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