complaint focused on GE's accounting for four items over various periods: derivatives, commercial-paper funding, sales of spare parts and revenue recognition. The commission said GE in 2002 and 2003 reported locomotive sales that hadn't yet occurred in order to boost revenue by $370 million. A 2002 change in accounting for spare parts in its aircraft-engine unit increased that year's net income by $585 million, the commission said.

In early 2003, the SEC alleges, GE changed how it accounted for hedges on its issuances of short-term borrowings known as commercial paper. The commission said the change boosted GE's pretax earnings for 2002 by $200 million. Had it not changed the methodology, the commission said, GE would have missed analysts' earnings estimates for the first time in eight years, by 1.5 cents.

"Every accounting decision at a company should be driven by a desire to get it right, not to achieve a particular business objective," said David P. Bergers, director of the commission's Boston office, which led the investigation. "GE misapplied the accounting rules to cast its financial results in a better light."

The settlement resolves the GE accounting inquiry, but Mr. Bergers said similar SEC investigations of other companies continue.

GE's shares were up 10 cents to $13.82 in 4 p.m. composite trading on the New York Stock Exchange. Investors and analysts said the settlement represented closure.

"I feel as though the company has corrected its practices," said David Weaver, a portfolio manager at Adams Express in Baltimore, which owns about 1.5 million GE shares. "Going forward, I feel a little more comfortable with the cleanliness of [GE's earnings] numbers."

Matt Collins, an industrial analyst at Edward Jones in St. Louis, said the accounting issues had been "frustrating for investors, but they were never material." He said investors are now focused on the recession and losses at GE's finance unit.

The SEC under enforcement chief Mr. Khuzami is trying to close cases older than three years unless they are critical to the agency's program. The goal is to clear out the pipeline so attorneys can work on current cases, although one person familiar with the matter said that wasn't a consideration in this case.

Jensen Comment
GM's auditor, KPMG, is not named in the court paper such that the role auditors played in allowing GE to push these alleged accounting abuses is not disclosed.

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

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

"SEC Charges Terex Corporation With Accounting Fraud," SEC News, August 12, 2009 ---
http://www.sec.gov/news/press/2009/2009-183.htm

The Securities and Exchange Commission today charged Terex Corporation, a Westport, Conn.-based heavy equipment manufacturer, with accounting fraud for making material misstatements in its own financial reports to investors, as well as aiding and abetting a fraudulent accounting scheme at United Rentals, Inc. (URI), another Connecticut-based public company.

Terex has agreed to settle the SEC's charges and pay a penalty of $8 million. The SEC previously charged URI with fraud as well as officers of URI and Terex. "Terex is being charged with helping United Rentals pull off a sophisticated accounting scheme," said Fredric D. Firestone, Associate Director in the SEC's Division of Enforcement. "These two public companies inflated year-end results in order to mislead investors during a period of industry recession." The SEC's complaint, filed in U.S. District Court for the District of Connecticut, alleges that Terex aided and abetted the fraudulent accounting by URI for two year-end transactions that were undertaken to allow URI to meet its earnings forecasts. These fraudulent transactions also allowed Terex to prematurely recognize revenue from its sales to URI. The fraud occurred through URI's sales of used equipment to a financing company and its lease-back of that equipment for a short period. As part of the scheme, Terex agreed to sell the equipment at the end of the lease period and guarantee the financing company against any losses. URI separately guaranteed Terex against losses it might incur under the guarantee it had extended to the financing company. The SEC's complaint also alleges that from 2000 through June 2004, Terex's accounting staff failed to resolve imbalances arising from certain intercompany transactions. Instead of investigating and correcting the imbalances, Terex offset the imbalances with unsupported and improper entries. As a result, costs were not recorded as expenses, and, on a consolidated basis, Terex appeared to be more profitable than it was. Without admitting or denying the SEC's charges, Terex agreed to settle the Commission's action by consenting to be permanently enjoined from violating the antifraud, reporting, books and records and internal control provisions of the federal securities laws and by paying the $8 million penalty. The settlement is subject to court approval. The Commission acknowledges the assistance of the U.S. Attorney's Office for the District of Connecticut and the New Haven Field Office of the Federal Bureau of Investigation in this matter.

Question
What does Bernie Madoff have in common with Terex?

Answer
At one time, Madoff and Terex used unregistered auditors.

