New Bookmarks
Year 2009 Quarter 3:  July 1 to September Additions to Bob Jensen's Bookmarks
Bob Jensen at Trinity University

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

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

Choose a Date Below for Additions to the Bookmarks File

2009
July 31           August 31         September 30

2009
April 30          May 31            June 30

2009
January 31     February 28     March 31

September 30, 2009

Bob Jensen's New Bookmarks on  September 30, 2009
Bob Jensen at Trinity University 

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

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

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

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

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

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

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

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

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

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

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

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

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

CPA Exam to Undergo Transformation --- http://www.journalofaccountancy.com/Web/20092194.htm

Some Accounting Blogs

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

Popular IFRS Learning Resources:
Check out the popular IFRS learning Deloitte link is http://www.deloitteifrslearning.com/  
Also see the free IFRS course (with great cases) --- Click Here
Also see the Virginia Tech IFRS Course --- Send a request to John Brozovsky [jbrozovs@VT.EDU]
Others --- http://www.trinity.edu/rjensen/theory01.htm#MethodsForSetting

I found from the UK that might be helpful for IFRS learning resources --- Click Here
http://www.icaew.com/index.cfm/route/150551/icaew_ga/en/Library/Links/Accounting_standards/IAS_IFRS/Sources_for_International_Financial_Reporting_Standards_IFRS_and_International_Accounting_Standards_IAS

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

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




Humor Between September 1 and September 30, 2009
http://www.trinity.edu/rjensen/book09q3.htm#Humor093009  

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

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

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

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

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

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

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

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



  • 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


     

    I think leading academic researchers avoid applied research for the profession because making seminal and creative discoveries that practitioners have not already discovered is enormously difficult. Accounting academe is threatened by the twin dangers of fossilization and scholasticism (of three types: tedium, high tech, and radical chic)
    From http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm
     

    “Knowledge and competence increasingly developed out of the internal dynamics of esoteric disciplines rather than within the context of shared perceptions of public needs,” writes Bender. “This is not to say that professionalized disciplines or the modern service professions that imitated them became socially irresponsible. But their contributions to society began to flow from their own self-definitions rather than from a reciprocal engagement with general public discourse.”

     

    Now, there is a definite note of sadness in Bender’s narrative – as there always tends to be in accounts of the shift from Gemeinschaft to Gesellschaft. Yet it is also clear that the transformation from civic to disciplinary professionalism was necessary.

     

    “The new disciplines offered relatively precise subject matter and procedures,” Bender concedes, “at a time when both were greatly confused. The new professionalism also promised guarantees of competence — certification — in an era when criteria of intellectual authority were vague and professional performance was unreliable.”

    But in the epilogue to Intellect and Public Life, Bender suggests that the process eventually went too far. “The risk now is precisely the opposite,” he writes. “Academe is threatened by the twin dangers of fossilization and scholasticism (of three types: tedium, high tech, and radical chic). The agenda for the next decade, at least as I see it, ought to be the opening up of the disciplines, the ventilating of professional communities that have come to share too much and that have become too self-referential.”

     

    What went wrong in accounting/accountics research? 
    How did academic accounting research become a pseudo science?
    http://www.trinity.edu/rjensen/theory01.htm#WhatWentWrong

     


    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:

    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."

  • All is Not Well in Modern Languages Education
    Proposal to integrate languages with literature, history, culture, economics and linguistics
    Proposal to use fewer adjuncts who now teach language courses
    The MLA created a special committee in 2004 to study the future of language education and its report, being issued today
    (May 24, 2007) is in many ways unprecedented for the association in that it is urging departments to reorganize how languages are taught and who does the teaching. In general, the critique of the committee is that the traditional model has started with basic language training (typically taught by those other than tenure-track faculty members) and proceeded to literary study (taught by tenure-track faculty members). The report calls for moving away from this “two tiered” system, integrating language study with literature, and placing much more emphasis on history, culture, economics and linguistics — among other topics — of the societies whose languages are being taught.
    Scott Jaschik, Inside Higher Ed, May 24, 2007 --- http://insidehighered.com/news/2007/05/24/mla
    Who Teaches First-Year Language Courses?
    Rank Doctoral-Granting Departments B.A.-Granting Departments
    Tenured or tenure-track professors 7.4% 41.8%
    Full-time, non-tenure track 19.6% 21.1%
    Part-time instructors 15.7% 34.7%
    Graduate students 57.4% 2.4%

     


    "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.

    I summarize some applications of multivariate visualizations in other disciplines at
    http://www.trinity.edu/rjensen/352wpvisual/000datavisualization.htm

     


    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

  • Bob Jensen's threads on accoutics doctoral programs are at
    http://www.trinity.edu/rjensen/theory01.htm#DoctoralPrograms

    September 4, 2009 reply from Patricia Doherty [pdoherty@BU.EDU]

    I find your comments on political science courses, especially your daughter's experience in the "introductory" course, interesting.

    Why is it that schools think that every introductory course needs a heavy dose of math to be a "serious" course? My own daughter's experience has been similar. An intro Psychology course was heavy on statistics and research methodology. Not necessary! When I was a liberal arts student as an undergraduate, my intro Poli Sci course (yes, I had to take one) was a "thought based" course. We read different prominent people, past and present, and discussed in class their theories, and contributions to modern thinking. It was a great introduction to the subject. We didn't do any equations with endless Greek letters to prove things we really didn't know anything about.

    Intro Psychology? Well, that course actually persuaded me to MAJOR in psychology. We looked at the prominent people and "schools" of psychology, read about the sorts of problems psychology considers, how it differs from Psychiatry and Medicine. In other words, an INTRODUCTION. Yes, there was a unit of the type of research psychologists do - a very short unit - but we didn't pretend to be scientists with just a (dangerous) little bit of knowledge. We were being introduced. Didn't tempt me to go out and analyze my neighbors (good thing, too).

    The statistics should be reserved for a later course. The instructors don't have to convince students that they are serious researchers - are their egos so fragile that they WORRY that an undergraduate might not find them serious? So they have to show all they know about statistics?

    I'm reminded of a TV show that I watched part of last night after the ball game ended - a hairdresser's assistant was "profiling" people involved in a crime - oh, she knew ever so much about how to "read" people, and the police should definitely enlist her help. Just like an undergraduate after one of these intro courses. Scary.

    Really, can't we introduce subjects in a way that actually engages students, without the patina of "research?" People who major in Poli Sci or Sociology or Psychology DO make a living doing things OTHER than research.

    OK, rant over. It's safe to come out of hiding

    p

    I haven't been everywhere, but it's on my list. Susan Sontag

    Patricia A. Doherty Department of Accounting Boston University School of Management 595 Commonwealth Avenue Boston, MA 02215

    September 7, 2009 reply from Paul Williams [Paul_Williams@NCSU.EDU]

    Bob,
    Ian Shapiro, a political scientist, has a wonderful book titled "The Flight from Reality in the Human Sciences" that focuses on the intrusion of rational decision theory into poly sci. The parallels with accounting are obvious. You start with a problem. Only then do you worry about method for solving it.

    I believe it was Joshua Ronen who wrote an essay for the Doctoral Program Directors meetings that AAA used to hold every year back in the 80s. He made this point over two decades ago -- research should be problem driven.

    It seems the real problem that accounting research is driven by is promotion, tenure and accumulating the reputational capital one needs to strut and preen before the ignorant masses

    Paul

    Jensen Comment

    As an aside, Josh also has been one of the few voices in academe promoting the controversial idea that financial statements should be insured as opposed to merely being audited in the traditional sense ---
    http://pages.stern.nyu.edu/~jronen/articles/December_final_Version.pdf

    But now back to rigor versus relevance.

    "I understand your point, Jim." He could not identify one issue that (accountics) researchers had been able to "put to bed" after all that effort.
    P. Kothari, one of the Editors of JAE and a full professor at MIT, as quoted by Jim Peters below.

    The following is an excerpt from my 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 

    Most importantly of all in accountics is that the leading accounting research journals for tenure, promotion, and performance evaluation in academe are devoted to accountics paper. Normative methods, case studies, and interviews are rarely used in studies published in such journals. The following is a quotation from “An Analysis of the Evolution of Research Contributions by The Accounting Review (TAR): 1926-2005,” by Jean L. Heck and Robert E. Jensen, Accounting Historians Journal, Volume 34, No. 2, December 2007, Page 121.

    Leading accounting professors lamented TAR’s preference for rigor over relevancy [Zeff, 1978; Lee, 1997; and Williams, 1985 and 2003]. Sundem [1987] provides revealing information about the changed perceptions of authors, almost entirely from academe, who submitted manuscripts for review between June 1982 and May 1986. Among the 1,148 submissions, only 39 used archival (history) methods; 34 of those submissions were rejected. Another 34 submissions used survey methods; 33 of those were rejected. And 100 submissions used traditional normative (deductive) methods with 85 of those being rejected. Except for a small set of 28 manuscripts classified as using “other” methods (mainly descriptive empirical according to Sundem), the remaining larger subset of submitted manuscripts used methods that Sundem [1987, p. 199] classified these as follows:

    292          General Empirical

    172          Behavioral

    135          Analytical modeling

    119          Capital Market

      97          Economic modeling

      40          Statistical modeling

      29          Simulation

     

    It is clear that by 1982, accounting researchers realized that having mathematical or statistical analysis in TAR submissions made accountics virtually a necessary, albeit not sufficient, condition for acceptance for publication. It became increasingly difficult for a single editor to have expertise in all of the above methods. In the late 1960s, editorial decisions on publication shifted from the TAR editor alone to the TAR editor in conjunction with specialized referees and eventually associate editors [Flesher, 1991, p. 167]. Fleming et al. [2000, p. 45] wrote the following:

    The big change was in research methods. Modeling and empirical methods became prominent during 1966-1985, with analytical modeling and general empirical methods leading the way. Although used to a surprising extent, deductive-type methods declined in popularity, especially in the second half of the 1966-1985 period.
     

    I think the emphasis highlighted in red above demonstrates that "Methodological Confusion" reigns supreme in accounting science as well as political science.

    February 22, 2008 reply from James M. Peters [jpeters@NMHU.EDU]

    A couple of years ago, P. Kothari, one of the Editors of JAE and a full professor at MIT, visited the U. of Maryland to present a paper. In my private discussion with him, I asked him to identify what he considered to the settled findings associated with the last 30 years of capital markets research in accounting. I pointed out that somewhere over half of all accounting research since Ball and Brown fit into this category and I was curious as to what the effort had added to Ball and Brown. That is, what conclusions have been drawn that could be considered settled ground so that researchers could move on to other topics. His response, and I quote, was "I understand your point, Jim." He could not identify one issue that researchers had been able to "put to bed" after all that effort.

    Jim Peters
    New Mexico Highlands University

    February 22, 2008 reply from J. S. Gangolly [gangolly@CSC.ALBANY.EDU]

    Jim,

    P. Kothari's response is to be expected. I have had similar responses from at least two ex-editors of TAR; how appropriate a TLA! But who wants to bell the cats (or call off the naked emperors' bluff)? Accounting academia knows which side of the bread is buttered.

    That you needed to flaunt Kothari's resume to legitimise his vacuous response shows the pathetic state of accounting academia.

    If accounting academia is not to be reduced to the laughing stock of accounting practice, we better start listening to the problems that practice faces. How else can we understand what we profess to "research"? We accounting academics have been circling our wagons too long as a ploy to keep our wages arbitrarily high.

    In as much as we are a profession, any academic on such a committee reduces the whole exercise to a farce.

    Jagdish

    September 8, 2009 reply from Amy Dunbar [Amy.Dunbar@BUSINESS.UCONN.EDU]

    Bob Jensen wrote:
    The troubles with multiple regression and discriminant analysis models are those nagging assumptions of linearity, predictor variable independence, homoscedasticity, and independence of error terms. If we move up to non-linear models, the assumption of robustness is a giant leap in faith. And superimposed on all of this is the assumption of stationarity needed to have any confidence in extrapolations from past experience.

    In the end, if gaming is allowed in the future as it has been allowed by bankers and their auditors for decades, putting accountics into the standards is not the answer.

    Sophisticated accountics is just perfume sprayed on the manure pile.

    Amy Dunbar comment/questions: Oh my, what a metaphor. ;-)

    I continue to struggle with the dismissal of econometric analysis (accountics?) as an approach to address accounting issues. Many disciplines use econometric analysis in research, despite the limitations you point out. What research methods do you think are appropriate for studying accounting issues? In my opinion, research requires a disciplined approach that can be replicated, which you argue is crucial. Can one replicate research using the research methods that you favor? Or perhaps I am misunderstanding your points.

    For example, consider the FIN 48 tax disclosures. My coauthors and I have collected data from the tax footnotes of300 companies to determine how firms are handling the FIN 48 21d requirement of forecasting the expected tax reserve change over the next 12 months. We want to know how accurate forecasts are and if the forecast errors result because of the inherent difficulty of providing the forecast or if firms do not want to disclose because they do not want to provide a roadmap for taxing authorities. We use econometric methods to test our hypotheses. How would you address this issue? By the way, the Illinois tax conference in October has a panel session on FIN 48 disclosures, including the forecast requirement, which suggests others are grappling with the informativeness of these disclosures.

    I ordered the book that Paul Williams suggested: The Flight from Reality in the Human Sciences. I hope I will have a better understanding of your position after I read it.

    Amy Dunbar
    UConn

    September 8, 2009 reply from Bob Jensen

    Hi Amy,

    If you really want to understand the problem you’re apparently wanting to study, read about how Warren Buffett changed the whole outlook of a great econometrics/mathematics researcher (Janet Tavkoli). I’ve mentioned this fantastic book before --- Dear Mr. Buffett. What opened her eyes is how Warren Buffet built his vast, vast fortune exploiting the errors of the sophisticated mathematical model builders when valuing derivatives (especially options) where he became the writer of enormous option contracts (hundreds of millions of dollars per contract). Warren Buffet dared to go where mathematical models could not or would not venture when the real world became too complicated to model. Warren reads financial statements better than most anybody else in the world and has a fantastic ability to retain and process what he’s studied. It’s impossible to model his mind.

    I finally grasped what Warren was saying. Warren has such a wide body of knowledge that he does not need to rely on “systems.” . . . Warren’s vast knowledge of corporations and their finances helps him identify derivatives opportunities, too. He only participates in derivatives markets when Wall Street gets it wrong and prices derivatives (with mathematical models) incorrectly. Warren tells everyone that he only does certain derivatives transactions when they are mispriced.

    Wall Street derivatives traders construct trading models with no clear idea of what they are doing. I know investment bank modelers with advanced math and science degrees who have never read the financial statements of the corporate credits they model. This is true of some credit derivatives traders, too.
    Janet Tavakoli, Dear Mr. Buffett, Page 19

    The part of my message that you quoted was in the context of a bad debt estimation message. I don’t think multivariate models in general work well in the context of bad debt estimation because of the restrictive assumptions of the models (except in some industries where bad debt losses are dominated by one or two really good predictor variables). There is an exception in the case of the Altman, Beaver, and Ohlson bankruptcy prediction models, but predicting bankruptcy is in a different ball park than predicting defaults among 10 million rather small accounts receivable.

    As to multivariate models as applied in TAR, JAR, and JAE I’ve no objection since the 1970s after referees became much better at challenging model assumptions (in the 1960s refereeing of econometrics models in accounting literature was often a joke).
    "FANTASYLAND ACCOUNTING RESEARCH: Let's Make Pretend..." by Robert E. Jensen, The Accounting Review, Vol. 54, January 1979, 189-196.

    The problem, as I see it, is that there’s nothing wrong with our econometrics tool bag when applied to problems where the tools fit the problem. The econometrics models (except for nonlinear models) are relatively robust in most papers that do get published these days.

    An Example of Challenges of Multivariate Model Assumptions

    "Is accruals quality a priced risk factor?" by John E. Corea, Wayne R. Guaya, and Rodrigo Verdib, Journal of Accounting and Economics ,Volume 46, Issue 1, September 2008, Pages 2-22



    Abstract
     In a recent and influential empirical paper, Francis, LaFond, Olsson, and Schipper (FLOS) [2005. The market pricing of accruals quality. Journal of Accounting and Economics 39, 295–327] conclude that accruals quality (AQ) is a priced risk factor. We explain that FLOS’ regressions examining a contemporaneous relation between excess returns and factor returns do not test the hypothesis that AQ is a priced risk factor. We conduct appropriate asset-pricing tests for determining whether a potential risk factor explains expected returns, and find no evidence that AQ is a priced risk factor.

    We need to see the above disputes become the rule rather than the exception!
    Francis, LaFond, Olsson, and Schipper vigorously disagree with criticisms of their work such that there are some interesting disputes that on occasion arise in accountics research. For the most part, however, published papers like this are rarely replicated such that errors and frauds go unchallenged in most of the thousands of accountics papers that have been published in the past four decades --- http://www.trinity.edu/rjensen/theory01.htm#Replication

    The Corea, Guaya, and Verdib replication is a very, very, very rare exception. I only wish there were more such disputes over underlying modeling assumptions --- they should be extended to data quality as well.

    Now let me ask about your FIN 48 tax disclosure study. Was there any independent replication to verify that you did not make any significant data collection or modeling analysis errors (you would be the last person in the world that I would suspect of research fraud)? Do we accept your harvest as totally edible without a single taste test by independent replicators?
    http://www.trinity.edu/rjensen/theory01.htm#Replication

    The Bigger Problems

    Accountics models seldom focus on the big problems of the profession, because the econometrics and mathematical analysis tools just are not suited to our systemic accountancy problems (such as the vegetable nutrition problem) --- http://www.trinity.edu/rjensen/FraudConclusion.htm#BadNews

    The editorial problem in TAR, JAR, and JAE is that they commenced in the 1980s to ignore problems that could not be attacked with accountics mathematics and statistical tool bags. This leaves out most problems faced in the accounting profession since practitioners and standard setters seldom (almost never) have copies of TAR, JAR, JAE, and even AH on the table when they are dealing with client issues or standards issues. AH evolved from its original charge to where articles in AH versus TAR are virtually interchangeable. I repeat from a message yesterday:

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

    For a long time, elite accounting researchers could find no “empirical evidence” of widespread earnings management. All they had to do was look up from the computers where their heads were buried.
    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.
    Scott Jascik --- http://www.insidehighered.com/news/2009/09/04/polisci  

    "I understand your point, Jim." He could not identify one issue that (accountics) researchers had been able to "put to bed" after all that effort.
    P. Kothari, one of the Editors of JAE and a full professor at MIT, as quoted by Jim Peters below.

    Do we forecast? You bet. Do we have confidence in our forecasts? Never! Confidence about a non-linear chaotic system can only come in degrees, and even those degrees of confidence are guesses. Not all hope is lost. There are times when it seems our ability to predict is better than others. Thus we need to take advantage of it if we see it. Trading ranges, pivot points, support and resistance, and the like can help, and do help the trader.
    Michael Covel, Trading Black Swans, September 2009 --- http://www.michaelcovel.com/pdfs/swan.pdf

    The following is an excerpt from my 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 

    Most importantly of all in accountics is that the leading accounting research journals for tenure, promotion, and performance evaluation in academe are devoted to accountics paper. Normative methods, case studies, and interviews are rarely used in studies published in such journals. The following is a quotation from “An Analysis of the Evolution of Research Contributions by The Accounting Review (TAR): 1926-2005,” by Jean L. Heck and Robert E. Jensen, Accounting Historians Journal, Volume 34, No. 2, December 2007, Page 121.

    Leading accounting professors lamented TAR’s preference for rigor over relevancy [Zeff, 1978; Lee, 1997; and Williams, 1985 and 2003]. Sundem [1987] provides revealing information about the changed perceptions of authors, almost entirely from academe, who submitted manuscripts for review between June 1982 and May 1986. Among the 1,148 submissions, only 39 used archival (history) methods; 34 of those submissions were rejected. Another 34 submissions used survey methods; 33 of those were rejected. And 100 submissions used traditional normative (deductive) methods with 85 of those being rejected. Except for a small set of 28 manuscripts classified as using “other” methods (mainly descriptive empirical according to Sundem), the remaining larger subset of submitted manuscripts used methods that Sundem [1987, p. 199] classified these as follows:

    292          General Empirical

    172          Behavioral

    135          Analytical modeling

    119          Capital Market

      97          Economic modeling

      40          Statistical modeling

      29          Simulation

     

    It is clear that by 1982, accounting researchers realized that having mathematical or statistical analysis in TAR submissions made accountics virtually a necessary, albeit not sufficient, condition for acceptance for publication. It became increasingly difficult for a single editor to have expertise in all of the above methods. In the late 1960s, editorial decisions on publication shifted from the TAR editor alone to the TAR editor in conjunction with specialized referees and eventually associate editors [Flesher, 1991, p. 167]. Fleming et al. [2000, p. 45] wrote the following:

    The big change was in research methods. Modeling and empirical methods became prominent during 1966-1985, with analytical modeling and general empirical methods leading the way. Although used to a surprising extent, deductive-type methods declined in popularity, especially in the second half of the 1966-1985 period.
     

    I think the emphasis highlighted in red above demonstrates that "Methodological Confusion" reigns supreme in accounting science as well as political science.

    February 22, 2008 reply from James M. Peters [jpeters@NMHU.EDU]

    A couple of years ago, P. Kothari, one of the Editors of JAE and a full professor at MIT, visited the U. of Maryland to present a paper. In my private discussion with him, I asked him to identify what he considered to the settled findings associated with the last 30 years of capital markets research in accounting. I pointed out that somewhere over half of all accounting research since Ball and Brown fit into this category and I was curious as to what the effort had added to Ball and Brown. That is, what conclusions have been drawn that could be considered settled ground so that researchers could move on to other topics. His response, and I quote, was "I understand your point, Jim." He could not identify one issue that researchers had been able to "put to bed" after all that effort.

    Jim Peters
    New Mexico Highlands University

    February 22, 2008 reply from J. S. Gangolly [gangolly@CSC.ALBANY.EDU]

    Jim,

    P. Kothari's response is to be expected. I have had similar responses from at least two ex-editors of TAR; how appropriate a TLA! But who wants to bell the cats (or call off the naked emperors' bluff)? Accounting academia knows which side of the bread is buttered.