Terex restated its financial statements in 2005 --- http://www.highbeam.com/doc/1G1-132061896.html

Terex Resources Inc. (TSX VENTURE:TRR) ("Terex" or the "Company") announces that it is filing on SEDAR today new financial statements in respect of its year ended December 31, 2003 that have been audited by Parker Simone LLP. The new financial statements have been prepared and are being filed on SEDAR today as a result of the former financial statements in respect of its year ended December 31, 2003 having been audited by an auditor that was not registered with the Canadian Public Accountability Board.

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

Should known fiction be added to financial statements?
There’s a huge controversy as to how much fiction we should allow in financial statements under fair value accounting. In my viewpoint, we should not allow fiction that we’re 99.999999% certain it's fiction. Keep in mind that all the fair value ups and downs of earnings totally wash out over the lifetime of an HTM security. Interim value changes are pure fiction, especially under IFRS where the penalties are too severe to turn fiction into cash.

Some argue that HTM fair value adjustments reflect opportunity gains and losses when evaluating management. But these opportunity gains and losses may be so inaccurate that they remain in the realm of total fiction.

Bob Jensen

"FASB Could Finally Get Loan Accounting Right – Well, Less Wrong," by Tom Selling, Accounting Onion, August 13, 2009  ---
Click Here
http://accountingonion.typepad.com/theaccountingonion/2009/08/fasb-could-finally-get-loan-accounting-right-almost.html

Jensen Comment

Tom selling wrote:
I can an think of two responses to the argument. The obvious one is that much has changed since 1993, when the FASB voted 5-2 to adopt FAS 115, and acceded to the held-to-maturity camp, to allow issuers to blissfully disregard readily available market values.

Tom and I will forever disagree on that earnings should be allowed to fluctuate for the fiction of price movements in held-to-maturity (HTM) securities and the asymmetry of fair value movements of hedging contracts that hedge unbooked items (such as forecasted transactions). My differences with Tom on these two issues vary with respect to HTM securities versus unbooked hedged items.

Suppose a firm borrows $100 million by selling 10-year bonds at 5% with the holding that debt to maturity. Letting earnings fluctuate for 40 quarters for fictional gains and losses of value changes on those bonds is more misleading than helpful investors in my viewpoint. It may be especially fiction if there are cost-profit-volume considerations. Just because a few investors in those bonds are willing to sell at current market (thereby making a market) does not mean that all investors are willing to sell at current market rates. There are issues of blockage costs of trying to by all the bonds back versus buying only $1 million of those bonds back. The fair value of all $100 million bonds is very, very difficult to estimate. Level 1 of FAS 157 can be very misleading in this instance.

But even if we can accurately measure the value of the $100 million in debt, I still do not think it adds value to actually book repeated gains and losses that automatically wash out over the 10 year life of the bonds. This is especially the case in IFRS where severe penalties are incurred for firms that the IASB imposes on companies that renege on their held-to-maturity pledges.

Debtors could book debt at current call back values, but these call back values often have penalty clauses that make them poor surrogates of current value, especially when penalties are severe.

I might ask Tom how he would adjust fair market value of HTM securities for the penalty clauses of the IASB for reneging on HTM pledges.

There are also hedge accounting considerations.

Paragraph 79 of IAS 39 does not allow interest rate risk hedge accounting for HTM securities. Paragraph 21(d) of FAS 133 similarly precludes hedge accounting treatment for interest rate risk and FX risk, although credit default hedges are permitted. AFS securities can get hedge accounting relief.

Tom could argue that elimination of HTM designations and valuation of all financial securities at fair value eliminates some of the complexity of having hedge accounting available for AFS securities and unavailable for HTM securities. However, in my viewpoint having hedge accounting for securities that the company pledges will truly be held to maturity causes more problems by having both hedge accounting and fair value adjustments on these securities set in stone for the duration of their life.

There’s a huge controversy as to how much fiction we should allow in financial statements under fair value accounting. In my viewpoint, we should not allow fiction that we’re 99.999999% certain is fiction. Keep in mind that all the fair value ups and downs of earnings totally wash out over the lifetime of an HTM security. Interim value changes are pure fiction, especially under IFRS where the penalties are too severe to turn fiction into cash.

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

SERIOUS Doubts Over Proposed Changes to FAS 133 and IAS 39

The FASB proposes dubious changes in FAS 133 on Accounting for Derivative Financial Instruments and Hedging Activities while the IASB is studying similar changes in IAS 39. With the SEC currently sitting on the fence in deciding if and when to replace FASB standards with IASB standards, I fully predict that IAS 39 will pretty much follow the revise FAS 133 as it did when IAS 39 was initially adopted, although IAS 39 will continue to have wider coverage of financial instruments in general whereas FAS 133 will narrowly focus on derivative financial instruments and hedge accounting.

When the FASB initially signaled possible revisions for changing hedge accounting rules in FAS 133, a wave of protests from industry hit the fan. The article below is the response of Ira Kawaller who serves on the FASB's Derivatives Implementation Group (DIG) and who is one of the leading consultants on FAS 133 and hedging in general which is his where he has historic roots as a PhD in economics --- http://www.kawaller.com/about.shtml
Ira has written nearly 100 trade articles on FAS 133. I don't think he consults on IAS 39. Ira's home page is at http://www.kawaller.com/about.shtml
Ira also maintains a small hedge fund where he walks the talk about interest rate hedging. However, I'm no expert on hedge funds and will not comment on any particular hedge fund.

I might note in passing for enthusiasts of the new FASB Codification Database for all FASB standards that FAS 133 coverage in the Codification database is relatively sparse. Professionals and students in hedge accounting most likely will have to connect back to original (non-codified) FASB literature. For example, none of the wonderful illustrations in Appendices A and B of FAS 133 are codified. And the extremely helpful, albeit complicated, pronouncements of the FASB's Derivatives Implementation Group (DIG) are excluded from the Codification database --- http://www.fasb.org/derivatives/
Most of the DIG pronouncements are included in context at http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm
I will never have a lot of respect for the Codification database until it includes much, much more on FAS 133.

Below is a publication in which Dr. Kawaller presents serious doubts regarding revisions to FAS 133 that the FASB is now considering (and the IASB is now considering for IAS 39).

The problem is even more severe for entities with fixed-rate exposures. In this case, there’s a clear disconnect between what swaps are designed to do versus what the FASB requires for hedge accounting.
"Paved With Good Intentions:  The Road to Better Accounting for Hedges," The CPA Journal, August 2009 --- http://www.kawaller.com/pdf/CPA_Paved_w_Good_Intent_Aug_2009.pdf

With 10 years of experience under the current regime of accounting for derivative contracts and hedging transactions, the FASB has determined that it’s time to make some adjustments. Accountants should be wary of the changes. Besides affecting the accounting procedure relating to these instruments and activities, the proposed changes may also seriously impact the manner in which certain derivative hedges are structured— particularly in connection with interest rate risk management activities.

Accounting rules for derivatives and hedging transactions were put forth by the FASB in SFAS 133, Accounting for Derivative Instruments and Hedging Activities. This standard was initially issued in June 1998. It has been amended twice since then, with relatively minor adjustments, but in 2008 the FASB issued a more substantive exposure draft with significant proposed changes. Although the comment period on this exposure draft is over, the project appears to be in limbo. Proposed changes have neither been accepted nor rejected. Further adjustments are likely to be made as the FASB moves to harmonize U.S. accounting guidance with International Financial Reporting Standards (IFRS). When attention turns to derivatives, this latest exposure draft could very likely serve as a starting point. The prospective decisions about the accounting treatment for these derivatives could have a profound impact on the structure and composition of derivatives transactions

The Current Standard SFAS 133 has long been recognized as one of the most complicated accounting standards the FASB has ever issued. A core principle of this standard is that derivative instruments must be recognized on the balance sheet as assets or liabilities at their fair market value. The critical issue, then, is the question of how to handle gains or losses. Should they be reported in current income or elsewhere? Ultimately, SFAS 133 ended up providing different answers for different situations. The “normal” treatment simply requires gains and losses recognized in earnings. This treatment, however, is often problematic for companies that use derivatives for hedging purposes. For such entities, the preferred treatment would recognize gains or losses of derivatives concurrently with the earnings impacts of the items being hedged. The normal accounting treatment generally won’t yield this desired result, but the alternative “hedge accounting” will.

For purposes of this discussion, attention is restricted to the two primary hedge accounting types: cash flow and fair value. For cash flow hedges, the exposure being hedged (i.e., the hedged item) must be an uncertain cash flow, forecasted to occur in a later time period. In these cases, effective gains or losses on derivatives are originally recorded in other comprehensive income (OCI) and later reclassified from OCI to earnings when the hedged item generates its earnings impact. Ineffective results are recorded directly in earnings. In essence, this accounting treatment serves to defer the derivatives’ gains or losses—but only for the portion of the derivatives’ results that are deemed to be effective—thus pairing the earnings recognition for the derivative and the hedged item in a later accounting period.