    That you needed to flaunt Kothari's resume to legitimise his vacuous response shows the pathetic state of accounting academia.

    If accounting academia is not to be reduced to the laughing stock of accounting practice, we better start listening to the problems that practice faces. How else can we understand what we profess to "research"? We accounting academics have been circling our wagons too long as a ploy to keep our wages arbitrarily high.

    In as much as we are a profession, any academic on such a committee reduces the whole exercise to a farce.

    Jagdish

    September 10, 2009 reply from Bob Jensen

    Hi again Amy,

    Accountics is the mathematical science of values.
    Charles Sprague [1887] as quoted by McMillan [1998, p. 1][NH1] 
     

    The history of the accountics takeover of leading academic accounting research journals around the world as well as the takeover of accountancy doctoral programs in the U.S. and other nations can be found at  http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm  

    The more I read in the book Dear Mr. Buffet by Janet Tavakoli, the more I see a parallel between investment bankers and accountics researchers.

    After almost 20 years working for Wall Street firms in New York and London, I made my living running a Chicago-based consulting business. My clients consider my expertise in product they consume. I had written books on credit derivatives and complex structured finance products, and financial institutions, hedge funds, and sophisticated investors came to identify and solve potential problems.
    Janet Tavokoli, Dear Mr. Buffett (Wiley, 2009, Page 5)
    Jensen Comment
    Before she wrote Dear Mr. Buffett, her technical book on Structural Finance & Collateralized Debt Obligations (Wiley) sat on my desk for constant reference. Janet also runs her own highly successful hedge fund. She won't disclose how big it is, but certain clues make me think it is over $100 million with very wealthy clients. Her professional life changed when she commenced to correspond with what was the richest man in the world in 2008  (before he gave much of his wealth to the Gates Charitable Foundation). He's also one of the nicest and most transparent and most humble men in the world.
    Warren Buffett --- http://en.wikipedia.org/wiki/Warren_Buffett

    Warren Buffett disproved the theory of efficient markets that states that prices reflect all known information. His shareholder letters, readily available (free) through Berkshire Hathaway's Web site, told investors everything they needed to know about mortgage loan fraud, mospriced credit derivatives, and overpriced securitizations, yet this information hid in plain "site."
    Janet Tavokoli, Dear Mr. Buffett (Wiley, 2009, Page 7)
    Jensen Comment
    Berkshire Hathaway --- http://en.wikipedia.org/wiki/Berkshire_Hathaway
    Jensen Comment
    This of course does not mean that on occasion Warren is not fallible. Sometimes he does not heed his own advice, and rare occasions he loses billions. But a billion or two to Warren Buffett is pocket change.

    I finally grasped what Warren was saying. Warren has such a wide body of knowledge that he does not need to rely on “systems.” . . . Warren’s vast knowledge of corporations and their finances helps him identify derivatives opportunities, too. He only participates in derivatives markets when Wall Street gets it wrong and prices derivatives (with mathematical models) incorrectly. Warren tells everyone that he only does certain derivatives transactions when they are mispriced.
    Janet Tavokoli, Dear Mr. Buffett (Wiley, 2009, Page 19)

    Why investment bankers are like many accoutics professors
    Wall Street derivatives traders construct trading models with no clear idea of what they are doing. I know investment bank modelers
    with advanced math and science degrees who have never read the financial statements of the corporate credits they model. This is true of some credit derivatives traders, too.
    Janet Tavokoli, Dear Mr. Buffett (Wiley, 2009, Page 19)
    Jensen Comment
    Especially note the above quotation when I refer to Reviewer A below.

    Warren is aided by the fact that most investment banks use sophisticated Monte Carlo models that misprice the transactions. Some of the models rely on (credit) rating agency inputs, and the rating agencies do a poor job of rating junk debt.
    Janet Tavokoli, Dear Mr. Buffett (Wiley, 2009, Page 21)

    Investment banks could put on the same trades if they did fundamental analysis of the underlying companies, but they are too busy playing with correlation models.
    Janet Tavokoli, Dear Mr. Buffett (Wiley, 2009, Page 24)

    Warren has another advantage:  Wall Street underestimates him. I mentioned that Warren Buffett and I have similar views on credit derivatives . . . My former colleague, a Wall Street structured products "correlation" trader, wrinkled his nose and sniffed:  "That old guy? He hates derivatives."
    Janet Tavokoli, Dear Mr. Buffett (Wiley, 2009, Page 24)

    Warren Buffett writes billions of dollars worth of put options
    When Warren sells a put buyer the right to make him pay a specific price agreed today for the stock index (no matter what the value 20 years from now), Warren receives a premium. Berkshire Hathaway gets to invest that money for 20 years. Warren thinks the buyer, the investment bank, is paying him too much . . . Furthermore, Berkshire Hataway invests the premiums that will in all likelihood cover anything he might need to pay out anything at all, since the stock index is likely to be higher than today's value.
    Janet Tavokoli, Dear Mr. Buffett (Wiley, 2009, Page 24)

     

    My Four Telltale Quotations about accoutics professors
    Although there are no longer any investment banks in the United States since early 2009, how were investment bankers much like accountics researchers? There is of course very little similarity now since investment bankers are standing in unemployment lines and investment banks are out of business --- http://www.trinity.edu/rjensen/2008Bailout.htm#InvestmentBanking

    Accountics professors are still happily in business dancing behind tenure walls and biased journal editors who still cannot see beyond accountics research methodology.

    I provide three quotations below that, I think, pretty well tell the story of why many, certainly not all, accountics professors are pretty much like investment bankers that were superior at mathematics and model building and lousy at accounting and finance fundamentals. You, Amy, will probably recall each of these quotations although they may not have sunk in like they should've sunk in.

    Quotation 1
    Denny Beresford gave a 2005 luncheon speech at the annual meetings of the American Accounting Association. Having been both a former executive partner with E&Y and, for ten years, Chairman of the FASB before becoming an accounting professor at the University of Georgia, Denny has lived all sides of accounting --- practice, standard setting, and academe. In his speech Denny very politely suggested that accountics professors should take and interest in and learn a bit more about, gasp, accounting.

    After he gave his speech, Denny submitted his speech for publication to Accounting Horizons. Referee A flatly rejected the Denny's submission for the following reasons:

    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?
    Referee A's rejection letter, Accounting Horizons, 2005

    What riled me the most was the arrogance of Referee A. I read into it that, whereas mathematicians and econometricians are true "scholars," other accounting professors are little better than teachers of bookkeeping and fairy tales. This is the same arrogant attitude held by previous investment bankers trying to take advantage of Warren Buffet as their counterparties in derivatives or other financial transactions.

    Investment bankers and many accountics professors put on superior airs because of their backgrounds in mathematics and science. To hell with knowledge of fundamentals in accounting and finance apart from mathematical models. To hell with reading and analyzing financial statements in great depth. Accountics scholars, at least some of them who referee many submissions to journals, don't waste their time on such mundane things.


    Quotation 2

    My second quotation laments that accounting education programs now often have to pay the highest starting salaries for some graduates of accounting doctoral programs who know very little accounting. Before she moved to Wyoming, Linda Kidwell wrote a revealing message to the AECM listserv.

    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.

    Quotation 3
    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 succumb to a vocational virus and focus on accounting rather than mathematics, econometrics, and/or psychometrics --- http://www.trinity.edu/rjensen/395wpTAR/Web/TAR.htm

    Quotation 4
    One of the very leading accountics professors is employed by the graduate school at Northwestern University. Ron Dye's academic background is in mathematics rather than accounting, and he's written some of the most esoteric accountics research papers ever published in leading accounting research journals.

    Richard Sansing  from Dartmouth, on the AECM, occasionally stresses the importance of a background in mathematics for students seeking fame and fortune as accounting professors. Although I agree with Richard because of the dominance of accountics in the accounting academy over the past four decades, I don't think Richard anticipated the response he got from Ron Dye when he (Richard Sansing) asked Ron Dye to comment about accountics research and about the possible desirability of getting a doctorate in mathematics, econometrics, psychometrics, statistics, etc. before becoming an accounting assistant professor.

    About the question: by and large, I think it is a mistake for someone interested in pursuing an academic career in accounting not to get a phd in accounting. If you look at the "success" stories, there aren't many: most of the people who make a post-phd transition fail. I think that happens for a couple reasons.

    1. I think some of the people that transfer late do it for the money, and aren't really all that interested in accounting. While the $ are nice, it is impossible to think about $ when you are trying to come up with an idea, and anyway, you're unlikely to come up with an idea unless you're really interested in the subject.

    2. I think, almost independent of the field, unless you get involved in the field at an early age, for some reason it becomes very hard to develop good intuition for the area - which is a second reason good problems are often not generated by "crossovers."

    The bigger thing - not related to the question you raise - but maybe you could add to the discussion is that there are, as far as I can tell, not a lot of new ideas being put forth by anyone in accounting nowadays (with the possible exception of John Dickhaut's neuro stuff). In most fields, the youngsters are supposed to come up with the new problems, techniques, etc., but I see a lot more mimicry than innovation among newly minted phds now.

    Anyway, for what it's worth....
    Ron Dye, Northwestern University

    I think Ron Dye is being extremely blunt and extremely honest. What really strikes me is that four decades of accountics research as pretty much evolved into sterile research where "not a lot of new ideas are being put forth" by accountics professors.

    What the big problem is with accountics research is that it is too restrictive as to what problems are taken on by accountics researchers, what papers are written for submission to the leading academic accounting research journals, and the high level of mathematics required for admission/progression in an accountancy doctoral program.

    What a boring time it is in accountics research where virtually nothing comes out that is deemed worth replicating and verifying.

    Accountics researchers, however, should thank the heavens that they did not become, like those "correlation investment bankers,"  counterparties in derivatives with Warren Buffet. It's far better to be among the highest paid professors in a university while dancing behind the protective walls of tenure.

    I will probably send out a lot more tidbits from my hero Janet Tavaloli (she became more of a hero after she delved into the mind of Warren Buffett).

    Bob Jensen

    September 10, 2009 reply from Bob Jensen

    Hi Pat,

    Gary Sundem, while editor of TAR and while AAA President, made a major point of saying that the accounting profession should not look to empirical research for "new theories."

    The following is a quote from the 1993 President’s Message of Gary Sundem, President’s Message. Accounting Education News 21 (3). 3.
     

    Although empirical scientific method has made many positive contributions to accounting research, it is not the method that is likely to generate new theories, though it will be useful in testing them. For example, Einstein’s theories were not developed empirically, but they relied on understanding the empirical evidence and they were tested empirically. Both the development and testing of theories should be recognized as acceptable accounting research.

    If we ever had an accounting Einstein in the past four decades, that accounting Einstein probably could’ve never published in TAR, JAR, JAE, CAR, or even AH (in later years). Hence, we do not look to these “leading” research journals of the accounting academy for the development of new theories that perhaps cannot be immediately tested.

    When I was Program Director for an AAA annual meeting in NYC, I arranged for Joel Demski to be on a plenary session (actually a debate with Bob Kaplan). Among other things I asked Joel to identify at least one seminal and creative idea from the academy of accountics researchers that impacted on the practitioner world. In his speech, Joel suggested Dollar-Value Lifo. Later I inspired accounting historian Dale Flesher investigate the origins of Dollar-Value Lifo.

     

    -----Original Message----- 
    From: Dale Flesher University of Mississippi [mailto:actonya@HOTMAIL.COM]  
    Sent: Friday, January 25, 2002 1:35 PM 
    To: AECM@LISTSERV.LOYOLA.EDU 
    Subject: Re: The Only Invention of Academic Accountants

    Contrary to a recent statement in this forum, Dollar-Value Lifo (DVL) was not developed by a professor. The father of DVL was Herbert T. McAnly, who retired in 1964 as a partner at Ernst & Ernst after 44 years with the firm. Throughout his career, McAnly was known as "Mr. LIFO."

    Although he did not develop LIFO, which had been around for decades in the form of the base-stock method, he did develop DVL after the Internal Revenue began accepting LIFO from all types of companies. The Treasury would probably never have agreed to allow all companies to use LIFO (in 1939) had they been able to prognosticate McAnly's idea. He first described the concept in an address delivered at the Accounting Clinic and the Central States Accounting Conference in Chicago in May 1941. His concept was finally accepted by the IRS following the Hutzler Brothers Co. case in 1947 (8 TC 14 (1947)). He later worked with the Treasury Department trying to get more practical regulations relating to LIFO.

    Dale L. Flesher 
    Professor of Accountancy University of Mississippi

    I repeat a few quotations below:

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

     

    If we ever had an accounting Einstein in the past four decades, that accounting Einstein probably could’ve never published in TAR, JAR, JAE, CAR, or even AH (in later years). Hence, we do not look to these “leading” research journals of the accounting academy for the development of new theories that perhaps cannot be immediately tested.
    Bob Jensen

     

    “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.
    Scott Jascik --- http://www.insidehighered.com/news/2009/09/04/polisci  

     

    "I understand your point, Jim." He could not identify one issue that (accountics) researchers had been able to "put to bed" after all that effort.
    P. Kothari, one of the Editors of JAE and a full professor at MIT, as quoted by Jim Peters in an AECM message.

     Bob Jensen

     

    September 9, 2009 reply from Paul Williams [Paul_Williams@NCSU.EDU]

    Amy,
    Why don't you ask the protagonists what they are doing and why? Anthropolotgists and sociologists do it all the time. At the AAA meeting in NYC I used an analogy that Sylvia Earle provided at an Emerging Issues Forum here at NC State a number of years ago. She is an oceanographer who holds all the records for time and depth spent under water by a woman. She described her discipline before and after the invention of SCUBA and other forms (bathosphere) of deep diving technology. Before the ability to immerse in the ocean environment she likened her research to being in a balloon over NYC throwing a basket through the clouds and dragging it along the streets.

    From the bits and pieces (much of which was simply the detritus of life in the city) you had to infer what life was actually like in a place you couldn't see. What underwater breathing technology did for her field was absolutely revolutionary because, as she said, you could actually be in the life of the sea. Obviously what we thought was the case from the bits of stuff retrieved turned out to be woefully inadequate for developing a rich understanding of oceanic life.

    Accountics research is still little more than throwing a basket over the side. It is observing at a distance the detritus (bits of accounting data that float to the surface in the form of public archives) and inferring what must be happening. This is further limited by the invariable assumption that whatever is happening must be economic! Little wonder we have made so little progress.

    Ackerloff and Shiller (Animal Spirits) provide an interesting, two dimensional matrix for understanding human behavior (they are still economists, but at least Shiller's wife is a social psychologist who has had a very positive influence on his thinking): One dimension is Motives -- economic and non-economic (people are likely more non-economic than economic) and Responses -- rational and irrational. Of the four boxes, accountics research has confined itself to just one: motives must be economic and responses must be rational. Seventy five percent of the terrain of human social behavior is completely ignored.

    Added to Bob's shortcomings to accountics research I would add one more. Sue Ravenscroft and I have a working paper trying to sort out the inadequacies of "decsion usefulness" as both a policy criterion and a research objective. One problem with accounting research is that the accountics approach privileges exclusively algorithmic knowledge -- behavior that can be modeled (so Wayne Gretzky's famous observation, "I skate to where the puck is going to be" is beyond understanding). Much of this research utilizes accounting data as a principal source of measurement. The problem is that though accountants produce numbers, they don't produce Quantities, which is essential for performing mathematical operations.

    Brian West discusses this extensively in his Notable Contribution Award winner Professionalism and Accounting Rules. To perform even the simplest arithmetic operation of addition the numbers you add must represent quantities of a like type. I can add a coffee cup to a Volkswagon and claim I have two, but two of what?

    Accounting numbers are what Gillies describes as operational numbers, i.e., numbers obtained by performing operations, analogous to grading an exam. As West points out financial statements today consist of numbers developed by performing operations that require cost, unamortized cost, lower-of-cost or market (with floor and ceiling rules), exit market values, present values, and, now, "fair" value. When you add all of these up what do you have? Good question. You have a number, but you most certainly do not have a quantity. So when an accountics researcher develops a 20 variable regression model where the dependent variable and at least half of the independent variables are the operational numbers produced by accountants (numbers, not quantities), what could the results possibly MEAN.

     It is a false precision of the most egregious kind (GIGO?). In your study you will use operational numbers and assert this is what my measures mean, but you have no way of knowing if this describes the actual context in which the decisions were actually made (you are looking at the stuff from the basket). What it means to you isn't necessarily what it meant to the actual people who made these decisions.

    My issue with so much accountics research is that it means what the researcher chooses to have it mean; the researcher assigns the meaning, but to understand what is going on with human beings it is important to know what their behavior means to them.

    And in accountics research this remains a mystery. A couple of other books (once you finish Shapiro"s) are by Bent Flyvbjerg: Rationality and Power and Making Social Science Matter. In the latter he discusses the work of Dreyfus and Dreyfus on what they call "a-rational" behavior (what Gretzsky is doing when he skates to where the puck is going to be). See also Gerd Gigerenzer, Gut Feelings: The Intelligence of the Unconscious..

    September 9, 2009 reply from Jagdish Gangolly [gangolly@GMAIL.COM]
     

  • 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/

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

    Some highlights:

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

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

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

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

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

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

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

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

    Also see
    "In Plato's Cave:  Mathematical models are a powerful way of predicting financial markets. But they are fallible" The Economist, January 24, 2009, pp. 10-14 --- http://www.trinity.edu/rjensen/2008Bailout.htm#Bailout

    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

  • You Rent It, You Own It (at least while you're renting it)
    Not surprisingly, such companies are not overly enthusiastic about the preliminary leanings of FASB and the International Accounting Standards Board toward overhauling FAS 13. The rule update could, by some predictions, move hundreds of billions of dollars in assets and obligations onto their balance sheets. Many of them are hoping they can at least convince the standard-setters that the rule doesn't have to encompass all leases. 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.
    Sarah Johnson, "Companies: New Lease Rule Means Labor Pains," CFO.com, July 21, 2009 --- http://www.cfo.com/article.cfm/14072875/c_2984368/?f=archives

    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:


     


    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… 

    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:

    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.

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


    September 11, 2009 message from David Albrecht [albrecht@PROFALBRECHT.COM]

    I usually agree with most every word that Floyd Norris, business correspondent at-large for the New York Times and the International Herald Tribune.

    If I understand him correctly, he says that the crash is accounting's fault because the accounting world didn't have better rules.

    In a short concluding paragraph, Norris states some downside if the SEC does not adopt IFRS.  This is pretty significant, as Floyd Norris is widely read and carries influence in Washington.  IFRS proponents have a significant ally if Floyd Norris is on board.

    First Kroeker, then Norris?  IFRS in the U.S. might be getting pretty close.

    David Albrecht

    "Accountants Misled Us Into Crisis," by FLOYD NORRIS, The New York Times, September 11, 2009 ---
    http://www.nytimes.com/2009/09/11/business/economy/11norris.html?_r=1

    The accountants let us down.

    That is one of the clear lessons of the financial crisis that drove the world into a dee
    p recession. We now know the major banks were hiding dubious assets off their balance sheets and stretching rules if not breaking them. We know that their capital was woefully inadequate for the risks they were taking.

    Efforts are now being made to improve the rules, with some success. But banks have persuaded politicians on both sides of the Atlantic that the real problem came not when their financial inadequacies were obscured by bad accounting, but when they were revealed as the losses mounted.

    “There were important aspects of our entire financial system that were operating like a Wild West show, huge unregulated opaque markets,” said the man whose job was to write the accounting rules, Robert H. Herz, the chairman of the
    Financial Accounting Standards Board.

    “The crisis highlighted how important better transparency around that system is,” Mr. Herz added in an interview this week. “I would hope that would be a major lesson learned or relearned.”

    Unfortunately, some seem to have learned exactly the opposite lesson. Accounting rule makers at FASB and its international equivalent, the International Accounting Standards Board, have been lambasted for efforts to improve transparency by forcing banks to disclose what their dodgy assets are actually worth, as opposed to what the banks think they should be worth.

    Both boards have tried to resist, but have been forced by political pressure to back down on some specifics. In the case of FASB, the retreat took a few weeks after Mr. Herz was ordered to act at an extraordinary Congressional hearing. The international board was given a long weekend to retreat, with the
    European Commission threatening to impose its own rules if the board did not cave in. Both boards tried to reduce the damage by forcing more disclosures, but it is unclear how much good that will do. Neither was willing to defy the politicians.

    It is unfortunate that there are significant differences between the American and international rules on how to determine fair values of financial assets. That has enabled banks on both sides of the Atlantic to demand that they get the best of both worlds. Pleas for a level playing field have resonated in Washington and Brussels.

    The banks have argued that market values can be misleading, and that their own estimates of the eventual cash flow from assets are more realistic than what they ­ or others ­ will now pay for those assets. The rules already allowed them to ignore so called “distress sales” in assessing fair value, but the banks pushed to broaden that exemption in the United States, while in Europe they got the regulators to allow them to retroactively stop calculating market value for assets they said they did not intend to sell.

    Behind the scenes, there is a battle pitting securities regulators ­ who instinctively favor disclosure ­ against banking regulators, who fear there are times when disclosure could make a bad situation worse.

    The securities regulators argue that accounting should do its best to report the actual financial condition of a company. If the banking regulators want to allow banks to use different rules in calculating capital ­ rules that would not require marking down assets, for example ­ then they can do so without depriving investors of important information.

    But that information could scare those investors, and set off the kind of panic that brought down
    Lehman Brothers a year ago.

    It is the job of banking regulators to keep their institutions healthy, and that effort can only be helped by accounting that reveals problems early. But if the banks do get into trouble, some regulators would prefer to maintain the appearance of prosperity while efforts are made to fix the problems quietly.

    It can be argued that approach worked nearly 20 years ago, when some banks were allowed to pretend they were solvent after the Latin American debt crisis, and were able to earn their way out of the problem over the ensuing decade.

    Had a different course been chosen in the early 1990s, Citibank might have vanished. Given what has happened to Citi in this crisis, it is not clear if that would have been a good or bad outcome.