Continued in article

Bob Jensen and Tom Selling have been having an active, to say the least, exchange over hedge accounting where Tom Selling advocates elimination of all hedge accounting (by carrying all derivatives at fair value with changes in value being posted to current earnings). Bob Jensen thinks this is absurd, especially for derivatives that hedge unbooked transactions such as forecasted transactions or unbooked purchase contracts for commodities. Not having hedge accounting causes asymmetric distortions of earnings where the changes in value of the hedging contracts cannot be offset by changes in value of the (unbooked) hedged items. You can read more about our exchanges under the terms "Insurance Contracts" at
http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm#I-Terms
Scroll down to "Insurance Contracts"

Bob Jensen's free tutorials, audio clips, and videos on FAS 133 and IAS 39 are linked at http://www.trinity.edu/rjensen/caseans/000index.htm

Big Four (Alumni) Blog (actually covering more than the Big Four) --- http://www.bigfouralumni.blogspot.com/
Accent the positive, eliminate the negative

Bob Jensen's threads on listservs, blogs, and social networking ---
http://www.trinity.edu/rjensen/ListservRoles.htm

"FASB and XBRL US Align XBRL US GAAP Tags to New Accounting Codification," SmartPros, August 4, 2009 --- http://accounting.smartpros.com/x67333.xml

The Financial Accounting Standards Board (FASB) and XBRL US, the nonprofit consortium for XML business reporting standards, announced today that they have completed the work to revise the XBRL US GAAP Taxonomy to reflect the FASB Accounting Standards Codification(TM) that was released on July 1, 2009. The Codification is the single source of authoritative nongovernmental US generally accepted accounting principles (GAAP) and is effective for interim and annual periods ending after September 15, 2009.

In 2008, the FASB created an XBRL project team that worked closely with the XBRL US team to release the new Codification extension taxonomy. The FASB's XBRL project team reviewed the authoritative references in the current taxonomy and added the related Codification references. Public companies using the US GAAP Taxonomy to create XBRL-formatted financial statements can now link directly from the taxonomy extension to the specific Codification reference as posted on FASB's Codification website. The Codification references, in conjunction with the element labels and definitions, provide companies the information they need to select the right element in the taxonomy to accurately reflect their financial statements.

"The FASB Accounting Standards Codification(TM) simplifies the process of researching accounting issues by providing a single authoritative source of US GAAP. The work that FASB and XBRL US have done to bring these references into the US GAAP Taxonomy further streamlines the process of financial statement preparation for public companies," stated Robert H. Herz, chairman of the FASB. "Incorporating the Codification into the US GAAP Taxonomy will give preparers an easy tool that will help them select the appropriate elements for filing their XBRL financial statements."

The Codification reorganizes the thousands of US GAAP pronouncements into roughly 90 accounting topics and displays all topics using a consistent structure. It also includes relevant Securities and Exchange Commission (SEC) guidance that follows the same topical structure in separate sections in the Codification.

The US GAAP Taxonomy was developed by XBRL US under contract with the SEC as a comprehensive set of reporting elements that include GAAP requirements and common reporting practices. Public companies use this digital dictionary when creating XBRL-formatted financials. The SEC mandated the use of XBRL for all public companies over a three year period; the largest public companies, with a worldwide public float greater than $5 billion, began filing for interim financial statements with periods ending on or after June 15, 2009.

"We will continue to work closely with the FASB to align the US GAAP reporting elements with all new accounting standards. Public company reporting must change to reflect investor and marketplace needs. The appropriate level of support and maintenance will ensure that the XBRL reporting elements used by public companies reflect the most current industry and accounting standards," said Mark Bolgiano, president and CEO, XBRL US. "Proper maintenance of the taxonomy is key to giving preparers the tool to create consistent, high-quality financial data that gives investors greater transparency and ultimately better accuracy in their own analysis."

Jensen Comment
It would seem that all this effort is a race against time before the FASB's Codification might self destruct if and when international standards (IFRS) replace all FASB domestic standards for public companies. The SEC has yet to issue a new roadmap to IFRS, but the Big Four firms (PwC insists that IFRS is absolutely certain to replace FASB standards) are all betting that FASB standards will self destruct very soon (odds place the funeral in 2014).

Codification of the FASB standards, interpretations, and other hard copy FASB documentation into a searchable "Codification" database, like the road to hell, is paved with good intentions. Bits and pieces of hard copy dealing with a given topic are scattered in many different hard copy FASB references and bringing this all together in newly coded Codification numbered sections and subsections is a fabulous "paving" idea.