    The accounting rules on financial assets were, and are, a confusing mess, with the same loan getting very different accounting based on whether or not it had been packaged as part of a security. In some cases, banks could not take loan losses as early as they should have, even if they wished to do so. As financial complexity increased, rule makers struggled to keep up, and were not always successful.

    // huge snip//

    The fights over bank accounting are taking place against the backdrop of the S.E.C. trying to decide whether and when to move the United States to international accounting standards, and as the two boards seek to converge on one set of accounting rules.

    Mr. Ciesielski fears convergence could lead to acceptance of the weakest standards for banks. But without convergence, the S.E.C. will have no standing to oversee application of international standards, or to act as a counterweight if European politicians try to order even weaker standards to protect their banks.

    Floyd Norris comments on finance and economics in his blog at nytimes.com/norris

    September 11, 2009 reply from Bob Jensen

    Hi David,

    It seems to me that we have two issues here that are being confounded in a confusing manner.

    Issue 1
    When auditors should insist on FAS 157 Level 1 (fair value adjustments of poisonous loan portfolios) or allow Level 3 (essentially historical cost in the name of a discounted cash flow model) on the grounds that the Level 1 and Level 2 requisite markets are broken. In FSP 157-4 the FASB essentially opened to floodgates to Level 3 by simply stating to auditing firms that:  “Hey, Level 3 is O.K. with us as long as you think the markets are broken.” The issue thus reduces to auditor judgment regarding if and when markets are seriously broken.

    Issue 2
    If banks adopt Level 3 and essentially revert to historical cost balance sheet reporting of loan portfolios that most likely are laced with poison, the real issue reduces to the age-old problem we’ve had with banks throughout the history of historical cost accounting. The fact of the matter is that when loan portfolios have likely increases in future collection losses, banks fight tooth and nail to under-report estimated bad debt loss reserves. Norris appropriately reminds us of the notorious underestimation of the really sick Latin American receivables held by big U.S. banks in the 1980s and how these banks arm twisted their auditors to underestimate bad debt losses on those international loan portfolios.

    It seems to me that the net result could be the same in either way as shown below where the estimated loan loss is $400,000 on a $1 million portfolio (historical cost book value).

    FAS 157 Level 1
    Unrealized fair value loss on loan portfolio           400,000
         Loan portfolio                                                                                400,000

    FAS 157 Level 3
    Estimated bad debt expense on loan portfolio      400,000
         Allowance for doubtful accounts on loan portfolio                           400,000

    If the Allowance for doubtful accounts is a contra account, the net balance in the balance sheet should be roughly the same if the degradation in the loan value is only due to estimated bad debts. Changes in interest rates can complicate this illustration.

    But the banks don’t want either entry to be made when there is serious poison in the loan portfolio.

    What the banks really want is a green light to hide suspected poison in loan portfolios, and they’re willing to take it to the EU in Europe and Washington DC in the U.S. We’ve already seen how thousands of banks forced the EU to carve out portions of IAS 39 compliance because they did not want to adjust all derivatives to fair value.

    Thus we have a power struggle over the authority and independence of the IASB and the FASB to set accounting standards in the face of industries that are willing to take their lobbying efforts to higher authorities. Fortunately, EU legislation and acts of the U.S. Congress are difficult to engineer. A huge effort to override FAS 123R was mounted by technology firms, but even enormous companies like Intel and Cisco found that legislating accounting standard overrides is no piece of cake. In the case of FAS 123R, the override effort failed and Intel and Cisco had to learn to live with expensing of employee stock options when the options vest.

    By the way, Janet Tavakoli in the book Dear Mr. Buffet has a very interesting chapter (The Prairie Princes versus Princes of Darkness) devoted to the evolution of FAS 123R and options backdating scandals. What I did not know is that Milton Friedman, Harry Markowitz, George Shultz, Paul O’Neil, Art Laffer, and Holman Jenkins were Princes of Darkness whereas there was a FAS 123R Prince of the Prairie named Warren Buffett.

    The political problem is different with banks, as opposed to most other corporations, since banks, like lawyers, seem to have exceptional insider-fighting powers when it comes to legislatures and members of parliament.

     Bob Jensen

     


    Financial WMDs (Credit Derivatives) on Sixty Minutes (CBS) on August 30, 2009 ---
    http://www.cbsnews.com/video/watch/?id=5274961n&tag=contentBody;housing
    I downloaded the video (5,631 Mbs) to http://www.cs.trinity.edu/~rjensen/temp/FinancialWMDs.rv 

    Steve Kroft examines the complicated financial instruments known as credit default swaps and the central role they are playing in the unfolding economic crisis. The interview features my hero Frank Partnoy. I don't know of anybody who knows derivative securities contracts and frauds better than Frank Partnoy, who once sold these derivatives in bucket shops. You can find links to Partnoy's books and many, many quotations at http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds

    For years I've used the term "bucket shop" in financial securities marketing without realizing that the first bucket shops in the early 20th Century were bought and sold only gambles on stock pricing moves, not the selling of any financial securities. The analogy of a bucket shop would be a room full of bookies selling bets on NFL playoff games.
    See "Bucket Shop" at http://en.wikipedia.org/wiki/Bucket_shop_(stock_market)

    I was not aware how fraudulent the credit derivatives markets had become. I always viewed credit derivatives as an unregulated insurance market for credit protection. But in 2007 and 2008 this market turned into a betting operation more like a rolling crap game on Wall Street.

    Of all the corporate bailouts that have taken place over the past year, none has proved more costly or contentious than the rescue of American International Group (AIG). Its reckless bets on subprime mortgages threatened to bring down Wall Street and the world economy last fall until the U.S Treasury and the Federal Reserve stepped in to save it. So far, the huge insurance and financial services conglomerate has been given or promised $180 billion in loans, investments, financial injections and guarantees - a sum greater than the annual cost of the wars in Iraq and Afghanistan."
    "Why AIG Stumbled, And Taxpayers Now Own It," CBS Sixty Minutes, May 17, 2009 ---
    http://www.cbsnews.com/stories/2009/05/15/60minutes/main5016760.shtml?source=RSSattr=HOME_5016760
    Jensen Comment
    To add pain to misery, AIG lied to the media about the extent of bonuses granted after receiving TARP funds.
    Bob Jensen's threads on AIG are at http://www.trinity.edu/rjensen/2008Bailout.htm#Bailout

    Simoleon Sense Reviews Janet Tavakoli’s Dear Mr. Buffett ---
    http://www.simoleonsense.com/simoleon-sense-reviews-janet-tavakolis-dear-mr-buffett/

    What’s The Book (Dear Mr. Buffett) About

    Dear Mr. Buffett, chronicles the agency problems, poor regulations, and participants which led to the current financial crisis. Janet accomplishes this herculean task by capitalizing on her experiences with derivatives, Wall St, and her relationship with Warren Buffett. One wonders how she managed to pack so much material in such few pages!

    Unlike many books which only analyze past events, Dear Mr. Buffett, offers proactive advice for improving financial markets. Janet is clearly very concerned about protecting individual rights, promoting honesty, and enhancing financial integrity. This is exactly the kind of character we should require of our financial leaders.

    Business week once called Janet the Cassandra of Credit Derivatives. Without a doubt Janet should have been listened to. I’m confident that from now on she will be.

    Closing thoughts

    Rather than a complicated book on financial esoterica, Janet has created a simple guide to understanding the current crisis. This book is a must read for all students of finance, economics, and business. If you haven’t read this book, please do so.

    Warning –This book is likely to infuriate you, and that’s a good thing! Janet provides indicting evidence and citizens may be tempted to initiate vigilante like witch trials. Please consult with your doctor before taking this financial medication.

    Continued in article

    September 1, 2009 reply from Rick Lillie [rlillie@CSUSB.EDU]

    Hi Bob,

    I am reading Dear Mr. Buffett, What an Investor Learns 1,269 Miles from Wall Street, by Janet Tavakoli. I am just about finished with the book. I am thinking about giving a copy of the book to students who perform well in my upper-level financial reporting classes.

    I agree with the reviewer’s comments about Tavakoli’s book. Her explanations are clear and concise and do not require expertise in finance or financial derivatives in order to understand what she (or Warren Buffet) says. She explains the underlying problems of the financial meltdown with ease. Tavakoli does not blow you over with “finance BS.” She does in print what Steve Kroft does in the 60 Minutes story.

    Tavakoli delivers a unique perspective throughout the book. She looks through the eyes of Warren Buffett and explains issues as Buffett sees them, while peppering the discussion with her experience and perspective.

    The reviewer is correct. Tavakoli lets the finance world, along with accountants, attorneys, bankers, Congress, and regulators, have it with both barrels!

    Tavakoli’s book is the highlight of my summer reading.

    Best wishes,

    Rick Lillie

    Rick Lillie, MAS, Ed.D., CPA Assistant Professor of Accounting Coordinator - Master of Science in Accountancy (MSA) Program Department of Accounting and Finance College of Business and Public Administration CSU San Bernardino 5500 University Pkwy, JB-547 San Bernardino, CA. 92407-2397

    Telephone Numbers: San Bernardino Campus: (909) 537-5726 Palm Desert Campus: (760) 341-2883, Ext. 78158

    For technical details see the following book:
    Structured Finance and Collateralized Debt Obligations: New Developments in Cash and Synthetic Securitization (Wiley Finance) by Janet M. Tavakoli (2008)

    AIG now says it paid out more than $454 million in bonuses to its employees for work performed in 2008. That is nearly four times more than the company revealed in late March when asked by POLITICO to detail its total bonus payments. At that time, AIG spokesman Nick Ashooh said the firm paid about $120 million in 2008 bonuses to a pool of more than 6,000 employees. The figure Ashooh offered was, in turn, substantially higher than company CEO Edward Liddy claimed days earlier in testimony before a House Financial Services Subcommittee. Asked how much AIG had paid in 2008 bonuses, Liddy responded: “I think it might have been in the range of $9 million.”
    Emon Javers, "AIG bonuses four times higher than reported," Politico, May 5, 2009 --- http://www.politico.com/news/stories/0509/22134.html

    Bob Jensen's Rotten to the Core threads are at http://www.trinity.edu/rjensen/FraudRotten.htm

    Bob Jensen's threads on the current economic crisis are at http://www.trinity.edu/rjensen/2008Bailout.htm
    For credit derivative problems see http://www.trinity.edu/rjensen/2008Bailout.htm#Bailout

    Also see "Credit Derivatives" under the C-Terms at http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm#C-Terms


    FASB Accounting Standards Codification Quick Reference Guide

    View this article in full

    Source: PricewaterhouseCoopers
    Author name: PwC assurance services

    Published: 09/03/2009

    Summary:
    PwC has developed a Quick Reference Guide to help you make the transition to the Codification.

    This user-friendly Guide includes:

    The Quick Reference Guide is only two-pages, making it ideal to print double-sided and keep nearby to help you navigate the Codification.

    View this article in full

     the Codification database has some huge limitations because it contains only a subset of the FASB hard copy material that it ostensibly is replacing.

    So what would've been smart for the FASB at this juncture?
    Since the FASB is taking it as a given that it will virtually be out of business in 2015 (actually it will become a downsized subsidiary of the IASB). The FASB should forget implementation (selling) the FASB Codification database and commence full bore into expanding it into an IASB Codification database. Then it will be ready to roll in 2015 when the IASB standards replace the FASB standards. FASB standards could be left codified as well such that users can easily compare what used to be required by the FASB with what is now (after 2015) required by the IASB.

    More importantly, the FASB should work 24/7 adding implementation guidelines and illustrations into an IASB Codification database to make up for the sad state of international standards in terms of implementation guidelines for complex U.S. financial contracting. Tons of illustrations should also be added to the illustration-lite international standards at the moment.

    But implementing the FASB Codification database for five years or less is dumb, dumb, and dumb!

    "I'm glad I'm not young anymore."

    For the PwC Codification Guide I snipped the URL to
    http://snipurl.com/ifrs-litevsheavy

    The original link is at
    http://www.pwc.com/en_GX/gx/ifrs-reporting/pdf/Sims_diffs_IFRS_SMEs.pdf

    Deloitte’s Codification helpers are linked at
    http://www.iasplus.com/usa/fasb/0906codification.pdf

     

    Bob Jensen's threads on Codification --- http://www.trinity.edu/rjensen/theory01.htm#MethodsForSetting


    "Trust and Data Assurances in Capital Markets: The Role of Technology Solutions," Edited by Dr. Saeed J. Roohani, PwC Research Monograph, 2003 --- http://www.xbrleducation.com/pubs/PWC_Book.pdf 

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


    IFRS SMEs = IFRS Lite for Small and Medium Sized Entities

    Similarities and Differences - A comparison of IFRS for SMEs and 'full IFRS'

    Source: PricewaterhouseCoopers
    Author name: PwC global accounting consulting services

    Published: 09/03/2009

    Summary:
    This PwC publication compares the requirements of the IFRS for small and medium-sized entities with 'full IFRS' issued up to July 2009. It includes an executive summary outlining some key differences that have implications beyond the entity's reporting function and encourages early consideration of what IFRS for SMEs means to the entity.

    This publication is a part of the PricewaterhouseCooper’s ongoing commitment to help companies navigate the switch from local GAAP to IFRS for SMEs. For information on other publications in our series on IFRS for SMEs, see the inside front cover.

    View this article in full ---
    http://www.pwc.com/en_GX/gx/ifrs-reporting/pdf/Sims_diffs_IFRS_SMEs.pdf

    Bob Jensen's threads on IFRS --- http://www.trinity.edu/rjensen/theory01.htm#MethodsForSetting


    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

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


    IFRS Rules versus Netherlands GAAP --- http://www.iasplus.com/dttpubs/0906ifrsnlgaapcomparison.pdf

    In the land of historic fair value theory, some differences between Dutch accounting and IFRS seem a bit surprising. For example, the Dutch still require pooling-of-interests in some circumstances. Also Dutch standards still amortize goodwill on a historical cost basis).

    One of the early contributors to value theory in accounting was Theodore Limperg from Holland.

    The social responsibility of the auditor: A basic theory on the auditor's function  by Theodore Limpberg ((Hard to Find, but no doubt Steve Zeff has a copy. Steve is an expert on accounting in The Netherlands)

    Contributions of Limperg & Schmidt to the Replacement Cost Debate in the 1920s, by Franke L. Clarke (Routledge New Works in Accounting History)

  • From IAS Plus on April 30, 2009 --- http://www.iasplus.com/index.htm
     
    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
  •  

    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 Harris Poll. July 7-10, 2006. N=approx. 500 adults nationwide. MoE ± 4
    "Would you generally trust each of the following types of people to tell the truth, or not? . . ."

    .

     

     

    Would Trust

     

     

     

     

    2006

    2002

    1998

     

     

     

     

    %

    %

    %

     

     

     

    Doctors

    85

    77

    83

     

     

     

    Teachers

    83

    80

    86

     

     

     

    Scientists

    77

    68

    79

     

     

     

    Police officers

    76

    69

    75

     

     

     

    Professors

    75

    75

    77

     

     

     

    Clergymen or priests

    74

    64

    85

     

     

     

    Military officers

    72

    64

    *

     

     

     

    Judges

    70

    65

    79

     

     

     

    Accountants

    68

    55

    *

     

     

     

    The ordinary man or woman

    66

    65

    71

     

     

     

    Civil servants

    62

    65

    70

     

     

     

    Bankers

    62

    51

    *

     

     

     

    The President

    48

    65

    54

     

     

     

    TV newscasters

    44

    46

    44

     

     

     

    Athletes

    43

    *

    *

     

     

     

    Journalists

    39

    39

    43

     

     

     

    Members of Congress

    35

    35

    46

     

     

     

    Pollsters

    34

    44

    55

     

     

     

    Trade union leaders

    30

    30

    37

     

     

     

    Stockbrokers

    29

    23

    *

     

     

     

    Lawyers

    27

    24

    *

     

     

     

    Actors

    26

    *

    *

       

     

    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

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


    September 2, 2009 message from Paul Bjorklund [PaulBjorklund@AOL.COM]

    SEC CHARGES LAS VEGAS-BASED CPA AND HIS ACCOUNTING FIRM WITH FRAUD

    Today, the Securities and Exchange Commission charged a Las Vegas-based CPA and his public accounting firm with securities fraud for issuing false audit reports that failed to comply with Public Company Accounting Oversight Board ("PCAOB") Standards and were often the product of high school graduates hired with little or no education or experience in accounting or auditing. The Commission's lawsuit, filed in federal district court in Las Vegas, Nevada, names Michael J. Moore ("Moore"), CPA, age 55, of Las Vegas, Nevada, and Moore & Associates Chartered ("M&A"), a Nevada corporation headquartered in Las Vegas, Nevada. Moore and M&A have agreed to settle the charges without admitting or denying the allegations.

    According to the SEC's complaint, Moore and M&A issued audit reports for more than 300 clients who consist of primarily shell or developmental stage companies with public stock quoted on the OTCBB or the Pink Sheets. The SEC alleges that Moore and M&A violated numerous auditing standards, including a failure to hire employees with adequate technical training and proficiency. The SEC further alleges that Moore and M&A did not adequately plan and supervise the audits, failed to exercise due professional care, and did not obtain sufficient competent evidence. Despite the audit failures, M&A issued and Moore signed audit reports falsely stating that the audits were conducted in accordance with PCAOB Standards. By issuing and signing these false audit reports, Moore and M&A violated the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder and Regulation S-X Rule 2-02(b)(1).

    The SEC's complaint also alleges that Moore and M&A violated Sections 10A(a)(1) and10A(b)(1) of the Exchange Act by failing to include audit procedures designed to detect and report likely illegal acts. The complaint further alleges that Moore and M&A improperly modified audit documentation in violation of Regulation S-X Rule 2-06.

    To settle the Commission's charges, Moore and M&A consented to the entry of a final judgment permanently enjoining them from future violations of Sections 10(b), 10A(a)(1), and 10A(b)(1) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and Regulation S-X Rules 2-02(b)(1) and 2-06 and ordering them to disgorge $179,750 plus prejudgment interest of $10,151.59. Moore separately agreed to pay a $130,000 penalty. Moore and M&A also consented to the entry of an administrative order that makes findings and suspends them from appearing or practicing before the Commission as an accountant pursuant to Rule 102(e)(3) of the Commission's Rules of Practice.

    http://www.sec.gov/litigation/litreleases/2009/lr21189a.htm

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


    Updated ideas and cases on accrual accounting and estimation ---
    http://www.trinity.edu/rjensen/theory01.htm#AccrualAccounting

    A Very Practical Application of 'Dollar-Value Lifo (Dollar Value Lifo)

    "The IPIC Method Revisited: A Simplified Explanation and Illustration of the Inventory Price Index Computation (IPIC) Method"
    by CPA Valuation Specialist William Brighenti [william_brighenti@yahoo.com]
    http://www.cpa-connecticut.com/IPIC.html

    Like Delphic oracles of antiquity, the Treasury Department has a reputation for issuing statements veiled in ambiguity and incomprehensibility to the uninitiated, keeping tax attorneys and tax accountants—the high priestesses of the tax mysteries—gainfully employed. And its regulation §1.472-8, “Dollar-Value Method of Pricing LIFO Inventories,” was no different when it was first issued, specifically in regard to the use of the inventory price index computation (IPIC) method, wherein the taxpayer computes an inventory price index (IPI) based on the consumer price indexes (CPI) or producer price indexes (PPI) published by the United States Bureau of Labor Statistics (BLS). Therein one previously found esoteric provisions, such as an arbitrary reduction of the inventory price index by 20 percent, the requirement of the 10 percent categories, the use of BLS weights to prioritize the categories, the use of a weighted harmonic mean for computing the inventory price index instead of a weighted arithmetic mean, ad infinitum ad nauseam. Adding to the confusion was the use of terminology imprecisely, if not ambiguously, defined, leaving it to the tax preparer to divine the technical meanings of and distinctions between an inventory item, category, or pool: neither the Code nor the regulations define what constitutes an item [see Wendle Ford Sales, Inc. v. Commissioner, 72 T.C. 447 (1979)]; a category is categorically dismissed as an accounting method, subject to approval after an IRS audit; and a pool is nebulously defined as the inventory of a “natural” business unit.

    Ultimately, public outcry over some of the above-mentioned provisions caused the Treasury Department to issue Treasury Decision 8976 on December 20 2001, simplifying the computation of the IPI under the IPIC method by no longer requiring 10 percent categories and the reduction of the inventory price index by 20 percent, as well as clarifying other provisions of its regulation. In spite of this simplification on the part of the Treasury Department, many companies still struggle over the proper application of the IPIC method. Some of the errors typically made include the improper calculation of the weighted harmonic average, the failure to assign inventory items correctly to BLS categories, the use of a very general, if not incorrect, index for the entire inventory, or the incorrect set up of pools, among others. Because it is such an opportune time to switch to LIFO from other inventory cost flow methods, with commodity prices rising dramatically over the past year, and because the IPIC method is probably the least costly method in terms of recordkeeping to implement for so many companies, perhaps an expliquer of its methodology—highlighting and illustrating its basic computational steps—is warranted at this time.

    According to Federal Regulation § 1.472-8, the IPI computation involves four steps:

    1. Selection of a BLS table and an appropriate month

    2. Assignment of items in a dollar-value pool to BLS categories

    3. Computation of category inflation indexes for selected BLS categories

    4. Computation of the IPI.

    For most “small”, nonpublic companies, determining LIFO pools is not a major problem, since most are within one product line (or related product lines) or consist of one operating business unit: that is, most have one pool. Furthermore, § 1.472-8 allows the company to use multiple pooling; however, multiple pools increase the risk of erosion of LIFO layers, and should be avoided at all cost. Of course, companies having gross receipts less than $5,000,000 on average may use one pool. Likewise, for most small, nonpublic companies, choosing an appropriate month is not difficult. Usually at its year-end, when an inventory count is undertaken, that is often the month of choice.

    Similarly, the selection of a BLS table for manufacturers, processors, wholesalers, jobbers, and distributors is not a difficult choice: Table 6 is ordinarily required (retailers may select BLS price indexes from Table 3).

    And the assignment of inventory items should not be an overtaxing matter, too. According to the regulation, “a taxpayer’s selection of a BLS category for a specific item is a method of accounting.” Given the various categories provided in table 6 for the various commodities, the taxpayer would decompose its inventory items into the provided categories in a logical and systematic manner; however, the implicit constraint is that, once selected, the inventory items should be categorized consistently in the same fashion from year to year.

    The next step in the computation of an IPI for a dollar-value pool—the computation of category inflation indexes for selected BLS categories—is the step that has given small, nonpublic companies the greatest difficulty. There are two methods of implementing the computation: double-extension IPIC method; and link-chain IPIC method. The major difference between the two methods is that the former employs a cumulative index from the first year of LIFO use; while the latter uses an index based on the index of the preceding year. More precisely, under the double-extension method, the category inflation index for a BLS category is the quotient of the BLS price index of the current year divided by that of the base year; whereas, under the link-chain method, the category inflation index for a BLS category is the quotient of the BLS price index of the current year divided by that of the prior year.

    Once a method is selected and the individual inflation indexes of the categories are calculated, then the next step would be to derive the IPI for a dollar-value pool by computing the “weighted harmonic mean” of the category inflation indexes. The regulation provides the following literal formula for its calculation:

    “Sum of Weights/Sum of (Weight/Category Inflation Index).” Although it may

    appear somewhat imposing at first glance:, the calculation of the weighted harmonic mean consists of four steps.

    1. To compute the “Sum of Weights”, after assigning all inventory items to categories, total all dollar values of inventory items by category, and sum all of these dollar values of the categories. The dollar values of each category comprise the “Weights” referred to in the numerator or dividend of the above formula.

    2. Next calculate the category inflation indexes for each category by dividing either the base year’s index (double-extension method) or the prior year’s index (link-chain method) into the current year’s index.

    3. Then divide each category’s total value by its respective category inflation index. The quotient of this division is the “Weight/Category Inflation Index” variable in the denominator of the above formula. Simply add all of these quotients to arrive at the “Sum of (Weight/Category Inflation Index)” value of the denominator.

    4. Now divide the “Sum of Weights” computed in step 1 by the “Sum of (Weight/Category Inflation Index)” computed in step 3 to yield the weighted harmonic mean.

    For the double-extension method, the weighted harmonic mean is also the IPI; however, because the link-chain method uses the prior period’s category inflation indexes and not those of the base year, its weighted harmonic mean needs to be multiplied by the prior year’s IPI in order to reflect the cumulative inflation effect since the inception of LIFO to arrive at the current year’s IPI.

    A simple example may help to illustrate IPI’s computation.
    This example appears at http://www.cpa-connecticut.com/IPIC.html

    Mr. Breghenti's home page is at http://www.cpa-connecticut.com

    Updated ideas and cases on accrual accounting and estimation ---
    http://www.trinity.edu/rjensen/theory01.htm#AccrualAccounting

    Mr. Brehenti also has a page on estimation of the value of employee stock options under FAS 123R rules of booking options when they vest and carrying them at fair value --- http://www.cpa-connecticut.com/sfas123r.html
    For more details and alternatives on valuing stock options go to http://www.trinity.edu/rjensen/theory/sfas123/jensen0


    In 2004 the FASB issued a revision called FAS 123R to the employee stock option standard that caused a huge stir because for the first time employee stock options had to be expensed when they vested rather than when employees exercised the options.
    FAS 123R --- Click Here
    Any future revisions will be in the FASB Codification database.

    This is one of the few standards where industry mounted a serious lobbying effort to have Congress and/or the SEC override the requirement to expense employee stock options when vested. In particular, huge technology firms like Cisco and Intel mounted an expensive lobbying effort. I can only speculate, but I think the lobbying effort might've succeeded had it not been for the timing of media coverage of outrageous and egregious executive compensation scandals ---
    http://www.trinity.edu/rjensen/FraudConclusion.htm#OutrageousCompensation
    It became politically correct in Congress to resist any effort to make executive compensation in corporations less transparent.

    Even though the original industry effort failed to override the FAS 123R requirement to book employee stock options as expenses, pressures continued long after FAS 123R went into effect in 2004. Janet Tavakoli summarizes an effort launched by bit names in academia, government, and industry.

    Warren Buffett's wisdom is often at odds with "famous names" and the nonsense taught by economists in graduate business schools. In August 2006, veture capitalist Kip Hagopian published a commentary in California Management Review, the scholarly journal of the University of California-Berkley Haas School of Business.He stated that expensing employee stock options was improper accou8nting and argued stock prices reflect employee stock options liabilities, implying that shareholders know how to efficiently value those stock options. He got 29 "famous names" to undersign his article. These included Milton Friedman (who would pass away in November) and Harry Markowitz, both former University of Chicago professors and winners of the Nobel Prize in Economics; George P. Schultz and Paul O'Neill, both former U.S. Treasury Secretaries; and Arther Laffer, Holman W. Jenkins Jr., a member of the Wall Street Journal editorial board, and supported this notion in a separate commentary.

    Even iff it were true that shareholders are well equipped to independently value stock options --- and it is not --- the proper place to account for costs is in the accounting statement. Shareholders shouldn't have to make a separate correction for material information that has been omitted from financial statements. The "famous names" should have lobbied for more transparency, or better yet, the abolishment of stock options as a compensation scheme. Instead, these Princes of Darkness advocated opacity.
    Janet Tavakoli, Dear Mr. Buffet (Wiley, 2009, Page 36).

    Jensen Comment
    With all due respects to Janet FAS 123, before FAS 123R, did require companies to disclose the values of employee stock options and gave an option to expense that value on the date of vesting (only one out of the Fortune 500 companies expensed this value). This made it easier for financial statement users to adjust earnings for options expense, but it did make it more difficult for users and analysts. FAS 123R requires that such values be expensed.

    There is considerable theoretical and practical objection to valuing employee stock options on the date of vesting. Most accounting literature suggests using the Black-Scholes model for valuing options. William Brighernti has a practical solution for valuation of stock options using the Black-Scholes model --- http://www.cpa-connecticut.com/sfas123r.html
    William Brighenti [william_brighenti@yahoo.com]
    http://www.cpa-connecticut.com/IPIC.html

    The problem in theory and practice is that the Black-Scholes model that is popular in financial markets for purchased options is not especially well suited for employee stock options where employees tend to have greater fears that option values will tank before expiration dates. It's a little like having to put your salary in suspension and then losing it before you get it back. As a result the lattice model described below may be more approprate.

     

    "How to “Excel” at Options Valuation," by Charles P. Baril, Luis Betancourt, and John W. Briggs, Journal of Accountancy, December 2005 --- http://www.aicpa.org/pubs/jofa/dec2005/baril.htm
    This is one of the best articles for accounting educators on issues of option valuation!

    Research shows that employees value options at a small fraction of their Black-Scholes value, because of the possibility that they will vest underwater. --- http://www.cfo.com/article.cfm/3014835

    "Toting Up Stock Options," by Frederick Rose, Stanford Business, November 2004, pp. 21 --- http://www.gsb.stanford.edu/news/bmag/sbsm0411/feature_stockoptions.shtml 

    How to value stock options in divorce proceedings --- http://www.optionanimation.com/MarlowHowToValueStockOptionsInDivorce.htm

    How the courts value stock options --- http://www.divorcesource.com/research/edj/employee/96oct109.shtml

    Search for the term options at http://www.financeprofessor.com/summaries/shortsummaries/FinanceProfessor_Corporate_Summaries.html

    "Guidance on fair value measurements under FAS 123(R)," IAS Plus, May 8, 2006 ---
    http://www.iasplus.com/index.htm

    Deloitte & Touche (USA) has updated its book of guidance on FASB Statement No. 123(R) Share-Based Payment: A Roadmap to Applying the Fair Value Guidance to Share-Based Payment Awards (PDF 2220k). This second edition reflects all authoritative guidance on FAS 123(R) issued as of 28 April 2006. It includes over 60 new questions and answers, particularly in the areas of earnings per share, income tax accounting, and liability classification. Our interpretations incorporate the views in SEC Staff Accounting Bulletin Topic 14 "Share-Based Payment" (SAB 107), as well as subsequent clarifications of EITF Topic No. D-98 "Classification and Measurement of Redeemable Securities" (dealing with mezzanine equity treatment). The publication contains other resource materials, including a GAAP accounting and disclosure checklist. Note that while FAS 123 is similar to IFRS 2 Share-based Payment, there are some measurement differences that are Described Here.

    Bob Jensen's threads on employee stock options are at http://www.trinity.edu/rjensen/theory/sfas123/jensen01.htm

    Bob Jensen's threads on fair value accounting are at http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#FairValue

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

     


    April 5, 2005 message from Dennis Beresford [dberesfo@TERRY.UGA.EDU]

    The SEC recently released an interesting memo from its Office of Economic Analysis to the Chief Accountant on economic valuation of stock options. It is available at: http://www.sec.gov/interps/account/secoeamemo032905.pdf 

    The memo concludes that valuing employee stock options under new FASB Statement 123R is "not unusual" and is quite similar to valuations done in other areas of accounting and finance. This seems to deflate the arguments of some within the business community who continue to assert that employee stock options are too hard to value. The memo footnotes several academic studies from both accounting and finance scholars in supporting its findings.

    Denny Beresford

    Bob Jensen's threads on employee stock options are at http://www.trinity.edu/rjensen/theory/sfas123/jensen01.htm
    Bob Jensen's threads on valuation are at http://www.trinity.edu/rjensen/roi.htm

     

    Concept of Real Options --- http://www.trinity.edu/rjensen/realopt.htm

    Bob Jensen's threads on FAS 123R ---
    http://www.trinity.edu/rjensen/theory/sfas123/jensen01.htm


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

    Updated ideas and cases on accrual accounting and estimation ---
    http://www.trinity.edu/rjensen/theory01.htm#AccrualAccounting

    Messaging Between Malcom McLelland and Bob Jensen About Bad Debt Estimation

    -----Original Message-----
    From: AECM, Accounting Education using Computers and Multimedia [mailto:AECM@LISTSERV.LOYOLA.EDU] On Behalf Of Mc Lelland, Malcolm J
    Sent: Sunday, August 23, 2009 11:35 PM
    To: AECM@LISTSERV.LOYOLA.EDU
    Subject: Re: Insurers Biggest Write downs May Be Yet to Come

     

    Hi again Bob,

    It is interesting to note that, once we begin to get into any real depth (when discussing things like FAS 5), it seems to become necessary to start talking about accountics.  One gets the idea accountics is useful in both understanding accounting and applying the understanding in the real world.

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

    Ok, but what does it mean to say "each risk pool assumes a uniform probability distribution where mean, median, and mode are identical numbers"?  Also who does the assuming, and how do they know the assumption is correct if we *know* such distributions are non-stationary?

    Let me try to make this concrete using accountics.  I'll represent receivables as A = A1 + A2 + ... + An, and estimated uncollectibles as U = U1 + U2 + ... + Un, for n different customer receivable accounts (so, total net AR = A - U).  For each account i, Ui = Li*Ai where Li is the proportion of the receivable account estimated to be uncollectible.  Now, Li is an accounting random variable with an unknown probability distribution.

    Is it appropriate to assume that Li (for any i = 1, 2, ..., n) is uniformly distributed?  Assume with loss of further generality that Li has only five potential outcomes; 0, .25, .5, .75, 1.  Representing probabilities with p(.), the mean of the Li can be written as ...

    mean(Li) = p(Li=0)*0 + p(Li=.25)*.25 + p(Li=.5)*.5 + p(Li=.75)*.75 + p(Li=1)*1

    If Li is uniformly distributed, then p(Li=0) = ... = p(Li=1) = .2 and ...

    mean(Li) = .2*0 + .2*.25 + .2*.5 + .2*.75 + .2*1 = .50

    Notice: If one thinks about it, any loss proportion between 0 and 1 is possible, so *if Li is uniformly distributed, then the mean loss proportion is (always) .50*.  This suggests, at least to me, that the accounting random variable "(allowance for) uncollectible accounts receivable" cannot be uniformly distributed.

    If not uniformly distributed, how is this accounting random variable distributed and how would an accountant know?

    I'll spare the argument for the time being, but I can similarly show in a clear way that uncollectible receivables are *positively*-skewed random variables.  I can think of economic conditions (like those we're in at present) where uncollectible receivables are fairly highly positively-skewed, in which case mean, median, and mode are all different; perhaps substantially different.

    So ... I ask again: Under FAS 5, what is the accountant's estimation objective; mean, median, mode, or some other quantile?  Should such an accounting standard specify the estimation objective, or simply leave it to accountants' (ad hoc) judgments?

    Cheers,

    Malcomb J. McLelland

    mjmclell@indiana.edu

    Hi Malcomb,

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

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

    In Pool D with n outstanding accounts, we assume that each account has a 1/n probability of going bad in a uniform distribution. We've assumed each account is a random variable with D dollars outstanding. There is error in assuming that each account has D dollars, but Kurtosis error decreases if we more finely partition Pool D into finer partitions than $501-$1000, such as Pools D1, D2, D3, etc. We've also assumed each customer's probability of becoming a bad debt is independent of every other customer, which is probably a source of minor error in large pools. But David Li's formula controversy hangs over our heads --- http://financeprofessorblog.blogspot.com/2009/03/recipe-for-disaster-formula-that-killed.html

    Now if you really want to take out more of the error in this bad debt estimation process of over a million companies, then be my guest. I suggest that you persuade a large company to examine an actual pool of aged accounts over a several years. Then you devise whatever means you like (look at some of the previous Bayesian models for bad debt estimation and the body of literature for alternative models of bad debt estimation). I don't really think I can greatly improve upon what companies use in practice.

    "An Intuitive Explanation of Bayes':  Theorem:  Bayes' Theorem for the curious and bewildered; an excruciatingly gentle introduction," by Eliezer S., Yudkowsky, August 2009 --- http://yudkowsky.net/rational/bayes

    See “Constructing Bayesian Networks to Predict Uncollectible Telecommunications Accounts” --- http://doi.ieeecs.org/portal/web/csdl/doi/10.1109/64.539016

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

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

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

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

    Blast From the Past
    Below is a fantastic book (a true classic) for you to study, Malcomb
    A classic older book in my library  that I still really, really treasure on the topic of bad debt estimation is
    Selecting A Portfolio of Credit Risks by Markov Chains, by R. M. Cyert and G. L. Thompson © 1968
    The University of Chicago Press.
    I was disturbed by the unrealistic assumptions of the Markov chains in their models, but this does not detract from the creative contributions of these great CMU scholars
    .

    The reason companies are advised to know their customers either personally (if possible) or in general (if there are many, many customers) is that the more they know about their customers the more they can adapt their bad debt estimation systems to non-stationarities caused by such things as economic downturn (my WT Grant illustration I gave you previously), regional problems (Hurricane Katrina), pending legislation (Cap and Prayed carbon emissions), etc.

    I don't think I have much more to add to this thread other than if you feel strongly about your contentions then this provides a great opportunity for you to conduct research and write up your own findings. I eagerly look forward to the benefits and costs of what you discover.

    Once again, I cannot stress enough that you start with all the basic theory monographs of Yuji Ijiri that are listed at http://aaahq.org/market/display.cfm?catID=5
    Especially note Studies 10 and 18. Unfortunately Study 10 is no longer listed because it is out of print. It is available, however, in hundreds of libraries. The title is "Theories of Accounting Measurement" as published by the American Accounting Association as SAR #10 in 1975. This is the book Yuji dedicated to his lovely wife Tomo.

    Although I admire the creative thinking of my old mentor, Yuji left much room for more research. My fantasy would be to come back to Yuji’s research base, but I fear my concerns for engineering practicality of accountancy corrupted the purity of my creative thinking.

    At the same time I fear that we no longer have accounting theorists of Yuji's caliber, albeit impractical as they might be. Tom Selling is trying to become one, and I encourage him to truly live out his fantasies. Seriously Tom Selling --- forget cynics like me and go for it!

    Thanks Malcomb
    I enjoyed this thread, but I fear I’ve reached the limit to what I can contribute.

     Bob Jensen

    Updated ideas and cases on accrual accounting and estimation ---
    http://www.trinity.edu/rjensen/theory01.htm#AccrualAccounting


     


    Clarence's Story About Goodwill

    Hi Tom,

    One of my favorite anecdotes about things related to goodwill is the following:

    KPMG’s “Unusual Twist”
    While KPMG's strategy isn't uncommon among corporations with lots of units in different states, the accounting firm offered an unusual twist: Under KPMG's direction, WorldCom treated "foresight of top management" as an intangible asset akin to patents or trademarks.
     
    See  http://www.trinity.edu/rjensen/FraudEnron.htm#WorldcomFraud

     

    Punch Line
    This "foresight of top management" led to a 25-year prison sentence for Worldcom's CEO, five years for the CFO (which in his case was much to lenient) and one year plus a day for the controller (who ended up having to be in prison for only ten months.) Yes all that reported goodwill in the balance sheet of Worldcom was an unusual twist.

    Tom Selling wrote privately to me for more information on the quotation in red below.

    Hi Again Tom,

    I found the original reference

    KPMG’s “Unusual Twist”
    While KPMG's strategy isn't uncommon among corporations with lots of units in different states, the accounting firm offered an unusual twist: Under KPMG's direction, WorldCom treated "foresight of top management" as an intangible asset akin to patents or trademarks.

     

    The potential claims against KPMG represent the most pressing issue for MCI. The report didn't have an exact tally of state taxes that may have been avoided, but some estimates range from $100 million to $350 million. Fourteen states likely will file a claim against the company if they don't reach settlement, said a person familiar with the matter.

     

    "MCI Examiner Criticizes KPMG On Tax Strategy," by Dennis K. Berman, Jonathan Weil, and Shawn Young, The Wall Street Journal, January 27, 2004 --- http://online.wsj.com/article/0,,SB107513063813611621,00.html?mod=technology%5Fmain%5Fwhats%5Fnews 

    The examiner in MCI's Chapter 11 bankruptcy case issued a report critical of a "highly aggressive" tax strategy KPMG LLP recommended to MCI to avoid paying hundreds of millions of dollars in state income taxes, concluding that MCI has grounds to sue KPMG -- its current auditor.

    MCI quickly said the company would not sue KPMG. But officials from the 14 states already exploring how to collect back taxes from MCI could use the report to fuel their claims against the telecom company or the accounting firm. KPMG already is under fire by the U.S. Internal Revenue Service for pushing questionable tax shelters to wealthy individuals.

    In a statement, KPMG said the tax strategy used by MCI is commonly used by other companies and called the examiner's conclusions "simply wrong." MCI, the former WorldCom, still uses the strategy.

    The 542-page document is the final report by Richard Thornburgh, who was appointed by the U.S. Bankruptcy Court to investigate legal claims against former employees and advisers involved in the largest accounting fraud in U.S. history. It reserves special ire for securities firm Salomon Smith Barney, which the report says doled out more than 950,000 shares from 22 initial and secondary public offerings to ex-Chief Executive Bernard Ebbers for a profit of $12.8 million. The shares, the report said, "were intended to and did influence Mr. Ebbers to award" more than $100 million in investment-banking fees to Salomon, a unit of Citigroup Inc. that is now known as Citigroup Global Markets Inc.

    In the 1996 initial public offering of McLeodUSA Inc., Mr. Ebbers received 200,000 shares, the third-largest allocation of any investor and behind only two large mutual-fund companies. Despite claims by Citigroup in congressional hearings that Mr. Ebbers was one of its "best customers," the report said he had scant personal dealings with the firm before the IPO shares were awarded.

    Mr. Thornburgh said MCI has grounds to sue both Citigroup and Mr. Ebbers for damages for breach of fiduciary duty and good faith. The company's former directors bear some responsibility for granting Mr. Ebbers more than $400 million in personal loans, the report said, singling out the former two-person compensation committee. Mr. Thornburgh added that claims are possible against MCI's former auditor, Arthur Andersen LLP, and Scott Sullivan, MCI's former chief financial officer and the alleged mastermind of the accounting fraud. His criminal trial was postponed Monday to April 7 from Feb. 4.

    Reid Weingarten, an attorney for Mr. Ebbers, said, "There is nothing new to these allegations. And it's a lot easier to make allegations in a report than it is to prove them in court." Patrick Dorton, a spokesman for Andersen, said, "The focus should be on MCI management, who defrauded investors and the auditors at every turn." Citigroup spokeswoman Leah Johnson said, "The services that Citigroup provided to WorldCom and its executives were executed in good faith." She added that Citigroup now separates research from investment banking and doesn't allocate IPO shares to executives of public companies, saying Citigroup continues to believe its congressional testimony describing Mr. Ebbers as a "best customer." An attorney for Mr. Sullivan couldn't be reached for comment.

    The potential claims against KPMG represent the most pressing issue for MCI. The report didn't have an exact tally of state taxes that may have been avoided, but some estimates range from $100 million to $350 million. Fourteen states likely will file a claim against the company if they don't reach settlement, said a person familiar with the matter.

    While KPMG's strategy isn't uncommon among corporations with lots of units in different states, the accounting firm offered an unusual twist: Under KPMG's direction, WorldCom treated "foresight of top management" as an intangible asset akin to patents or trademarks. Just as patents might be licensed, WorldCom licensed its management's insights to its units, which then paid royalties to the parent, deducting such payments as normal business expenses on state income-tax returns. This lowered state taxes substantially, as the royalties totaled more than $20 billion between 1998 to 2001. The report says that neither KPMG nor WorldCom could adequately explain to the bankruptcy examiner why "management foresight" should be treated as an intangible asset.