FASB News Release --- Click Here

Just to see how important this is for accounting and finance students as well as faculty, go to
http://www.cfo.com/article.cfm/13854787/c_2984368/?f=archives

Also see http://www.journalofaccountancy.com/Web/July1Codification

And see http://www.journalofaccountancy.com/Web/Codification

At least Codification of FASB hard copy was a great "paving" idea until it became evident that FASB standards most likely will be entirely replaced by IASB international standards (IFRS). It's still uncertain when and if IFRS will replace the FASB standards, but recent events in Washington DC suggest that the transition will most likely happen at the end of 2014. This means that millions of dollars and millions of professional work time hours by accountants, auditors, educators, and financial analysts will be spent using the FASB's new Codification database that commenced on July 1, 2009 and will most likely self destruct on December 31, 2014. As I indicated, when and if IFRS will take over is still uncertain and controversial, but I'm betting the shiny new FASB Codification database will self destruct in 2014 --- http://www.trinity.edu/rjensen/theory01.htm#MethodsForSetting

As a result of scheduled obsolescence, what commenced as a Codification smart idea became dumb and dumber in 2009.

Furthermore, the Codification database has some huge limitations because it contains only a subset of the FASB hard copy material that it ostensibly is replacing. This greatly complicates XBRL tagging for some standards and interpretations and implementation guidelines.

But the biggest problem remains that all this effort to develop XBRL tagging for the new Codification database codes may be a waste of time if the Big Four firms are correct in their expectations of death for FASB standards that comprise the Codification database.

Previously one of the top experts on XBRL tagging said developing Codification tags will be a "trivial exercise," but some of us lesser novices cannot fathom that it will be so trivial to tag the huge Codification referencing and cross referencing system.

There's an added problem that Louis does not address. Companies themselves have not shown a whole lot of enthusiasm for the Codification referencing system, in part, because they too anticipate a funeral for the Codification referencing of FASB standards and interpretations EITFs and implementation guidelines.

June 28, 2009 reply from Louis Matherne [matherne@OPTONLINE.NET]

Bob,

I don't agree with the following...

"... This year early adopters of XBRL who tagged their financial statements with FASB hard copy references will be putting out obsolete XBRL tagging. All the U.S. standard XBRL tagging software and financial analysis software will have to be rewritten..."

While there will undoubtedly be some impact to the current USGAAP taxonomies, I expect it to be minimal. The references that are currently in the taxonomy are largely in sync with their codification replacements as the FAF and XBRL US have been working on this expected transition for some time.

From a mechanical point of view it will be a fairly simple exercise to "slip stream" in the codification references.

Louis

June 28, 2009 reply from Zane Swanson [ZSwanson@UCO.EDU]

Askaref (which I developed with 2 others) is designed for handheld internet devices to do that cross-referencing between line item accounts, XBRL tags, and GAAP references (FASBs, etc). Having gone through the database machinations to make this function work, I would say that effort is nontrivial, but not rocket science. Until I see what a official release of the XBRL tagging for the Codification, I would suggest that blanket statements are premature about the ease to “slip stream” references or the rendering of databases as useless. In any event, it will make users and support individuals mad if this feature is delayed … like the Boeing 787 dreamliner (the launch date keeps getting delayed and there is a corresponding loss of value). With respect to XBRL tagging errors being generated by the inclusion of Codification, it is difficult to get into the mind of the user/preparer who is selecting the “best match” of a XBRL tag with an accounting line item. I do agree that referencing the appropriate GAAP is critical in order to select the “best match” of an XBRL tag. If this referencing activity is made more difficult or has incomplete links, then it is logical that more errors will occur.

With regard to textbooks, one fix that I have seen is a cross reference table which lists textbook pages and their FASB references with the Codification references. Hardly elegant, but it works.

Zane Swanson

June 28, 2009 reply from Bob Jensen

Hi Louis

I was influenced by the following quotation that does not make it sound so slip stream and mechanical as firms struggle to update the XBRL tags:

Any company with a scheduled filing date before July 22 for a quarter ending June 15 or later can opt to file its report using the out-of-date 2008 taxonomy. The SEC, though, is encouraging filers to use the current set of data tags. To accommodate that request, a company with a line item affected by new FASB literature will have to create its own extensions to the core taxonomy. Not only would that require extra effort by companies, Hannon lamented that "a bunch of rogue XBRL elements" not formed the same way from company to company would inevitably hinder analyses of the effect of FASB's new pronouncements on financial statements.
David McCann, "Speed Bumps for Early XBRL Filers, Users," CFO.com, June 26, 2009 ---
http://www.cfo.com/article.cfm/13932485/c_2984368/?f=archives

I hope you are correct because it will be a race to update all the tagging software and implement these tags in corporate annual reports before the FASB Codification archive database self destructs.