    Continued in the article

    I also still highly, highly, highly recommend the WorldCom fraud video at
    http://www.baylortv.com/streaming/001496/300kbps_str.asx 


    A Sampling of What Lurks at the Bottom of the Goodwill Garbage Heap --- Click Here
     

    By Tom Selling
    Posted: 08 Sep 2009 12:37 AM PDT

    I have already reported stumbling upon a fascinating interview of Clarence Sampson, SEC Chief Accountant for more than a decade starting in the mid-1970s. Of his many tales of peculiar interactions with special interests, this one struck me right in one of my biggest pet peeves:

    "In the process of recording ... [a business combination transaction] ... they discovered, by golly, that in a $300,000,000 acquisition, $100,000,000 of assets they thought they had didn't exist. And so the company tromped in with their auditors and said, the rules say the difference between what we got and what we paid is goodwill. I simply wasn't able to accept the fact that there should be $100,000,000 goodwill on their books, which didn't exist, and we told them to write it off."

    I have explained in a previous post many months ago why I think the process of measuring goodwill and periodically testing it for impairment is a shameful waste of time and money. I would be hard pressed to think of a better example than Clarence's story to back that up. But, I also want to explain why Clarence's story is more than merely an interesting anomaly.

    Goodwill (I despise the term, but will use it here for the sake of clarity and with the understanding that it's meaning as a term of art bears no relation whatsoever to what regular folks think it means) arises from two sources. One source is genuine assets that have been acquired, but for various and sundry good reasons those assets are never separately recognized under GAAP. Even the management that bought those assets probably can't adequately explain to you what those assets actually are in anything but very general and vague terms. Yet, in a business combination, we recognize them all together (and mixing them in with liabilities of a similar ilk as part of the process) as 'goodwill.'

    The second source of goodwill are 'mistakes.' In other words, paying a price to acquire a company greater than its value. Although the amounts of money in Clarence's story are extreme, the fact of the matter is that mistakes happen all the time. There are business school academics who spend virtually their entire careers trying to explain why it is so often the case that an acquiror's stock price goes down after they have proudly announced their plans to acquire another company. During my part-time career as litigation consultant, I can recall at least four cases where acquirors have claimed that assets they purportedly purchased either didn't exist, or those assets were worth less than they were represented to be worth by acquirees. In all of those cases I was involved in, how did a mistake get accounted for? Capitalized as goodwill, of course! No Clarence Sampson or auditor suggested they do otherwise.

    I suppose that one could justify initial capitalization of mistakes as goodwill, because they are impossible to detect at the time a transaction takes place; if they could have been detected, then the purchase price presumably would have been adjusted. But, don't business combination accounting rules give one a full year to adjust the values of assets acquired and liabilities assumed? Sometimes they do, but the rules don't mention that mistakes aren't supposed to go to goodwill; so that's where they go.

    But, won't impairment testing eventually catch the mistakes and chase them out of goodwill? Not usually. If it ever should happen that a mistake pops out as an impairment charge, it's usually years after the mistake has become known to management. The goodwill impairment tests allow companies to aggregate subsidiaries into 'reporting units,' which are usually large enough to allow any mistakes to be offset by goodwill from other acquisitions that have accumulated a successful enough track record over time to protect their own goodwill, plus the goodwill generated by any recent mistakes.

    At least the big mistakes will get caught by the Chief Accountant, right? Ironically, I doubt whether the current chief accountant or his predecessor would have the gumption Clarence did to stand up to a registrant and its auditor like that. Unlike Clarence, who spent decades coming up through the ranks of the SEC, these guys spent their distinguished careers chest bumping their fellow Big Four partners. When an erstwhile comrade-in-arms "tromps" into the SEC as his client's Doberman Pincer, will he be welcome with the secret Big Four handshake? But to be fair, today's SEC staff may not have the technical ammunition Clarence did; the FASB's sausage factory has created a new line of business combinations rules; their literal application has come to be the generally accepted method for leveling the M&A playing field…

    … as opposed to Clarence Sampson's application of common sense principles:

    "And that's the kind of thing that the Commission can say - look that's just too far; you can't look at the written words and try to apply them to a situation where it just doesn't make sense. And as a matter of fact there's some language, and I'll bet you can tell me where it is, which says if it doesn't make sense, you can't do it."

    Those "written words" (principles-based rules?) Clarence couldn't specifically recall are still in the cupboard (see Exchange Act Rule 12b-20, and AICPA Ethics Rule 203-1), but they haven't been taken off the shelf in a real long time.

    Anyway, I hope you enjoyed Clarence's story as much as I did.

    Tom Selling


    Bright Lines Versus Principles-Based Rules

    Pat Walters and I have a friendly debate running over bright lines (FASBs) versus principles-based rules (IFRS) in accountancy. I'm a bright lines guy who favors 20 mph signs in front of the schools and the historic 3% SPE outside equity bright line that was the smoking gun that brought down Andersen and Enron. I don't know how Pat feels about speed limit signs, but I suspect she worries that these bright lines might encourage us old folks to press the pedal to 20 mph when we can only safely drive in a school zone at 5 mph.

    Be that as it may, Daniel Henninger has a new WSJ article that seems to take my side in this debate. What's interesting is that new technology sometimes favors rules. Serena Williams will pass on knowing that she indeed had a foot fault in the 2009 U.S. Open women's semifinal, because new technology records bright line violations that are virtually impossible to dispute. The feuding Jimmy Connors and John McEnroe will pass on never knowing for certain who was right and who was wrong in most of their disputed calls.

    If there was no bright line for a foot fault, then Serena Williams would not have to concede that she was wrong. In principle she may have been totally fair in her serve. And Enron and Andersen might still be thriving. And Franklin Raines might still be managing the earnings levels and his bonus amounts at Fannie Mae --- http://www.trinity.edu/rjensen/theory01.htm#Manipulation

    "If Sports Ruled the World:  While we all know what the rules are in sports, no one knows anymore what the rules are in real life," by Daniel Heninger, The Wall Street Journal, September 17, 2009 ---
    http://online.wsj.com/article/SB10001424052970204518504574416774102132370.html

    'Those two f-words," said Mary Carillo amid the eruption of Mount Serena in the U.S. Open women's semifinal, "apparently led to some more." The vocabulary Mary Carillo had in mind were not the f-words of common usage but simply, "foot fault."

    What happened next is the civilized world divided between those who believe that rules still matter and those who think rules exist to be bent. Rules won.

    But we are ahead of ourselves. Safely assuming not everyone shares a fanaticism that requires watching two weeks of tennis into the wee hours each summer, we need to set the scene for what is one of the most infamous moments in tennis history.

    Outplayed by Kim Clijsters, a tennis hobbyist from Belgium, incumbent Open champion Serena Williams was serving on the precipice of a humiliating defeat when an odd sound emerged from the sideline. It was the sound of a lines woman yelling "foot fault." Point to Clijsters.

    Whereupon, Serena snapped. Walking over to what must be the world's smallest lines woman, Serena loudly related her willingness to place the tennis ball inside the woman's throat, modifying both "ball" and "throat" with the world's most famous ing word.

    In the days since, sports aficionados have debated the propriety not only of Serena's language but the lines woman's calling a foot fault within a whisper of match point. In most championships, with one of the competitors at death's door, the rule of thumb is "let them play."

    Setting that aside, the real problem for tournament referee Brian Earley was that Bad Serena had committed what tennis primly calls a "code violation." If Mr. Earley called the code violation with Ms. Clijsters one-point from victory, Serena was done. He called it.

    This is why we watch sports. Not just to see the thrill of victory and the agony of defeat, but because it is the one world left with clear rules abided by all. Compared to sports, real life has become constant chaos. (Some esthetes would chime in that this is why they listen to classical music. Structure rules.)

    Should the lines woman have called that foot fault? Let a thousand water-cooler debates begin. What remains is that whatever one's sport, you know what the game is going in, and that includes the final moments of any championship, when a season can be lost on a fatal infraction.

    A pitcher balks (don't ask) with the bases loaded in baseball, and a free run trots to home plate. Body movement along a football line before the snap can make it first and goal. Hit a golf ball off a building and behind a tree (Phil Mickelson, Winged Foot's 18th hole, the 2006 Open) and the gods of sanity will abandon you. A basketball player who taps a three-point shotmaker on the wrist may, with fouls, cost his team six points. The Austrian novelist Peter Handke reduced the fine line separating freedom from foul to a novel's title: "The Goalie's Anxiety at the Penalty Kick."

    While we all know what the rules are in the sports, no one knows anymore what the rules are in real life. Not in politics, law, the bureaucracies, commerce, finance or Federal Reserve policy.

    My favorite story from rule-free politics was the time in 1987 when House Speaker Jim Wright got around a rule that a defeated vote couldn't be redone for 24 hours. Mr. Wright adjourned the House, brought it back to order in minutes, and called it a "new" legislative day. The House clerk even said that Oct. 29 had suddenly become Oct. 30.

    Boston lawyer Harvey Silverglate argues in a forthcoming book, "Three Felonies a Day," that federal law has become such a morass that people in business routinely violate statutes without a clue. Modern law lacks what sports provides lucidity.

    Attorney General Eric Holder's decision to let a prosecutor investigate CIA interrogations that were ruled inbounds years ago is like a baseball commissioner reversing a hotly disputed World Series home run. Fans everywhere would burn down the stadium.

    Which brings us to the Supreme Court. At this turn in history, the battle lines there are drawn between Scalian originalism and Obamian "empathy." In between stands Referee Anthony Kennedy, who gives the ball to whichever team plays by his rules. The f-numbers 5-4 define the chaos of our era.

    The war over the Court may run for a century. It must mean something, though, that in the primal world of sports we are all strict constructionists, even as we agree that a discreet judge would have given Serena's foot fault a pass.

    From this we may conclude that the utopia most people want is a rules-based life, with wiggle room.

    Jensen Comment
    Of course it's never possible or practical to have a bright line for every rule. Umpires must subjectively decide in each specific situation what constitutes "unnecessary roughness," "unsportsman like conduct," "pass interference," "interference with a base runner," "goal tending," etc. But when bright lines can take away the subjectivity to the satisfaction of both sides playing the game, then I'm all for taking subjectivity out of the equation.

    Bob Jensen's threads on rules-based versus principles-based accounting standards are at buried in the dialog at
    http://www.trinity.edu/rjensen/theory01.htm#MethodsForSetting


    "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.

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

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

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

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

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

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

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

    Also see
    "Strain, Differential Association, and Coercion: Insights from the Criminology Literature on Causes of Accountant's Misconduct," by James J. Donegan and Michele W. Ganon, Accounting and the Public Interest 8(1), 1 (2008) (20 pages)

    September 17, 2009 reply from Zabihollah Rezaee (zrezaee) [zrezaee@MEMPHIS.EDU]

    Dear Bob,

    The second edition of my book on “FINANCIAL STATEMENT FRAUD: PREVENTION AND DETECTION” coauthored with Richard A. Riley is now available from Wiley (please see the attached flyer).

    Best regards,
    Zabi

     

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

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

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

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

     


    "The Forensics Behind Accounting," The Atlanta Journal-Constitution via SmartPros, August 26, 2009 ---
    http://accounting.smartpros.com/x67450.xml

    He started using numbers to track wrong-doing back in 1983, when the FBI hired him and a slew of other able-brained accountants to sort through the savings-and-loan mess.

    Now Berecz, director of Georgia Southern University's Center for Forensic Studies in Accounting and Business, helps college students gain the skills to sort through the debris of today's financial industry meltdown.

    "Our course work is so close to practical application," says Berecz, a licensed polygraph examiner who teaches one class with the tough-guy title "Forensic Interviews and Interrogations."

    "Forensic accounting permeates through all of those other categories of accounting," Berecz says.

    Q: Why do you think white-collar crime has been so prevalent over the last 10 years?

    A: The amount of money. No one ever thought a Ponzi scheme could reach the level of Madoff.

    Q: Which is harder to detect, fraud within a corporation, like Enron, or fraud by an investment adviser, like Bernie Madoff?

    A: Most detection of fraud comes because someone tells us about it. Without a whistle-blower, there's not a clear answer.

    Q: Do you think additional regulation of the financial sector will help forensic accountants? Will it create more of a paper trail, for example, that will be easier to track?

    A: I think it [increased regulation] is inevitable because we learn from our mistakes. It will cost more, but it is worth it for the good of the whole.

    Q: But do you think it will help solve white-collar crimes?

    A: I think what it will show is the intention of people committing crimes earlier. That's what I think the regulation will do. Small frauds that go undetected become larger frauds. It will help detect them earlier.

    Q: What red flags of fraud should every investor know to look for?

    A: Anyone who contacts you and tells you that they've got a guaranteed investment with a high return, that is the No. 1 red flag.

     And if there's some urgency and secrecy around it, if they say they are doing it just for you, that's a major red flag.

     

    Q: How are you preparing students to detect fraud?

    A: One example is our students take a course called 'Micro Fraud Examination.' We take them through 40 to 50 fraud schemes . . . Most of the people who perpetrate these frauds think they are doing something that has never been done before. But the reality is, they keep repeating schemes that have happened before.

    Q: One of the classes at Georgia Southern teaches the verbal and nonverbal cues indicating truth or deception. What's one of the best clues that someone is lying?

    A: The general rule of thumb is they're just uncomfortable. Eye contact is just not right . . . When you lie, you have to be creative, use that part of the brain, so when you lie you have to visualize the lie, and you look up and to the right. That is a theory . . . Also, it may be nanoseconds, but it takes a person six times longer to answer a question with a lie than to answer it truthfully.

    Q: How many forensic accounting programs are there like the one at Georgia Southern?

    A: Only four offer 10 or more forensic accounting classes: Utica College in New York; Stevenson University [near] Baltimore; Florida Atlantic University and us. In academia, we don't call them competitors, we call them peers.

    Q: What do you foresee as the next trend in white-collar crime?

    A: Technology. Cybercrimes. I think it behooves us here at Georgia Southern to make sure our coursework continues to evolve with these cybercrimes.

    Jensen Comment
    Various colleges and universities have added concentrations on forensic accounting.

    Georgia Tech in Atlanta has a rather unique Financial Reporting and Analysis Lab that is not so much into forensics at a micro level but is definitely into fraud detection using financial statements --- http://mgt.gatech.edu/fac_research/centers_initiatives/finlab/index.html

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


    Humor Between September 1-30, 2009

    If Pres. Obama’s mom had named him Al, he would have been Al Obama.
    Ed Scribner


    Forwarded by Dick and Cec

    I would never trade my amazing friends, my wonderful life, and my loving family for less gray hair or a flatter belly. As I've aged, I've become kinder to myself, and less critical of myself. I've become my own friend. I don't chide myself for eating that extra cookie, or for not making my bed, or for buying that silly cement gecko that I didn't need, but looks so avante garde on my patio. I am entitled to a treat, to be messy, to be extravagant.

    I have seen too many dear friends leave this world too soon; before they understood the great freedom that comes with aging.

    Whose business is it if I choose to read or play on the computer until 4 AM and sleep until noon? I will dance with myself to those wonderful tunes of the 60 & 70's, and if I, at the same time, wish to weep over a lost love ... I will.


    Not exactly funny --- http://apnews.myway.com/article/20090828/D9AC6R881.html

    Police in Michigan say a first date went from bad to worse when a Detroit man skipped out on the restaurant bill, then stole his date's car.

    Police say 23-year-old Terrance Dejuan McCoy had dinner with a woman April 24 at Buffalo Wild Wings in the Detroit suburb of Ferndale. The woman says the two met a week earlier at a Detroit casino and she knew McCoy only as "Chris."

    The woman told police that McCoy said he left his wallet in her car and asked for keys. He then sped away in the 2000 Chevrolet Impala.

    The Daily Tribune of Royal Oak reports that police identified McCoy by a photo he'd sent to the woman's cell phone, and his phone number.

    McCoy is charged with unlawfully taking the car, a five-year felony. He waived a preliminary exam and was bound over for trial Thursday.


    Forwarded by Auntie Bev

    I've often been asked, 'What do you old folks do now that you're retired'? Well..I'm fortunate to have a chemical engineering background, and one of the things I enjoy most is turning beer, wine, Scotch, and margaritas into urine. And I'm pretty damn good at it, too!!

    Harold should be an inspiration to all of us.


    Forwarded by Blan McBride

    PHILOSOPHY 101

    TODAY'S LESSON - WHY DID THE CHICKEN CROSS THE ROAD? OR - IT’S ALL IN HOW YOU THINK ABOUT IT

    Grandpa: In my day, we didn't ask why the chicken crossed the road. Someone told us that the chicken crossed the road, and that was good enough for us.

    Karl Marx: It was an historical inevitability.

    Captain James T. Kirk: To boldly go where no chicken had gone before!

    Mr. Spock: It seemed like the logical thing for the chicken to do at the time.

    Bill Gates: We have just released e-Chicken 5.0 which will not only cross roads but also lay eggs, file your important documents and balance your checkbook. Internet Explorer is now an inextricable part of e-Chicken.

    Albert Einstein: Did the chicken really cross the road, or did the road move beneath the chicken?

    Moses: And God said unto the chicken, "Thou shalt cross the road!" And the chicken crossed the road, and there was much rejoicing.

    Colonel Sanders: I missed one?

    Sir Isaac Newton: A chicken at rest will stay at rest, and chickens in motion will cross the road.

    Aristotle: To actualize its potential.

    Werner Heisenberg: We can never be certain the chicken actually crossed the road.

    Charles Darwin: It was the logical next step after coming down from the trees.

    Mark Twain: The news of the chicken's crossing the road has been greatly exaggerated.

    Aristotle: It is the nature of chickens to cross roads.

    Douglas Adams: To find out why there is a road here.

    Voltaire: I may not agree with the chicken’s crossing of the road, but I will defend to the death its right to do so.

    Caesar: To come, to see, to conquer.

    The Sphinx: You tell me.

    The Buddha: If you ask this question, you deny your own chicken-nature.

    Erwin Schrodinger: The chicken was simultaneously on both sides of the road until it was observed and its wave function collapsed.

    Hemingway: To die, in the rain.

    And so shall we all. THUS ENDETH THE LESSON

     


    Forwarded by Paula

    What is the difference between Bird Flu and Swine Flu?

    For bird flu you need tweetment and for swine flu you need oinkment.


    Forwarded by Auntie Bev

    Drafting Guys over 60----this is funny & obviously written by a Former Soldier-
     
     New Direction for any war: Send Service Vets over 60!
     
     I am over 60 and the Armed Forces thinks I'm too old to track down terrorists.. You can't be older than 42 to join the military. They've  got the whole thing ass-backwards. Instead of sending 18-year olds off to fight, they ought to take us old guys. You shouldn't be able to join a military unit until you're at least 35.
     
     For starters: Researchers say 18-year-olds think about sex every 10 seconds.  Old guys only think about sex a couple of times a day, leaving us more than 28,000 additional seconds per day to concentrate on the enemy.
     
     Young guys haven't lived long enough to be cranky, and a cranky soldier is a dangerous soldier. 'My back hurts! I can't sleep, I'm tired and hungry' We are impatient and maybe letting us kill some asshole that desperately deserves it will make us feel better and shut us up for a
     while.
     
     An 18-year-old doesn't even like to get  up before 10 a.m. Old guys always get up early to pee so what the hell. Besides, like I said, 'I'm tired and can't sleep and since I'm already up, I may a well be up killing some fanatical S-of-a-B....
      
     If  captured we couldn't spill the beans because we'd forget where we put them. In fact, name, rank, and serial number would be a real brainteaser.
     

     Boot camp would be easier for old guys.  We're used to getting screamed and yelled at and we're used to soft food. We've also developed an appreciation for guns. We've been using them for years as an excuse to get out of the house, away from the screaming and yelling.
     
     They could lighten up on the obstacle course however. I've been in combat and didn't see a single 20-foot wall with rope hanging over the side, nor did I ever do any pushups after completing basic training.
     
     Actually, the running part is kind of a waste of energy, too. I've never  seen anyone outrun a bullet.
     
     An 18-year-old has the whole world ahead of him. He's still learning to shave, to start up a conversation with a pretty girl.  He still hasn't figured out that a baseball cap has a brim to shade his eyes, not the back of his  head.
     
     These are all great reasons to keep our kids at home to learn a little more about life before sending them off into harm's way.
     
     Let us old guys track down those dirty rotten coward terrorists. The last thing an enemy would want to see is a couple of million pissed off old farts with attitudes and automatic weapons who know that their best years are already behind them.
     
    How about recruiting Women over 50 ....with PMS !!! You think Men have attitudes !!! Ohhhhhhhhhhhh my God!!!
     
     If nothing else, put them on border patrol....we  will have it secured the first night!


    Forwarded by Debbie Bowling

    History Exam... Everyone over 40 should have a pretty easy time with this exam.

    If you are under 40 you can claim a handicap.

    Get paper & pencil & number from 1 to 20. Write the letter of each answer & score at the end.

    Then before you pass this test on, put your score in the subject line...Send to friends so everyone can HAVE FUN!

    1. In the 1940s where were automobile headlight dimmer switches located? a. On the floor shift knob. b. On the floor board to the left of the clutch. c. Next to the horn.

    2. The bottle top of a Royal Crown Cola bottle had holes in it. For what was it used? a. Capture lightning bugs. b. To sprinkle clothes before ironing. c. Large salt shaker.

    3. Why was having milk delivered a problem in northern winters? a. Cows got cold and wouldn't produce milk. b. Ice on highways forced delivery by dog sled. c. Milkmen left deliveries outside of front doors and milk would freeze expanding and pushing up the cardboard bottle top.

    4. What was the popular chewing gum named for a game of chance? a. Blackjack b. Gin c. Craps

    5. What method did women use to look as if they were wearing stockings when none were available due to rationing during WW II. a. Suntan b. Leg painting c. Wearing slacks

    6. What postwar car turned automotive design on its ear when you couldn't tell whether it was coming or going? a. Studebaker b. Nash Metro c. Tucker

    7. Which was a popular candy when you were a kid? a . Strips of dried peanut butter. b. Chocolate licorice bars. c. Wax coke-shaped bottles with colored sugar water inside.

    8. How was Butch wax used? a. To stiffen a flat-top haircut so it stood up. b. To make floors shiny and prevent scuffing. c. On the wheels of roller skates to prevent rust.

    9. Before inline skates how did you keep your roller skates attached to your shoes? a. With clamps tightened by a skate key. b. Woven straps that crossed the foot. c. Long pieces of twine.

    10. As a kid what was considered the best way to reach a decision? a. Consider all the facts. b. Ask Mom. c. Eeny-meeny-miney-MO.

    11. What was the most dreaded disease in the 1940s and 1950s? a. Smallpox b. AIDS c. Polio

    12. "I'll be down to get you in a ________, Honey" a. SUV b. Taxi c. Streetcar

    13.. What was the name of Caroline Kennedy's pony? a. Old Blue b. Paint c. Macaroni

    14. What was a Duck-and-Cover Drill? a . Part of the game of hide and seek. b. What you did when your Mom called you in to do chores. c. Hiding under your desk and covering your head with your arms in an A-bomb drill.

    15. What was the name of the Indian Princess on the Howdy Doody show? a. Princess Summerfallwinterspring b. Princess Sacajawea c. Princess Moonshadow

    16. What did all the really savvy students do when mimeographed tests were handed out in school? a. Immediately sniffed the purple ink as this was believed to get you high. b. Made paper airplanes to see who could sail theirs out the window. c. Wrote another pupil's name on the top to avoid their failure.

    17. Why did your Mom shop in stores that gave Green Stamps with purchases? a. To keep you out of mischief by licking the backs which tasted like bubble gum. b. They could be put in special books and redeemed for various household items. c. They were given to the kids to be used as stick-on tattoos..

    18. Praise the Lord & pass the _________? a. Meatballs b. Dames c. Ammunition

    19. What was the name of the singing group that made the song "Cabdriver" a hit? a. The Ink Spots b. The Supremes c. The Esquires

    20. Who left his heart in San Francisco ? a. Tony Bennett b. Xavier Cugat

    c. George Gershwin ----------------------------- ------------------------------

    ANSWERS

    1. (b) On the floor to the left of the clutch. Hand20controls popular in Europe took till the late '60's to catch on.

    2. (b) To sprinkle clothes before ironing. Who had a steam iron?

    3. (c) Cold weather caused the milk to freeze and expand popping the bottle top.

    4 . (a) Blackjack Gum.

    5. (b) Special makeup was applied followed by drawing a seam down the back20of the leg with eyebrow pencil.

    6. (a) 1946 Studebaker.

    7. (c) Wax coke bottles containing super-sweet colored water.

    8 (a) Wax for your flat top (butch) haircut.

    9. (a) With clamps tightened by a skate key which you wore on a shoestring around your neck.

    10. (c) Eeny-meeny-miney-mo.

    11. (c) Polio.. In beginning of August swimming pools were closed movies and other public gathering places were closed to try to prevent spread of the disease.

    12. (b) Taxi . Better be ready by half-past eight!

    13. (c) Macaroni.

    14. (c) Hiding under your desk and covering your head with your arms in an A-bomb drill.

    15. (a) Princess Summerfallwinterspring. She was another puppet.

    16. (a) Immediately sniffed the purple ink to get a high.

    17. (b) Put in a special stamp book they could be traded for household items at the Green Stamp store.

    18. (c) Ammunition and we'll all be free.

    19. (a) The widely famous 50's group The Inkspots.

    20. (a) Tony Bennett and he sounds just as good today. _______________________ SCORING:

    17- 20 correct: You are older than dirt and obviously gifted with mental abilities. Now if you could only find your glasses. Definitely someone who should share your wisdom!

    12 -16 correct: Not quite dirt yet but you're getting there.

    0 -11 correct: You are not old enough to share the wisdom of your experiences.

     


    I'll drink to it!
    Authorities in the Florida Panhandle say they arrested a convenience store shoplifter who demanded to drink the 12-ounce beer he had stolen before being taken into custody. The Bay County Sheriff's office says the man told the deputy he had recently lost his job of 13 years and wanted to drink beer. The man became combative when the deputy wouldn't let him finish it. George R. Linthicum II was charged Wednesday with shoplifting, battery, possession of marijuana not more than 20 grams and smuggling contraband into a detention facility.
    AZ Central, September 10, 2009 --- Click Here


    A guy in a bar leans over to the guy next to him and says, "Want to hear an accountant joke?"

    The guy next to him replies, "Well, before you tell that joke, you should know that I'm 6 feet tall, 200 pounds, and I'm an accountant. And the guy sitting next to me is 6'2" tall, 225 pounds, and he's an accountant. Now, do you still want to tell that joke?"

    The first guy says, "No, I don't want to have to explain it two times."


    Humor Between September 1 and September 30, 2009
    http://www.trinity.edu/rjensen/book09q3.htm#Humor093009  

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

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

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

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

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

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

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

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



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

     

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

    International Accounting News (including the U.S.)

    Some Accounting Blogs

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

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

     

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

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

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

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

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

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

     

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

     

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

     

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

     

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

     

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

     

     

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

     

     

     

    August 31, 2009

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

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

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

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

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

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

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

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

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

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

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

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

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

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




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

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

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

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

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

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

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

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

    Suggestions for Writing and Using Cases

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

     

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

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

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

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

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

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

     


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

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

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

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

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

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

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

    http://reallyengagingaccounting.wikispaces.com/Twitter 

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

     


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


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

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

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


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

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

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

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

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

    Yes, professors do get hard copy versions.

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

    Thanks for open sharing Joe!

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

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

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

    Joe Hoyle
    University of Richmond

    To:  Richmond Accounting Faculty
    From:  Joe

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

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

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

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

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

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

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

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

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

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

     

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

     

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

     

    If you have any questions, please let me know.

     

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

    Joe Hoyle

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

    Bob,

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

    Jim Fuehrmeyer

     

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


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

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

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

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


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

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

    From The Wall Street Journal Accounting Weekly Review on June 12, 2009

    Wells Fargo, BofA Pay to Settle Claims
    by Jennifer Levitz
    The Wall Street Journal

    Jun 09, 2009
    Click here to view the full article on WSJ.com

    http://online.wsj.com/article/SB124447741263994585.html?mod=djem_jiewr_AC

    TOPICS: Advanced Financial Accounting, Auditing, Fair-Value Accounting Rules, Internal Controls, Investments

    SUMMARY: "One of the nation's largest mutual-fund companies allegedly overvalued its holdings of mortgage securities during the housing bust, making its fund appear to be one of the top performers, and then was forced to take big write-downs, leaving some investors in the supposedly conservative offering with losses approaching 25%....Evergreen began repricing the securities after its valuation committee learned on June 10 that the portfolio managers had known since March about problems with a certain mortgage-backed security but had failed to disclose it to the committee", the SEC said.

    CLASSROOM APPLICATION: The implication of properly establishing fair values in a trading portfolio is the major topic covered in this article. Also touched on are the internal control procedures and related audit steps over this valuation process.

    QUESTIONS: 
    1. (Introductory) What was the implication of not properly valuing certain fund investment for the reported performance of the Evergreen Ultra Fund?

    2. (Introductory) What also was the apparent problem with the type of investment made by portfolio managers of this Evergreen fund? In your answer, comment on the purpose of the fund and the risk of mortgage-backed securities in which it invested.

    3. (Introductory) How should an entity such as the Evergreen Ultra Fund account for its investments? Describe the balance and income implications and state what accounting standard requires this treatment.

    4. (Advanced) What evidence should the Evergreen fund's portfolio managers have taken into account in valuing investments? How did the fund managers allegedly avoid using that evidence?

    5. (Advanced) What internal control procedures were apparently in place at Evergreen to ensure that fund assets were properly valued by portfolio managers? What was the apparent breakdown in internal control?

    6. (Advanced) Based on the description in the article of internal control processes at Evergreen, design audit procedures to assess whether the internal control over investment valuations is functioning properly. What evidence might arise to indicate a failure in internal control?

    Reviewed By: Judy Beckman, University of Rhode Island

     

    "Wells Fargo, BofA Pay to Settle Claims," by Jennifer Levitz, The Wall Street Journal, June 10, 2009 ---
    http://online.wsj.com/article/SB124447741263994585.html?mod=djem_jiewr_AC

    Wells Fargo & Co. and Bank of America Corp. agreed Monday to settle claims that employees misled investors about the value and safety of certain securities during the financial crisis.

    Wells's Boston-based mutual fund Evergreen Investment Management Co. agreed along with its brokerage unit to pay $40 million to end civil state and federal securities-fraud allegations that it overvalued the holdings of its Evergreen Ultra Short Opportunities Fund and then, when it was going to lower the value of the securities, informed only select investors -- many of them customers of an Evergeen affiliate -- allowing them to cash out of the fund and lessen their losses.

    Separately, Bank of America agreed to "facilitate" the return of more than $3 billion to California clients who purchased auction rate securities, an investment that went sour last year amid a liquidity freeze. The bank reached the agreement with the California Department of Corporations.

    "We are pleased that the outcome of these negotiations will result in the return of money to many investors who suffered by the freezing of their assets when the auctions failed," said California Department of Corporations Deputy Commissioner Alan Weinger. A bank spokeswoman couldn't be reached for comment.

    The Wells case highlights the valuing of securities as a key issue during the financial crisis as banks, hedge funds and now mutual funds have failed to take losses on their holdings even though there was evidence in the market these securities were trading at lower prices.

    In one case Evergreen, which had $164 billion in assets at the end of the first quarter, was holding a security at nearly full value when another fund at the firm purchased a similar security for 10 cents on the dollar.

    Evergreen didn't admit or deny wrongdoing in a settlement with the Securities and Exchange Commission and the Massachusetts Securities Division. "We are committed to acting in the best interest of shareholders, and continue to move forward with our primary goal of safeguarding your investments," Evergreen stated in a letter to clients on its Web site announcing the settlement.

    Evergreen was a unit of Wachovia Corp. at the time of the alleged overvaluations. Lisa Brown Premo and Robert Rowe, then co-managers of the Ultra fund, have left Evergreen, as have two unidentified senior vice presidents, said Evergreen spokeswoman Laura Fay. Wachovia was acquired last year by Wells Fargo.

    The Evergreen case is similar to an SEC fraud case against Van Wagoner Funds in San Francisco. In 2004, Van Wagoner agreed to pay $800,000 to settle civil charges by the SEC that it mispriced some technology-company securities in its stock funds.

    Regulators allege that Evergreen inflated the value of mortgage-related securities in the Ultra fund -- which the company touted as conservative -- by as much as 17% between February 2007 and June 2008, when it closed and liquidated the fund. The overstatement caused the fund to rank as one of the top five or 10 funds among between 40 and 50 similar funds in 2007 and part of 2008. An accurate valuation would have placed the fund at the bottom of its category, regulators said.

    Regulators said that when Evergreen began to reprice certain inflated holdings in the three weeks before the fund was liquidated on June 18, the company only disclosed the adjustments -- and the reason why -- to select customers, many of them customers of Evergreen affiliate Wachovia Securities LLC. Those customers also were told more pricing adjustments were likely.

    At liquidation, the fund had $403 million in assets, down from $739 million at the end of 2007, regulators said.

    David Bergers, director of the SEC in Boston, said that by law mutual funds must treat all shareholders equally, and that "it's particularly troubling in these difficult times that that did not happen." He said the SEC's "investigation is continuing relating to this matter."

    Ms. Fay declined to comment on Mr. Bergers's statement. Of Monday's settlement, she said it is in "Evergreen's and our clients' best interest to resolve the matter and move forward."

    Regulators say that in pricing Ultra fund securities, Evergreen's portfolio managers didn't factor in readily available information about the decline in mortgage-backed securities. By law, mutual funds are supposed to take all available information into account when valuing securities, and "that's especially true when the market is shifting," Mr. Bergers said.

    Massachusetts regulators cite one case in May 2008 in which the Ultra fund priced a subprime mortgage-backed security for $98.93, even though another Evergreen fund purchased the same security for $9.50.

    After learning of the transaction, state regulators allege, the Ultra fund's portfolio management team contacted the broker who had sold the security to determine whether the sale was distressed and thus could be disregarded for purposes of determining the fair value of the security. The dealer responded that the security wasn't coming from a distressed seller. Nonetheless, the Ultra fund team told Evergreen's valuation committee they believed the sale was distressed and failed to lower the price of the security for several days.

    Evergreen began repricing the securities after its valuation committee learned on June 10 that the portfolio managers had known since March about problems with a certain mortgage-backed security but had failed to disclose it to the committee, the SEC said.

    Bank of America pays $33M SEC fine over Merrill bonuses
    Bank of America Corp. has agreed to pay a $33 million penalty to settle government charges that it misled investors about Merrill Lynch's plans to pay bonuses to its executives, regulators said Monday. In seeking approval to buy Merrill, Bank of America told investors that Merrill would not pay year-end bonuses without Bank of America's consent. But the Securities and Exchange Commission said Bank of America had authorized New York-based Merrill to pay up to $5.8 billion in bonuses. That rendered a statement Bank of America mailed to 283,000 shareholders of both companies about the Merrill deal "materially false and misleading," the SEC said in a statement.
    Yahoo News, August 3, 2009 --- http://news.yahoo.com/s/ap/20090803/ap_on_bi_ge/us_bank_of_america_sec

    Bank of America Not Punished Enough
    "Judge Rejects Bank of America's $33M Fine," SmartPros, August 11, 2009 --- http://accounting.smartpros.com/x67360.xml

    A federal judge in New York refused to accept a $33 million fine imposed on Bank of America for deceiving investors in its purchase of Merrill Lynch.

    Bank of American did not admit to any wrongdoing in the pre-trial settlement with the Securities and Exchange Commission. But judge Jed Rakoff not only said the fine was too small, but told the SEC to name the executives responsible for the deception, The New York Times reported Tuesday.

    Rakoff said the two financial firms "effectively lied to their shareholders," by paying Merrill Lynch employees $3.6 billion in bonuses after the deal closed in January.

    Rakoff said the fine was "strangely askew" given the multi-billion-dollar deal and the $45 billion in government bailout funds Bank of America has accepted, much of it to help the bank absorb Merrill Lynch's losses.

    "Do Wall Street people expect to be paid large bonuses in years when their company lost $27 billion?" Rakoff asked.

    SEC and Bank of America attorneys defended their position, but Rakoff refused to budge, ordering a new hearing on the issue in two weeks, the newspaper said.

    Bob Jensen's threads on the banking crisis are at http://www.trinity.edu/rjensen/2008Bailout.htm

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

    The AICPA's Fair Value Accounting Resources --- http://www.journalofaccountancy.com/Web/FairValueResources.htm
     


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


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

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

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

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

    Aloha,
    Roger D

    August 19, 2009 reply from Bob Jensen

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

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

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

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

    Bob Jensen

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


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

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


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

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

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

    August 28, 2009 reply from Bob Jensen

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

    Self Regulation Really Works in New York --- It Kept a Few Drunks From Performing Bad Audits
    Out of roughly 50,000 accountants licensed in New York, only 16 were disciplined by the state last year-most of them for drunk driving. In fact, only one was reprimanded on professional grounds.

    NEW YORK, March 18, 2002 (Crain's New York Business) — http://www.smartpros.com/x33351.xml 

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

     


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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


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

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

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

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

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

    I do give you, Steve, credit for responding in such detail to Paul’s letter. I can’t think of a single TAR editor since Steve Zeff who I think would’ve have taken the time and trouble to answer Paul’s personal remarks with such a personalized and heartfelt reply.

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

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

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

    Hi Steve,

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

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

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

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

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

     

    Earlier message from Bob Jensen

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

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

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

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

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

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

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

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

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

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

     

    Earlier Message From Bob Jensen

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    Bob Jensen

    Follow up message from Bob Jensen

    Hi David,

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

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

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

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

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

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

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

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

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

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

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

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

    Bob Jensen

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

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

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

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

    Assorted difficulties in measuring gains to fundamental research.

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

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

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

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

    Kenneth R. French Dartmouth College - Tuck School of Business

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

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


    August 20, 2009 message from  Malcolm J. McLelland,

     Hi Bob,

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

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

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

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

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

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

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

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

    Best regards,

    Malcolm

    August 20, 2009 reply from Bob Jensen

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

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

    Hi Malcomb,

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

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

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

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

    The CDO bond risks became compounded when so many investment banks commenced to crumble mortgage contracts into diversified CDO bonds dictated by David Li’s model. CDO bond sellers and holders commenced to use this model that essentially leaves out the covariance terms for interactive defaults on investments. The chances that everything would blow up seemed negligible at the time.  Probably the best summary of what happens appears in “In Plato’s Cave.”
    Also see
    "In Plato's Cave:  Mathematical models are a powerful way of predicting financial markets. But they are fallible" The Economist, January 24, 2009, pp. 10-14 --- http://www.trinity.edu/rjensen/2008Bailout.htm#Bailout

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

    Some highlights:

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

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

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

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

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

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

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


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

    Also see
    "In Plato's Cave:  Mathematical models are a powerful way of predicting financial markets. But they are fallible" The Economist, January 24, 2009, pp. 10-14 --- http://www.trinity.edu/rjensen/2008Bailout.htm#Bailout

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

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

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

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

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

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

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

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

    Continued in article

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

    Thank you Bob and Pat,

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

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

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

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

    Cheers,

    Malcolm

    August 21, 2009 reply from Bob Jensen

    Hi Malcomb,

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

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

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

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

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

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

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

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

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

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

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

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

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

    Bob Jensen

    August 22, 2009 reply from Bob Jensen

    Hi Again Malcomb,

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

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

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

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

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

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

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

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

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

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

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

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

    Hope this helps.

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

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

    Hi Malcomb,

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

     

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

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

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

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

    To: AECM@LISTSERV.LOYOLA.EDU

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

     

    Bob,

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

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

     

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

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

     

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

     

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

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

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

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

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

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

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

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

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

    BOB JENSEN

     

    ________________________________________

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

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

    To: AECM@LISTSERV.LOYOLA.EDU

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

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

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

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

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

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

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

    Bob Jensen

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

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


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

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

    TOPICS: Bond Prices, Bonds, Debt, Debt Covenants, Early Retirement of Debt, Financial Accounting, Financial Analysis, Financial Statement Analysis

    SUMMARY: The article describes early extinguishments of debt by five firms at rates between 22 and 88 cents on the dollar. Questions in the review focus on Harrah's Entertainment, Inc., and analyzing the source for the information in the article from footnotes in the company's quarterly filing for June 30, 2009.

    CLASSROOM APPLICATION: The article can be used to introduce the motivations behind early extinguishments of debt and the resulting accounting and disclosure. The article also lends itself to focusing on financial statement analysis procedures as well as the initial preparation of accounting for these transactions.

    QUESTIONS: 
    1. (Introductory) How must companies account for and disclose early extinguishments of debt as discussed in this article? Under what circumstances are gains recorded in these transactions?

    2. (Introductory) Access the Harrah's Entertainment, Inc. Form 10-Q filing for the quarter ended June 30, 2009 available at http://www.sec.gov/Archives/edgar/data/858339/000119312509174432/d10q.htm (Note that the live link in the online article to the Harrah's Entertainment company information on the WSJ site does not work.) How much of a gain on extinguishments of debt did Harrah's recognize in this quarter? Where is this information found?

    3. (Advanced) Compare the gain on extinguishments of debt to Harrah's overall operations in this quarter; describe your assessment of this comparison, clearly stating your references to other financial statement items.

    4. (Advanced) In the article, the author refers to Harrah's having paid "an average of 48 cents on the dollar to purchase $788 million in debt, during the second quarter, according to Harrah's filings." Access the discussion on Debt and Liquidity, Open Market Repurchases and Other Retirements, page 41 of the 10-Q filing obtained above. How is this information reported in the WSJ article obtained from this note? Clearly explain your calculations.

    5. (Advanced) How does the summarization of Harrah's debt extinguishment from their footnote discussed above allow comparison to other companies cited in the WSJ article?

    6. (Introductory) What other debt transaction by Harrah's contributed to the gain on extinguishment reported in the quarter ended June 30, 2009, and discussed in answer to question two, above?

    7. (Advanced) Return to your analysis of the note discussed in answer to question four above. How do the extinguishment results differ between two Harrah's subsidiaries' debt repurchases? What factors do you think contribute to that difference?

    8. (Introductory) What are debt covenants? According to the article, what actions are companies taking to distance themselves from the impact of debt covenants? Why do you think that step is necessary particularly during these economic times?

    Reviewed By: Judy Beckman, University of Rhode Island

    "Firms Move to Scoop Up Own Debt," by Serena Ng, The Wall Street Journal, August 24, 2009 ---
    http://online.wsj.com/article/SB125080949684547827.html?mod=djem_jiewr_AC

    A number of corporations are quietly buying back bonds on the cheap in the open market as the financial system works its way out of crisis mode.

    They are taking advantage of depressed prices to save millions of dollars in interest and debt-repayment costs.

    In the recent round of second-quarter financial filings, companies including Beazer Homes USA Inc., Hexion Specialty Chemicals Inc., Harrah's Entertainment Inc. and Tenet Healthcare Corp. disclosed they had bought slugs of their bonds from the market at discounts to the debt's face, or par, value. Until the disclosures, investors were mostly in the dark about the purchases.

    Bankers said the trend could signal that corporate executives think the worst of the credit crisis is over and are feeling better about the economic outlook, because they are using cash to buy back debt instead of hoarding it.

    But the moves also reflect how companies and private-equity firms are coming to grips with the new reality. Companies with below-investment-grade credit ratings have roughly $1.4 trillion in debt coming due through 2014, according to Standard & Poor's data. With markets unlikely to allow them to easily refinance most of that debt, companies are doing whatever they can now to pay some of it down or buy extra time to repay.

    "The real issue for companies now is how they delever, and every little bit counts," says Judith Fishlow Minter, a managing partner at North Sea Partners LLC, a private investment bank in New York.

    While many companies are purchasing bonds through publicly announced tender offers, those that conduct buybacks without formal notification can often do so without driving prices higher.

    "No one wants to announce a bond or loan buyback until they have to, as that will move prices," said Tom Newberry, head of leveraged finance at Credit Suisse in New York. "Those firms that can do this quietly and under the radar screen can buy more cheaply and chip away at their maturities."

    Chemicals producer Hexion, which is controlled by Apollo Management LP, spent $26 million in the first quarter buying back notes with a face value of $196 million, paying an average of 13 cents on the dollar.