Another problem is that companies that are affected by FAS 133 often refer to DIGG documents that will not be updated for Codification references. This could lead to rather confusing outcomes where a footnote quotation from a DIGG refers to Paragraph 243 of FAS 133 and the XBRL tag refers to Section 8-15-38 of the Codification database that is not part of the DIGG document.. It will be especially troublesome with FAS 133 since there is so much FAS 133 hard copy that was left out of the Codification database such that searches and references of the database cannot even find many hard copy references originally issued by the FASB.

I don't think it's as easy as you make it sound and for what purpose with an archival database that will most likely self destruct in such a relatively short period of time?

Thanks,
Bob Jensen

August 10, 2009 reply from Louis Matherne [matherne@OPTONLINE.NET]

Bob,

The 2009 US GAAP taxonomy, as has the 2008 taxonomy before it, includes references to the authoritative literature. Effective July 2009, XBRL US / FAF also made available references to the codification. As you can see at this link
http://viewer.xbrl.us/yeti/resources/yeti-gwt/Yeti.jsp#tax~(id~7*v~34)!net~(a~118*l~30)!lang~(code~en-us)
 the codification references are now available in the current 2009 taxonomy.

For anyone using the US GAAP taxonomy to build a company extension taxonomy, XBRL US has provided a new “industry entry point” that includes the codification references right alongside the legacy references. The references include links into the cod. For example, the element “AssetsHeldForSaleCurrent” includes the uri http://asc.fasb.org/extlink&oid=6360116&loc=d3e1107-107759 .

For any filer that has already built an extension taxonomy based on the existing references, they may want to confirm that these new references don’t change their prior choices but given the extent to which the references factored into the prior selections (just my opinion) and the level of consistency you should expect to see between the legacy references and the cod, I don’t expect this to take much time or effort.

Louis Matherne

August 11, 2009 reply from Zane Swanson [ZSwanson@UCO.EDU]

Louis,

You are right. It was the latter. I think that this message discussion will be a caution for some faculty situations presenting information in class room settings [i.e., in regards to some complexities using XBRL with respect to linkages (e.g., GAAP Codification), etc]. But, it also is a light of hope for showing XBRL information sytems are flexible in terms of work-a-rounds.

Zane,

August 10, 2009 reply from nhannon@gmail.com

Hi Bob,

I just sent Compliance Week an answer to an email question that they will publish in their next hard copy.  See attached.  I will let you know when I have a web address for the piece.

Meanwhile, there are a few problems.

• The new reference linkbase is unofficial and will not be accepted by the SEC's EDGAR system.
• URI links point to the proper places in the COD for FASB publications but require a separate log in and give you access to the public (high level) view only.  AAA members with professional access will not find this a problem, but practitioners will have to subscribe to get anything beyond the bare bones.
• SEC literature stops at the top of the page for ALL SEC GAAP citations.  For example, any XBRL element that has a regulation SX reference will point to exactly the same place, the top of the document.  Not very useful.  

So it appears we have three levels of GAAP material to deal with.  1) the high level public access literature in the Cod; 2) the professional view additional detail and explanations, and 3) the stuff the FASB left out of the COD that was in the hard copy literature but didn't make the COD cut.  The last category contains information that is officially non-GAAP (as of July 1, 2009).

Neal

August 11, 2009 reply from Bob Jensen

Thank you so much for the clarification Neal.

All this complexity seems so pointless for a self destructing database (FASB Codification)

Bob Jensen

August 11, 2009 reply from John Brozovsky [jbrozovs@VT.EDU]

I agree with what Neal says and am very happy to have the codification available for all the reasons Neal mentioned (caveat-I did work as a consultant on the project and so may have a biased view). However, the SEC was given cart blanche to put into the codification what they thought should be included. The SEC personnel themselves put the information into the system. If the SEC information is inadequate then that would be a matter for the SEC not the FASB. Of course there is the issue that the SEC material is in its own sections and not fully integrated. This was done because not everyone has to follow the incremental SEC guidance. On the issue of codifying discussion memorandum, exposure drafts, etc.; those are not GAAP and so really should not be in the codification. Access to this material is critical as it gives a view of what may happen but it is not yet GAAP. Codifying something as amorphous as a discussion memorandum may not be a good use of professional resources. As it becomes GAAP it will be included in the codification. All new standards will be included in the codification and will be written with inclusion in mind.

John Brozovsky

August 11, 2009 reply from Neal Hannon [neal@GILBANE.COM]

Bob,

My take is that the codification was a necessary step in the evolution of US GAAP. I believe that having one source for publishing authoritative literature will greatly simplify the task of learning GAAP. I'm disappointed, however, that the FAF revenue model, which includes earning revenues to pay for GASB (not covered by Sar-Ox fees) charges such a high amount to view the wealth of guidance available in FASB discussion papers and other guidance materials. I would encourage FASB to go the next step and "codify" all written materials within their publication family so that we do not miss anything currently available.