    Between April and August, Hexion spent another $37 million purchasing $92 million in debt at an average of 40 cents on the dollar. While the buyback enabled Hexion to book a gain of $182 million, the company still has $3.5 billion in outstanding debt. An Apollo spokesman declined to comment.

    In addition to open-market bond buybacks, others are getting lenders' consent to push out the maturity dates of loans. Many also are selling secured junk bonds to replace bank loans that impose strict financial-performance standards known as covenants.

    But while buybacks and bond tenders are helping companies shrink debt loads at the margin, the challenges ahead are immense.

    Buying back debt cheaply also is advantageous because a company can record accounting gains, reflecting the difference between what it paid and the value of the bond on its books, boosting bottom lines.

    "You can rearrange the deck chairs all you want, but these are mostly short-term fixes," said Daniel Toscano, a former Wall Street banker. "At some point, something's got to give and someone in the food chain will lose money."

    Most of the debt buybacks took place between March and August, a period in which average high-yield-bond prices rose from 59 cents to 85 cents for every dollar of debt. Leveraged loans issued by companies with speculative-grade ratings traded between 66 cents and 86 cents, according to Standard & Poor's Leveraged Commentary & Data.

    The run-up in prices will make it more expensive for companies to repurchase debt, but with many bonds still trading well below par value, firms still may find it a worthwhile move.

    Continued in article

    Jensen Comment
    It's generally more difficult for firms to "scoop up" their own secured debt since the historical cost amortized book value (payoff) is usually less than the value of the collateral plus foreclosure costs. In 2009, however, there is a breakdown of some collateral markets such that firms might even find scoop-up deals on their debt. But in the case of home mortgages, borrowers have the backing of government pressure for Fannie, Freddie, and their local banks to renegotiate terms advantageous to borrowers and costly to lenders.

    In-Substance Defeasance
    In-substance defeasance used to be a ploy to take debt off the balance sheet. It was invented by Exxon in 1982 as a means of capturing the millions in a gain on debt (bonds) that had gone up significantly in value due to rising interest rates. The debt itself was permanently "parked" with an independent trustee as if it had been cancelled by risk free government bonds also placed with the trustee in a manner that the risk free assets would be sufficient to pay off the parked debt at maturity. The defeased (parked) $515 million in debt was taken off of Exxon's balance sheet and the $132 million gain of the debt was booked into current earnings --- http://www.bsu.edu/majb/resource/pdf/vol04num2.pdf

    Defeasance was thus looked upon as an alternative to outright extinguishment of debt until the FASB passed FAS 125 that ended the ability of companies to use in-substance defeasance to remove debt from the balance sheet. Prior to FAS 125, defeasance became enormously popular as an OBSF ploy.

     

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


    "Microsoft Office to Go Online for Free," Fortune, July 13, 2009 --- Click Here
    This will not be the full-featured version of Office that you can purchase, but it will compete head on with Google Office.
    Free Alternatives to/for MS Office (Word, Excel, PowerPoint, etc.) --- http://www.trinity.edu/rjensen/Bookbob4.htm#MSofficeAlternatives

    Unfortunately none of the free alternatives to MS Office will have all the new and supposedly wonderful features of the 2010 Version of MS Office
    Richard Campbell forwarded this link describing the new features to look forward to with the MS Office 2010 --- http://download.cnet.com/8301-2007_4-10284013-12.html?tag=smallC
    Also see http://reviews.zdnet.co.uk/software/productivity/0,1000001108,39674807,00.htm


    "An Intuitive Explanation of Bayes':  Theorem:  Bayes' Theorem for the curious and bewildered; an excruciatingly gentle introduction," by Eliezer S., Yudkowsky, August 2009 --- http://yudkowsky.net/rational/bayes

    Your friends and colleagues are talking about something called "Bayes' Theorem" or "Bayes' Rule", or something called Bayesian reasoning. They sound really enthusiastic about it, too, so you google and find a webpage about Bayes' Theorem and...

    It's this equation. That's all. Just one equation. The page you found gives a definition of it, but it doesn't say what it is, or why it's useful, or why your friends would be interested in it. It looks like this random statistics thing.

    So you came here. Maybe you don't understand what the equation says. Maybe you understand it in theory, but every time you try to apply it in practice you get mixed up trying to remember the difference between p(a|x) and p(x|a), and whether p(a)*p(x|a) belongs in the numerator or the denominator. Maybe you see the theorem, and you understand the theorem, and you can use the theorem, but you can't understand why your friends and/or research colleagues seem to think it's the secret of the universe. Maybe your friends are all wearing Bayes' Theorem T-shirts, and you're feeling left out. Maybe you're a girl looking for a boyfriend, but the boy you're interested in refuses to date anyone who "isn't Bayesian". What matters is that Bayes is cool, and if you don't know Bayes, you aren't cool.

    Why does a mathematical concept generate this strange enthusiasm in its students? What is the so-called Bayesian Revolution now sweeping through the sciences, which claims to subsume even the experimental method itself as a special case? What is the secret that the adherents of Bayes know? What is the light that they have seen?

    Soon you will know. Soon you will be one of us.

    While there are a few existing online explanations of Bayes' Theorem, my experience with trying to introduce people to Bayesian reasoning is that the existing online explanations are too abstract. Bayesian reasoning is very counterintuitive. People do not employ Bayesian reasoning intuitively, find it very difficult to learn Bayesian reasoning when tutored, and rapidly forget Bayesian methods once the tutoring is over. This holds equally true for novice students and highly trained professionals in a field. Bayesian reasoning is apparently one of those things which, like quantum mechanics or the Wason Selection Test, is inherently difficult for humans to grasp with our built-in mental faculties.

    Or so they claim. Here you will find an attempt to offer an intuitive explanation of Bayesian reasoning - an excruciatingly gentle introduction that invokes all the human ways of grasping numbers, from natural frequencies to spatial visualization. The intent is to convey, not abstract rules for manipulating numbers, but what the numbers mean, and why the rules are what they are (and cannot possibly be anything else). When you are finished reading this page, you will see Bayesian problems in your dreams.

    And let's begin.

    --------------------------------------------------------------------------------

    Here's a story problem about a situation that doctors often encounter:

    1% of women at age forty who participate in routine screening have breast cancer. 80% of women with breast cancer will get positive mammographies. 9.6% of women without breast cancer will also get positive mammographies. A woman in this age group had a positive mammography in a routine screening. What is the probability that she actually has breast cancer?

    What do you think the answer is? If you haven't encountered this kind of problem before, please take a moment to come up with your own answer before continuing.

    --------------------------------------------------------------------------------

    Next, suppose I told you that most doctors get the same wrong answer on this problem - usually, only around 15% of doctors get it right. ("Really? 15%? Is that a real number, or an urban legend based on an Internet poll?" It's a real number. See Casscells, Schoenberger, and Grayboys 1978; Eddy 1982; Gigerenzer and Hoffrage 1995; and many other studies. It's a surprising result which is easy to replicate, so it's been extensively replicated.)

    Do you want to think about your answer again? Here's a Javascript calculator if you need one. This calculator has the usual precedence rules; multiplication before addition and so on. If you're not sure, I suggest using parentheses.

    Continued in article




    The June 30, 2009 edition of Fraud Updates is available at http://www.trinity.edu/rjensen/FraudUpdates.htm

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


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


  • Spotlight Dr, Paul Pacter
    Our good friend Paul Pacter (Deloitte in Hong Kong and Michigan State University PhD) who has led a number of IASB projects is featured in the left column of IAS Plus on August 6, 2009 --- http://www.iasplus.com/index.htm
    I was on the faculty at MSU when Paul earned his doctorate, but I cannot claim him as one of mine. As a PhD he took the road less traveled by going with the FASB in the early years rather than going down the tenure-track road. Eventually he moved to London to join the IASB. Eventually his grant from the World Bank took him to Hong Kong where he has a passion for Asia, especially China and Tibet. I will also vouch for the fact that he's a tremendous host when his friends visit Hong Kong (if you can find him in town). His digs are to die for!

    He's a tremendous professional, dedicated, and tech savvy as the Webmaster of IAS Plus.

    Paul Pacter
    Hong Kong, China
    +852 2852 5896

    • Director, Deloitte IFRS Global Office
    • Concurrently, IASB Director of Standards for SMEs
    • Webmaster, www.iasplus.com
    • IASC Project manager on IASs 14, 34, 35, 39, 41
    • Deputy Director of Research, FASB (USA)
    • CFO of large municipal government (USA)
    • Vice Chairman, GASB Advisory Council (USA)
    • Editorial Advisory Boards: Journal of Accountancy, Accounting Review, CPA Journal, Corporate Accounting, Research in Accounting Regulation
    • Member, FASB consolidations and GASB pensions task forces
    • Co-author, Applying International Financial Reporting Standards and Australian Accounting Standards (both Wiley)

     

    Years ago I persuaded Paul to appear in one of my 1998 FAS 133 and IAS 39 workshops when IAS 39 was still a work in progress under his direction. You can read his tremendous summary of the history of the IASC/IASB in general and IAS 39 in particular --- http://www.trinity.edu/rjensen/acct5341/speakers/pacter.htm


    "Large money laundering schemes often go undetected," AccountingWeb, August 12, 2009 --- http://www.accountingweb.com/topic/cfo/large-money-laundering-schemes-often-go-undetected

    Identifying and then unraveling money laundering schemes in a global financial network where as much as one trillion dollars is circulating each day amounts to “finding a needle in a haystack of needles,” says Michael Zeldin, global leader, anti-money laundering/trade sanctions services for Deloitte Financial Advisory Services. Adding to the difficulty of tracking illegal asset transfers, he says, is the sophistication of the people for whom money laundering is a business, who charge as much as 20 percent in payment for their services. “They are very clever people who are paid a lot of money to make sure that the source of money goes undetected. As soon as the government or banks identify one activity as suspicious, they stop using it and come up with something else.”

    Still, prosecutions for this complex crime are initiated daily by authorities around the world, Zeldin says. Data collected from mandatory financial institution reports combined with law enforcement stings and undercover operations bring money laundering activities to trial. A conviction in the felony crime of money laundering brings a sentence of 20 years in prison.

    Financial companies are required by the Bank Secrecy Act (BSA), to file Currency Transaction Reports (CTRs) for transactions in currency that exceed $10,000, and Suspicious Activity Reports (SARs) for suspicious transactions that in aggregate exceed $5,000. The money laundering schemes uncovered in New Jersey recently with the help of an FBI informant involved small sums of money paid to charities by check with sponsors of the charities receiving a percentage of the proceeds, which was then returned in cash.

    Financial companies that must submit the CTR and SAR reports now include brokers and dealers in securities, under the USA Patriot Act, and under recent Treasury Department rulings, casinos and money services businesses (MSBs), including money exchangers, sellers of traveler's checks and money transmitters.

    These reports, which are filed with the Treasury Department, are “the backbone of money laundering prosecutions,” Zeldin says. Data gathered from numerous reports can point to criminal activity. Foreign Bank Account Reporting (FBAR), also required by the BSA, and currently a focus of the Internal Revenue Service primarily as a source of revenue, can provide important information in money laundering cases.

    Most financial institutions have systems that automatically generate CTRs, but SARs are based on observation or red flags. Institutions need to develop Know Your Client (KYC) profiles and risk/rank their clients, Zeldin says. They should have systems that monitor transactional activity. They should be able to investigate any red flag that the system generates, and perform appropriate due diligence to determine whether the activity is true and reportable or false.

    Banks and other money service businesses need to audit and test their CTR and SAR systems and train their employees in BSA compliance and reporting. Deloitte Financial Advisory Services Group provides support for financial services clients that are developing or refining their BSA reporting capability.

    But not all money laundering schemes are designed by professionals. Some of the problems would-be money launderers face when trying to hide their cash are almost the stuff of comedy. Ex-representative William Jefferson of Louisiana, convicted last week of 11 counts of bribery, racketeering, and money laundering, famously hid $90,000 in cash in his freezer. The informant in the recent case in New Jersey agreed to cooperate with the FBI when he was charged with bank fraud in May 2006. He was arrested when he deposited two $25 million checks, one of them at the drive-up window of a PNC bank, and immediately withdrew $22 million. One check bounced, and the bank refused to accept the second deposit.

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

    Bob Jensen's threads on professionalism in auditing are at
    http://www.trinity.edu/rjensen/Fraud001.htm#Professionalism


    See one of my heroes, Bernie Milano, on Video --- http://www.diversityinc.com/public/3150.cfm

    "KPMG Foundation Celebrates 15th Year of Minority Accounting Doctoral Program," SmartPros, August 1, 2009 --- http://accounting.smartpros.com/x67298.xml 

    The KPMG Foundation is marking the 15th anniversary of its Minority Accounting Doctoral Scholarship program by announcing today it has awarded a total of $390,000 in scholarships to 39 minority doctoral scholars for the 2009 - 2010 academic year.

    Of the awards, eight are to new recipients scheduled to begin their accounting doctoral program this fall, three are to new recipients who have already begun programs, and 28 are renewals of scholarships previously awarded.

    Each of the scholarships is valued at $10,000 and renewable annually for a total of five years. The Foundation established the scholarship program in 1994 as part of its ongoing efforts to increase the number of minority students and professors in business schools – and has since awarded $8.7 million to minorities pursuing doctorate degrees.

    “We’re proud of the achievements of our program over the last 15 years, and we have seen a healthy increase in the number of minority faculty members at our nation’s business schools, although more work needs to be done,” said Bernard J. Milano, President of the KPMG Foundation and The PhD Project. “That’s why we continue to award new scholarships each year and we remain committed to our mission.”

    Together with The PhD Project, a related program whose mission is to increase the diversity of business school faculty, the Minority Accounting Doctoral Scholarship program has helped to more than triple the number of minority business professors in the United States since The PhD Project first began in 1994. Today, there are 985 minority business school professors teaching in the United States. Nearly 400 minority students are currently enrolled in business doctoral programs.

    The Minority Accounting Doctoral Scholarship recipients come from a wide variety of cultures and backgrounds. This year’s new recipients are:

    Continued in article

    Jensen Comment
    Under the guidance of KPMG Executive Partner Bernie Milano this program became more than a money awards program. KPMG works with some recipients in customized counseling and assistance when problems arise for certain individuals still studying for their doctorates. Various types of problems arise, including some crises within families.

     

    Minority Hiring Success Varies Greatly by Discipline:  Law, Business, and Sciences Have the Worst Records
    The major cause lies in the supply chain of PhD graduates

    One of the reasons for the shortage of minority undergraduate students in accounting has been the lack of role models teaching accounting courses in college.

    "Whatever Happened to All Those Plans to Hire More Minority Professors?" by Ben Gose, Chronicle of Higher Education, September 26, 2008
    http://chronicle.com/weekly/v55/i05/05b00101.htm?utm_source=at&utm_medium=en

    Duke U.: Success rates vary by discipline

    The black faculty Strategic Initiative began in 1993, on the heels of the failed effort to add at least one black professor to every department.

    As of the fall of 2007, Duke had 62 tenured or tenure-track black professors, accounting for 4.5 percent of the faculty. But while the raw number is double that of 20 years ago, it masks tremendous variation within the university. Black professors remain rare in the law school, which has one black professor, the business school, with two, and the natural sciences, with three.

    Karla FC Holloway, an English professor who served as dean of humanities and social sciences from 1999 to 2005, says each unit of the university should be held accountable for its record on diversity. "There has been growth in arts and social sciences, and medicine, but in some ways that growth has arguably allowed other schools or divisions not to work as aggressively with this effort," she says.

    Mr. Lange, the provost, concedes that some parts of the university have fallen short. He says he is working closely on the issue with the law school's dean, David F. Levi, and other officials. "They have made offers and have not been successful at times," Mr. Lange says. "They're putting in a lot of effort to do better."

    Duke makes sure that when black job applicants visit the campus, they meet other black faculty members — and not just potential colleagues in the department to which they're applying. The university also is taking small steps to widen the pipeline. Duke has financed two postdoctoral positions for minority candidates each year, with the hope that it will eventually hire some of them for tenure-track faculty positions.

    In 2003, Duke started yet another faculty initiative related to diversity — but this time the scope was expanded to include women and all underrepresented minority groups. "We needed to recognize that diversity had come to include a substantially broader set of concerns," Mr. Lange says.

    Ms. Holloway worries that the broader focus may give deans and department chairs an out: "People can say, 'I've hired enough women, and that makes up for the lack of minorities.'"

    Harvard U.: Uneven progress on racial diversity

    Harvard created an office of faculty development and diversity, to be headed by a senior vice provost, in 2005, shortly after announcing that it would spend $50-million to help diversify the faculty.

    In the more than three years since that commitment, the university has made modest progress in diversifying its faculty, and some professors believe that the new office deserves some of the credit. Kay Kaufman Shelemay, a professor of music and of African and African-American studies, says the office has done a good job compiling statistics related to diversity and working with deans and department chairs to ensure that they cast a wider net in their searches. "There is no doubt that the office established by former President Summers both invigorated and centralized our institutional efforts," Ms. Shelemay says.

    Women now make up 16 percent of tenured and tenure-track faculty members in the natural sciences, up from 12 percent in 2004-5. In the humanities, 32 percent of the professors are women, up from 30 percent, and in the social sciences, 31 percent are women, up from 28 percent.

    The changes for the professional schools over that period varied — law, engineering, and government all saw significant gains for women, while the proportion of female faculty members actually dropped in the schools of divinity, dentistry, and education.

    The university's progress on racial diversity, meanwhile, has been uneven. More than 6 percent of the tenured and tenure-track faculty members in the social sciences are black, but black professors make up 1 percent or less of faculty members in the natural sciences and the humanities. Hispanic professors make up no more than 2 percent of faculty members in each of those three areas.

    In 2006, Harvard committed $7.5-million to improve child care on the campus — a primary concern of female faculty members. The university also just completed its third year of a summer program aimed in part at improving the pipeline for female and minority professors. The program allows undergraduates to spend 10 weeks in the research laboratories of science and engineering faculty members. More than half of the 400 participants have been women, and more than 60 percent have been minority students.

    Judith D. Singer, a professor of education who became senior vice provost for faculty development and diversity in June, says she was willing to take on the job because the climate "feels different" under Drew Gilpin Faust, Harvard's first female president. But Ms. Singer acknowledges that progress has been uneven among departments and divisions.

    "Addressing issues of diversity remains a challenge throughout higher education," she says. "We at Harvard, like our peer institutions, must do better."

    U. of Wisconsin at Madison: Progress in fits and starts

    The university undertook its Madison Plan in 1988, vowing to double the number of black, Hispanic, and American Indian professors by adding 70 new faculty members within three years.

    Progress has come in fits and starts. A Wisconsin official told The Chronicle in 1995 that the university hadn't made the progress it had hoped for. The number of tenured or tenure-track black professors, for example, increased only 61 percent, to 37, in that seven-year span. The total then surged to 60 by 2001, only to stall. Over the six years ending in 2007, the number of black professors dropped to 51.

    Mr. Farrell, the provost, argues that part of the challenge is increased competition. While institutions like Wisconsin were among the first to spell out ambitious plans to diversify the faculty, now almost every institution has one. "We compete with everybody else for the pool that exists," he says.

    Damon A. Williams, who became vice provost for diversity and climate in August, says Wisconsin and other universities must seek out minority job candidates more aggressively. For example, he wants to see Madison recruit aggressively at the annual Institute on Teaching and Mentoring, sponsored by the Southern Regional Educational Board and attended by hundreds of minority Ph.D. candidates.

    "We have to be visible and present at that meeting and be willing to sell ourselves to them," he says.

    Wisconsin's record with Hispanic and American Indian faculty members has been stronger. The university had 77 Hispanic professors in 2007, up from 53 in 1998, and 13 American Indian professors, up from four in 1998.

    The growth of American Indian studies — in a state that is home to several Indian tribes — has helped attract new American Indian professors to the campus, Mr. Farrell says. "Professors who visit say, 'OK, here's a place where people from our background can thrive, fit in, and have success.'"

    Still, Wisconsin and other universities must persuade more minority undergraduates to pursue academic careers, the provost says. The engineering school has developed a fellowship program, aimed primarily at minority graduate students, that encourages them to pursue research immediately. That program is being copied by the College of Letters and Science.

    "When students spend their first year or two just on class work," Mr. Farrell says, "they find graduate school is not nearly as interesting as they thought it would be."

    Virginia Tech: A bigger faculty role in hiring

    The university made an extraordinary effort to diversify its campus starting in the late 1990s, and it paid off: During the three years ending in 2002, the number of black tenured and tenure-track professors in the College of Arts and Sciences rose by more than 50 percent, to 17; the number of Hispanic professors more than doubled, to seven; and the proportion of female professors rose from 20.6 percent to 23.6 percent.

    Myra Gordon, an associate dean who left Virginia Tech in 2002, was the architect of the plan. At the time, faculty members complained that she had essentially taken over their role of hiring new professors.

    Mark G. McNamee, the provost since 2001, says that while the university remains strongly committed to diversifying the faculty, some of the tactics that were criticized have been reined in or eliminated. Now he and the deans offer input at beginning of the process but for the most part let faculty members have the final say in hiring.

    "It was a much more centrally controlled process at the time," Mr. McNamee says. "The deans are still engaged and have responsibilities, but they're not perceived as unduly influencing what the outcome is going to be."

    It is difficult to evaluate progress in the College of Arts and Sciences since then, because it was divided into smaller colleges several years ago. Over the four years ending in 2007, the university had a net increase of five black and five Hispanic professors. Black faculty members make up about 3 percent of the tenured and tenure-track professoriate, Hispanic faculty members less than 2 percent, and women 24.3 percent.

    In 2006 students protested the university's decision not to grant tenure to a black professor known for his activism on affirmative action and other causes. Mr. McNamee promised to establish a committee to study the role of race at the university. "When someone doesn't get tenure, that doesn't help us, but that's just the way it is sometimes," he says now.

    In August the committee released a plan that calls for a cluster of six new hires in Africana studies and race and social policy.

    Virginia Tech also frequently invites professors from historically black universities to deliver lectures on the campus, in part to elevate awareness of the university among those lecturers.