For the FAF/FASB, i think the move to the Cod is a necessary step to a) cut the complexity of GAAP, b) to eliminate GAAP conflicts in the literature, c) to finally purge the AICPA of GAAP publishing status, d) to help prepare for further convergence analysis and e) come up to speed with the codification of IFRS, which is already in place today. Regardless of the movement to IFRS, I believe this step was necessary and correct.

We do need, however, to strongly encourage the FAF to go all the way and codify all literature published by the organization and to do a much better job of incorporating SEC literature into the codification.

Neal

Bob Jensen's free tutorials on FAS 133, IAS 39, and DIGG pronouncements are at
http://www.trinity.edu/rjensen/caseans/000index.htm 

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

First, kudos to the Audit Committee (John McCartney, Dubose Ausley and James Edwards) for unearthing this issue and pursuing it fearlessly to its terrible end at Huron Consulting.

From The Wall Street Journal Weekly Accounting Review on August 6, 2009
 

Huron Takes Big Hit as Accounting Falls Short
by Gregory Zuckerman
Aug 05, 2009
Click here to view the full article on WSJ.com

TOPICS: Accounting Changes and Error Corrections, Advanced Financial Accounting, Mergers and Acquisitions

SUMMARY: Huron Consulting Group, Inc., was formed in May 2002 by partners from the now-defunct Arthur Andersen LLP. "Today, fewer than 10% of the company's employees came directly from Arthur Andersen." The firm provides "...financial and legal consulting services, including forensic-style investigative work...." The firm announced restatement of earnings for fiscal years 2006, 2007, and 2008 and the first quarter of 2009 due to inappropriate accounting for payments made to acquire four businesses between 2005 and 2007. The payments were made after the acquisitions for earn-outs: additional amounts of cash payments or stock issuances based on earning specific financial performance targets over a number of years following the business combinations. However, portions of these earn-out payments were redistributed to employees remaining with Huron after the acquisitions based on specific performance measures by these employees rather than being based on their relative ownership interests in the firms prior to acquisition by Huron. Consequently, those payments are deemed to be compensation expense. The amounts restated thus reduce net income for the periods of restatement and reduce future income amounts, but do not affect cash flows of the firm. Negative shareholder reaction to this announcement by a firm which provides consulting services in this area certainly is not surprising.

CLASSROOM APPLICATION: Accounting for allocation of a purchase price in a business combination is covered in this article.

QUESTIONS: 
1. (Introductory) In general, how do we account for assets acquired in business combinations? How are cash payments and stock issued to selling shareholders accounted for?

2. (Introductory) What are contingent payments in a business combination? What are the two main types of contingent payments and what are their accounting implications?

3. (Introductory) Which of the above 2 types of contingent payments were employed in the Huron acquisition agreements for businesses it acquired over the years 2005 to 2008?

4. (Advanced) Obtain the SEC 8_k filing by Huron for the restatement announcement, dated July 31, 2009, and the filing answering subsequent questions and answers as posted on its web site, dated August 3, 2009 available at http://www.sec.gov/Archives/edgar/data/1289848/000119312509160844/d8k.htm and http://www.sec.gov/Archives/edgar/data/1289848/000128984809000017/exh99-1.htm respectively. What was the problem which made the original acquisition accounting improper? What accounting standard establishes requirements for handling corrections of errors such as this? In your answer, explain why the company discloses that investors must not rely on the previously released financial statements.

5. (Advanced) Refer specifically to the August 3, 2009, filing obtained above. What were the ultimate journal entries made to correct these errors? Explain the components of these entries.

6. (Advanced) The author of this article writes that this error in reporting and subsequently required restatement "...suggests [that] a closer alliance between consulting and accounting isn't such a bad idea." What is the SEC requirement that divides consulting and accounting? Do you think this problem with reporting would have arisen had the firm been allowed to perform both auditing, accounting, and consulting services to its clients? Support your answer.

Reviewed By: Judy Beckman, University of Rhode Island

"Huron Takes Big Hit as Accounting Falls Short," by Gregory Zuckerman, The Wall Street Journal, August 5, 2009 ---
http://online.wsj.com/article/SB124943146672806361.html?mod=djem_jiewr_AC

Financial downturns often expose accounting problems at companies, but scandals have been noticeably absent in the recent turmoil. Not so anymore.

Late Friday, Huron Consulting Group Inc. said it would restate the last three years of financial results, withdraw its 2009 earnings guidance and lower its outlook for 2009 revenue. The accounting snafu, which has decimated the company's shares, was all the more surprising because Huron traces its roots to Arthur Andersen LLP, the accounting firm at the heart of the last wave of scandals.

A dose of added irony is that Huron makes its money providing financial and legal consulting services, including forensic-style investigative work, and tries to help clients avoid these types of mistakes.

"One of their businesses is forensic accounting -- they're experts in this," says Sean Jackson, an analyst at Avondale Partners in Nashville, Tenn., who dropped his rating to the equivalent of "hold" from "buy." "Investors are saying, 'These guys had to know what happened with the accounting, or they should have known.'"

Investors fear the accounting issues, which will reduce net income by $57 million for the periods in question, might damage the firm's credibility. Huron's shares fell 70% on Monday, well below the price of its initial public offering in 2004. On Tuesday, Huron shares rose four cents to $13.73.

Huron, based in Chicago, was started in May 2002 by refugees from Arthur Andersen who fled the firm after it was indicted for its role in the collapse of Enron Corp. At the time, the group said that it would specialize in bankruptcy and litigation work, as well as education and health-care consulting, and that it would work with more than 70 former clients of Arthur Andersen. Arthur Andersen's guilty verdict was later overturned, but it was too late to save the firm, which was dismantled. Today, fewer than 10% of the company's employees came directly from Andersen, according to a Huron spokeswoman.

Huron on Friday also announced preliminary second-quarter revenue that was shy of analyst expectations, along with the resignation of Gary Holdren, its board chairman and chief executive, along with the resignations of finance chief Gary Burge and chief accounting officer Wayne Lipski. "No severance expenses are expected to be incurred by the company as a result of these management changes," Huron's regulatory filing said.

After its founding by 25 Andersen partners and more than 200 employees, Huron grew rapidly. It soon had 600 employees and counted firms like Pfizer, International Business Machines and General Motors as clients. Growing scrutiny of accounting firms that also did consulting made Huron's consulting-only business look promising, and shares soared from below $20 five years ago to nearly $44 before the news on Friday.

That is when Huron dropped its bombshell -- one that suggests a closer alliance between consulting and accounting isn't always such a bad idea. Huron is restating financial statements to correct how it accounted for certain acquisition-related payments to employees of four businesses that Huron purchased since 2005.

Huron said the employees shared "earn-outs," or financial rewards based on the performance of acquired units after the transaction was completed, with junior employees at the units who weren't involved in the original sale. They also distributed some of the proceeds based on performance of employees who remained at Huron, not based on the ownership interests of those employees in the businesses that were sold.

The payments were legal. The problem was how Huron accounted for these payouts. The compensation should have been booked as a noncash operating expense of the company. Huron said the payments "were not kickbacks" to Huron management, but rather went to employees of the acquired businesses.

The method the company used to book the payments served to increase its profit. The adjustments reduced the company's net income, earnings per share and other measures, though it didn't affect its cash flow, assets or liabilities.

Part of investors' concern is that they aren't entirely sure what happened at Huron. The company's executives aren't speaking with analysts, some said on Tuesday.

Employees and big producers now might bolt from Huron, Avondale Partners' Mr. Jackson says.

"It's still unclear what happened, but it's almost irrelevant at this point," says Tim McHugh, an analyst at William Blair & Co., who has the equivalent of a "hold" on the stock, down from a "buy" last week. "The company's brand has been impaired and turnover of key employees is a significant risk."

"Shocking Accounting Scandal at Huron Consulting Group," The Big Four Blog, August 5, 2009 ---
http://bigfouralumni.blogspot.com/2009/08/shocking-accounting-scandal-at-huron.html

First, kudos to the Audit Committee (John McCartney, Dubose Ausley and James Edwards) for unearthing this issue and pursuing it fearlessly to its terrible end.

Second, shame on senior management to succumb to greed and not complying strictly with accounting standards

Third, shame also on the auditor, PricewaterhouseCoopers for failing to spot this issue, especially in 2008, when the amount of money kept in goodwill was $31 million, three times the true net income of Huron of only $10 million

Fourth, shame on Huron itself for providing accounting, internal audit, internal controls, Sarbanes, and similar advice to its corporate clients, while following shady accounting practices. Physician, heal thyself first.

Finally, our sympathies for all the hard working and honest Huron consultants who had nothing to do with acquisitions or their accounting, and are likely as mad as anyone that this could happen to them.

Continued in article