    "Once people know Virginia Tech," says Mr. McNamee, "they really like it a lot better than they think they're going to like it."

    Continued in article

    To its credit, the Big Four accounting firm KPMG, inspired heavily by Bernie Milano at KPMG, years ago created a foundation  (with multiple outside contributors) for virtually five years of funding to minorities to selected for particular accounting doctoral programs --- http://www.kpmgfoundation.org/foundinit.asp

  • Minority Accounting Doctoral Scholarships

    The KPMG Foundation Minority Accounting Doctoral Scholarships aim to further increase the completion rate among African-American, Hispanic-American and Native American doctoral students. The scholarships provide the funding for them to see their dreams come to fruition.

    For the 2007-2008 academic year, the Foundation awarded $10,000 scholarships (annually), for a total of five years, to 9 minority accounting and information systems doctoral students. There are 35 doctoral students who have had their scholarships renewed for 2007-2008, bringing the total number of scholarships awarded to 44. To date, KPMG Foundation's total commitment to the scholarship program exceeds $12 million.

    Financial support often determines whether a motivated student can meet the escalating costs of higher education. For most of those students, a return to school means giving up a lucrative job. For some, acceptance in a doctoral program means an expensive relocation. Still others need enough time to study without the burden of numerous part-time jobs.
    Jensen Comment
    This is more than just a pot of money. KPMG works with doctoral program administrators and families of minority candidates to work out case-by-case solving of special problems such as single parenthood. I think added funding is provided on an as-needed basis. The effort is designed to help students not only get into an accounting doctoral program but to follow through to the very end. It should be noted that although KPMG started this effort, various competing accounting firms have donated money to this exceptionally worthy cause. One of the reasons for the shortage of minority undergraduate students in accounting has been the lack of role models teaching accounting courses in college.

    See one of my heroes, Bernie Milano, on Video --- http://www.diversityinc.com/public/3150.cfm

    Universities, if they are going to encourage the careers of women (and of everyone), she said, need to be willing to embrace “people with different values” and be sure that they are fully included. To the extent some men “will compete for anything,” Downey said, that should not set a standard where only women who share those values can succeed in academe. The success of women and men, she said, can be judged on their work and not competitiveness. “It’s no longer useful to have a ’sink or swim’ mentality,” she said.
    "New Questions on Women, Academe and Careers," by Scott Jaschik, Inside Higher Ed, September 22, 2008 --- http://www.insidehighered.com/news/2008/09/22/women

    Bob Jensen's threads on affirmative action in hiring and pay raises are at
    http://www.trinity.edu/rjensen/HigherEdControversies.htm#AffirmativeAction


  • August 20, 2009 message from Patricia Walters [patricia@DISCLOSUREANALYTICS.COM]

    Here's another interesting post by Jonathan Weil: From:
    http://www.bloomberg.com/apps/news?pid=20601039&sid=a8itsmbfm9qc

    Commentary by Jonathan Weil

    Aug. 20 (Bloomberg) -- How many legs would a calf have if we called its tail a leg?

    Four, of course. Calling a tail a leg wouldn’t make it a leg, as Abraham Lincoln famously said.

    Nor does calling an expense an asset make it an asset. This brings us to the odd accounting rules for the insurance industry, including Lincoln National Corp., which uses Honest Abe as its corporate mascot.

    Look at the asset side of Lincoln National’s balance sheet, and you’ll see a $10.5 billion item called deferred acquisition costs,” without which the company’s shareholder equity of $9.1 billion would disappear. The figure also is larger than the company’s stock-market value, now at $7 billion.

    These costs are just that -- costs. They include sales commissions and other expenses related to acquiring and renewing customers’ insurance-policy contracts. At most companies, such costs would have to be recorded as expenses when they are incurred, hitting earnings immediately.

    Because it’s an insurance company selling policies that may last a long time, however, Lincoln is allowed to put them on its books as an asset and write them down slowly -- over periods as long as 30 years in some cases -- under a decades-old set of accounting rules written exclusively for the industry.

    Rule Overhaul

    Those days may be numbered, under a unanimous decision in May by the U.S. Financial Accounting Standards Board that has received little attention in the press. The board is scheduled to release a proposal during the fourth quarter to overhaul its rules for insurance contracts. If all goes according to plan, insurers no longer would be allowed to defer policy-acquisition costs and treat them as assets.

    One question the board hasn’t addressed yet is what to do with the deferred acquisition costs, or DAC, already on companies’ books. While there’s been no decision on that point, it stands to reason that insurers probably would have to write them off, reducing shareholder equity. The board already has decided such costs aren’t an asset and should be expensed. If that holds, it wouldn’t make sense to let companies keep their existing DAC intact.

    The impact of such a change would be huge. A few examples: As of June 30, Hartford Financial Services Group Inc. showed DAC of $11.8 billion, which represented 88 percent of its shareholder equity, or assets minus liabilities. By comparison, the company’s stock-market value is just $7.3 billion.

    MetLife, Prudential

    MetLife Inc. showed $20.3 billion of DAC, equivalent to 74 percent of its equity. Prudential Financial Inc.’s DAC was $14.5 billion, or 78 percent of equity. Aflac Inc. said its DAC was worth $8.1 billion as of June 30, which was more than its $6.4 billion of equity. Genworth Financial Inc. listed its DAC at $7.6 billion, or 76 percent of net assets. That was more than double the company’s $3.4 billion stock-market value.

    The rules on insurance companies’ sales costs are a holdover from the days when the so-called matching principle was more widely accepted among accountants and investors.

    At life insurers, for example, it’s common to pay upfront commissions equivalent to a year’s worth of policy premiums. By stretching the recognition of expenses over the policy’s life, the idea is that companies should match their revenues and the expenses it took to generate them in the same time period.

    The problem with this approach is that deferred acquisition costs do not meet the board’s standard definition of an asset. That’s because companies don’t control them once they have paid them. The money is already out the door. There’s no guarantee that customers will keep renewing their policies.

    No Recognition

    Even the industry’s normally friendly state regulators don’t recognize DAC as an asset for the purpose of measuring capital, under statutory accounting principles adopted by the National Association of Insurance Commissioners.

    To be sure, the FASB’s decisions to date are preliminary. How to treat acquisition costs is one of many issues the board is tackling as part of its broader insurance project. Others include the question of how to measure insurers’ liabilities for obligations to policy holders.

    Meanwhile, the London-based International Accounting Standards Board is working on its own insurance project and has said it would take a more accommodating approach to policy- acquisition costs.

    Insurers would be required to expense them immediately. However, the IASB has said it would let companies record enough premium revenue upfront to offset the costs. That way, they wouldn’t have to recognize any losses at the outset. So far, the U.S. board has rejected the IASB’s method.

    Congress Wild Card

    The wild card in all this is Congress. Last spring, the insurance industry joined banks and credit unions in getting U.S. House members to pressure the FASB to change its rules on debt securities, including those backed by toxic subprime mortgages, so that companies could keep large writedowns out of their earnings. Because the FASB caved before, it’s a safe bet the industry would go that route again.

    With so much riding on the outcome, we should expect nothing less. What’s at stake isn’t the real value of the industry’s assets, but investors’ perceptions of how much they’re worth.

    Honest Abe wouldn’t be fooled.

    August 20, 2009 reply from Bob Jensen

  • The current conflict about rules for insurance company accounting brings to light once again the conflict between income statement versus balance sheet priorities accounting standard setting.

    The matching concept based on historical cost accrual accounting was always favored the income statement in place of the balance sheet, because deferred costs were considered obsolete and often arbitrary on the balance sheet. Payton and Littleton provide one of the best theoretical arguments in favor of the matching concept where revenues deemed realized are matched with expenses (or price-level adjusted expenses) used in generating those revenues --- http://www.trinity.edu/rjensen/theory01.htm#FairValue
    Also see mention of Payton and Littleton in
    "Research on Accounting Should Learn From the Past," by Michael H. Granof and Stephen A. Zeff, Chronicle of Higher Education, March 21, 2008

    In the 1970s, the matching concept lost favor in accounting when the FASB decided the balance sheet was to be the primary financial instrument of concern in standard setting. This was heavily influenced at the time by when the FASB declared war on off-balance sheet financing that companies were using to hide financial risk. The FASB subsequently became concerned with earnings management, but the priority of the balance sheet was never questioned by the FASB.

    Today the thrust of the FASB and the IASB into fair value accounting is primarily in the interest of making balance sheets more informative to investors. In the process, fair value accounting greatly confuses the income statement by mixing realized versus unrealized earnings components in the bottom line. This has led some powerful accounting leaders like the current Director of the FASB (Bob Herz) to argue that perhaps income statement components should not be aggregated by companies or auditors into bottom line net income ---
    http://www.trinity.edu/rjensen/theory01.htm#ChangesOnTheWay
    This is analogous for pharmacies to declare that certain drugs are too dangerous to sell in one pill, but they will sell 100 ingredient pills that you can pick and choose from to get a combined effect.

    The current heated debate on what unrealized earnings can be diverted to Comprehensive Income (OCI) instead of being posted to current earnings is rooted in the unresolved problem of what types of unrealized income to keep out of current earnings. This is the black hole of fair value accounting apart from the even more serious problem of how to make fair value estimates cost effective (e.g., having real estate formally appraised every year would not be cost effective for large international hotel or restaurant chains).

    The current conflict about rules for insurance company accounting brings to light once again the conflict between income statement versus balance sheet priorities accounting standard setting.

    There are accounting theorists (today it's Tom Selling) who argue that historical cost accounting should be replaced by entry value (replacement cost) accounting. Note, however, that replacement cost accounting is not fair value accounting in the sense that it still entails the hated arbitrary cost allocation assumptions of historical cost accounting. When a farmer buys a tractor for $500,000 and puts it on a 15-year double declining balance (DDB) depreciation schedule, the cost allocation is quite arbitrary but still in the spirit of the matching concept. At the end of five years, the replacement cost may now be $800,000, but the farmer cannot book his old tractor at the price of a new tractor. Under replacement cost accounting he must bring the $800,000 on the books net of five years of (arbitrary) depreciation.

    Thus replacement cost accounting is not "valuation" accounting. It’s still cost allocation accounting based largely on capital maintenance theory to prevent greedy managers or ignorant farmers from declaring dividends that destroy the farm.

    There are even more theorists (Chambers, Sterling, Schuetz, Edwards, Bell, etc.) that favor exit value accounting. This is truly valuation accounting. But exit values sometimes have little to do with value in use. For example, the exit value of that $500,000 tractor may only be $100,000 in the used market but still have a value in use to the farmer far in excess of $400,000. Exit values are particularly problematic for valuable assets in place (like custom factory robots) that are practically worthless in the used equipment market because of the immense cost of tearing them down and re-installing them at a new location.

    Hence the main problem of exit value accounting for operating assets in use is that it nearly always values them in their worst possible use (unloading them in a used-asset market) when in fact their best possible use is to continue using them as part of a profitable operation where they have synergy and valuable covariances with other operating assets and skilled employees.

    Hence there are no silver bullets in putting numbers on balance sheet items. All have some advantages and disadvantages in terms of potential to mislead passive investors --- http://www.trinity.edu/rjensen/theory01.htm#FairValue

    Bob Jensen’s summary of the fair value accounting controversies (including a Days Inn illustration from the past) are at
    http://www.trinity.edu/rjensen/theory01.htm#FairValue

    Bob Jensen's threads on accounting history ---
    http://www.trinity.edu/rjensen/theory01.htm#AccountingHistory

    Bob Jensen


    This is not the way forward. While regulators and legislators are keen to find simple solutions to complex problems, allowing financial institutions to ignore market transactions is a bad idea.
    "2 Nobel Laureates Recommend Disclos[ing] the fair value of complex securities," Simoleon Sense, August 22, 2009 ---
    http://www.simoleonsense.com/2-nobel-laureates-recommend-disclosing-the-fair-value-of-complex-securities/

    Introduction (Via FT)

    Banks and other financial institutions are lobbying against fair-value accounting for their asset holdings. They claim many of their assets are not impaired, that they intend to hold them to maturity anyway and that recent transaction prices reflect distressed sales into an illiquid market, not what the assets are actually worth. Legislatures and regulators support these arguments, preferring to conceal depressed asset prices rather than deal with the consequences of insolvent banks.

    Excerpts (Via FT)

    Financial assets, even complex pools of assets, trade continuously in markets. Markets function best when companies disclose valid information about the values of their assets and future cash flows. If companies choose not to disclose their best estimates of the fair values of their assets, market participants will make their own judgments about future cash flows and subtract a risk premium for non-disclosure. Good accounting should reduce such dead-weight losses.

    Financial assets, even complex pools of assets, trade continuously in markets. Markets function best when companies disclose valid information about the values of their assets and future cash flows. If companies choose not to disclose their best estimates of the fair values of their assets, market participants will make their own judgments about future cash flows and subtract a risk premium for non-disclosure. Good accounting should reduce such dead-weight losses.

    "Disclose the fair value of complex securities," by Robert Kaplan, Robert Merton and Scott Richard, Financial Times, August 17, 2009 --- http://www.ft.com/cms/s/0/f206cf68-8b59-11de-9f50-00144feabdc0.html?nclick_check=1 

    Banks and other financial institutions are lobbying against fair-value accounting for their asset holdings. They claim many of their assets are not impaired, that they intend to hold them to maturity anyway and that recent transaction prices reflect distressed sales into an illiquid market, not what the assets are actually worth. Legislatures and regulators support these arguments, preferring to conceal depressed asset prices rather than deal with the consequences of insolvent banks.

    This is not the way forward. While regulators and legislators are keen to find simple solutions to complex problems, allowing financial institutions to ignore market transactions is a bad idea.

    A bank typically argues that a mortgage loan for which it continues to receive regular monthly payments is not impaired and does not need to be written down. A potential purchaser of the loan, however, is unlikely to value it at its origination value. The purchaser calculates a loan-to-value ratio using the current, much lower value of the house. After calculating the likelihood of default, the potential buyer works out a price balancing the risk of default and amount that might be lost – a price well below the carrying value on the bank’s books.

    The bank is likely to ignore this offered price, or trades of similar assets, with the claim that unusual market conditions, not a decline in the value of the assets, causes a lack of buyers at the origination price. Its real motive, however, is to avoid recognising a loss. Yet, by keeping assets at their origination value, the bank creates the curious possibility that its traders could buy an identical loan more cheaply and so carry two identical securities in the same not-for-sale account at vastly different prices.

    Financial assets, even complex pools of assets, trade continuously in markets. Markets function best when companies disclose valid information about the values of their assets and future cash flows. If companies choose not to disclose their best estimates of the fair values of their assets, market participants will make their own judgments about future cash flows and subtract a risk premium for non-disclosure. Good accounting should reduce such dead-weight losses.

    This already happens in another financial sector. Mutual funds in the US now use models, rather than the last traded price, to provide estimates of the fair values of their assets that trade in overseas markets. The models forecast the prices at which these overseas assets would have traded at the close of the US market, based on the closing prices of similar assets in the US market. In this way, the funds ensure that their shareholders do not trade at biased net asset values calculated from stale prices. Banks can similarly use models to update the prices that would be paid for various assets. Trading desks in financial institutions have models that allow them to predict prices to within 5 per cent of what would be offered for even their complex asset pools.

    Obtaining fair-value estimates for complex pools of asset-backed securities, of course, is not trivial. But these days it is possible for a bank’s analysts to use recent market transaction prices as reference points and then adjust for the unique characteristics of the assets they actually hold, such as the specific local housing prices underlying their mortgage assets.

    For fair-value estimates made by internal bank analysts to be credible, they need to be independently validated by external auditors. Many certified auditors, however, have little training or experience in the models used to calculate fair-value estimates. In this case, auditing firms can use outside experts, much as they do today with actuaries and lawyers who provide an independent attestation to other complex estimates disclosed in a company’s financial statements. The higher cost of using independent experts is part of the price of originating and investing in complex, infrequently traded financial instruments.

    Legislators and regulators fear that marking banks’ assets down to fair-value estimates will trigger automatic actions as capital ratios deteriorate. But using accounting rules to mislead regulators with inaccurate information is a poor policy. If capital calculations are based on inaccurate values of assets, the ratios are already lower than they appear. Banks should provide regulators with the best information about their assets and liabilities and, separately, allow them the flexibility and discretion to adjust capital adequacy ratios based on the economic situation. Regulators can lower capital ratios during downturns and raise them during good economic times.

    No system of disclosing the fair value of complex securities is perfect. Models can be misused or misinterpreted. But reasonable and auditable methods exist today to incorporate the information in the most recent market prices. Investors, creditors, boards and regulators need not base decisions on biased values of a company’s financial assets and liabilities.

    Robert Kaplan and Robert Merton, 1997 Nobel laureate in economics, are professors at Harvard Business School. Scott Richard is a professor at the Wharton School of the University of Pennsylvania

    Jensen Comment
    I am also in favor of fair value accounting for financial instrument. The unresolved controversy is whether to post unrealized changes in value of these securities to current earnings or accumulated OCI where the changes do not affect earnings until if and when they are realized. In the case of held-to-maturity securities the accumulated value changes wash out and never are realized. If unrealized fair value changes are posted to earnings, bankers especially hate the volatility in earnings that comes about from mixing realized with unrealized revenues. Kaplan, Merton, and Richard due not address this primary concern of bankers.

    Bob Jensen's threads on fair value accounting ---
    http://www.ft.com/cms/s/0/f206cf68-8b59-11de-9f50-00144feabdc0.html?nclick_check=1

     


    SEC Concerns About the Rush to  IFRS

    From IAS Plus on August 4, 2009 --- http://www.iasplus.com/index.htm

    Speaking at the annual meeting of the American Accounting Association in New York on 3 August 2009, Wayne Carnall, Chief Accountant of the Division of Corporation Finance of the US Securities and Exchange Commission, discussed issues relating to the use of IFRSs by SEC registrants. Among the points Mr Carnall made:

    Bob Jensen's threads on the controversies of IFRS ---
    http://www.trinity.edu/rjensen/theory01.htm#MethodsForSetting


    From the Maryland Association of CPAs (MACPA)
    "How to Leverage Social Networking," The Journal of Accountancy, August 2009 --- http://www.journalofaccountancy.com/Issues/2009/Aug/20091768.htm 

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

    July 24, 2009 reply from Tom Hood [tom@MACPA.ORG]

    I think we should also nominate this cat for a Darwin Award (seems to have evolved well ahead of its time)
    Keith R. Griffin, of the 3600 block of Northeast Jeannette Drive, was charged Wednesday with 10 counts of possession of child pornography after detectives found more than 1,000 child pornographic images on his computer, according to a news release. Griffin told detectives he would leave his computer on and his cat would jump on the keyboard.
    Sun Sentinal, August 6, 2009 ---
    http://www.sun-sentinel.com/news/local/breakingnews/sfl-cat-downloads-porn-bn080709,0,6415792.story

     

  • Bob,

    Thanks for the shout out.

    For those interested in Social Media for CPAs we were also featured in these other Journal of Accountancy articles.

    Video – Making Social Media Work for You http://www.journalofaccountancy.com/Multimedia/TomHood.htm 

    Accounting for Second Life http://www.journalofaccountancy.com/Issues/2008/Jun/AccountingforSecondLife 

    We also have created a free self-guided learning tool (using a blog) for social media- everything from Facebook to LinkedIn, Youtube and Second Life. At http://www.cpalearning2.com for educators and students (although it may be too elementary for them).

    I would be remiss if I did not mention my professor who fueled my interest in technology as a student and later on the MACPA’s technology committee, E. Barry Rice! See my blog post about Barry here http://www.cpasuccess.com/2009/02/back-to-the-future-macpa-technology.html  He greatly influenced me and the Association and we are eternally grateful.

    Hope these are useful

    Warmest regards,

    Tom

    Bob Jensen's threads on social networking, Twitter, blogs, and listservs ---
    http://www.trinity.edu/rjensen/ListservRoles.htm


    SEC says:  "GE bent the accounting rules beyond the breaking point"

    From The Wall Street Journal Accounting Weekly Review on August 6, 2009

    GE Settles Civil-Fraud Charges
    by Paul Glader and Kara Scannell
    Aug 05, 2009
    Click here to view the full article on WSJ.com

    TOPICS: Accounting, Accounting Changes and Error Corrections, Derivatives, Hedging, SEC, Securities and Exchange Commission

    SUMMARY: GE "...agreed to pay a $50 million fine to the Securities and Exchange Commission to settle civil fraud and other charges that GE's financial statements in 2002 and 2003 misled investors....GE agreed to pay the fine without admitting or denying the SEC's allegations." The SEC uncovered the accounting issues from a strategic risk-based identification process followed by specific investigative procedures to determine whether a problem exists at a particular issuer. This case began with investigation into accounting for derivatives and hedging instruments, then ultimately uncovered four problems in three areas of accounting: derivatives and financial instruments; revenue recognition; and accounting for spare parts inventory. GE made restatements for the items found by the SEC in 2002 and 2003. As made clear in the related article, the SEC also is undertaking an effort, under its new Enforcement Director Robert Khuzami, to resolve old cases and make other improvements following criticism for failure to detect the Madoff fraud despite numerous warnings from outsiders. Actions documented in the article are examples of strategies undertaken by Mr. Khuzami, which are modeled after the Justice Department from which he came.

    CLASSROOM APPLICATION: The article can be used to understand the role played by the U.S. SEC to improve financial reporting practices despite delegation of its authority to establish accounting standards to the FASB. Though not mentioned in the article, this enforcement role is unique in world markets and emphasizes the need for monitoring over and above the services provided by the auditing profession.

    QUESTIONS: 
    1. (Introductory) According to the main and related articles, how did the SEC decide to investigate GE's accounting practices? How does this enforcement role by the SEC add to the value created by the audit function over public financial information?

    2. (Advanced) In what four accounting areas did GE make restatements as a result of this investigation? How are these areas subject to "bending of accounting rules" and management judgments which may result in earnings management or manipulation?

    3. (Advanced) Compare and contrast the reactions to this announcement by two financial analysts. In your answer, comment on how the SEC's role as described in answer to question #1 supports their work in using publicly-available financial information.

    4. (Introductory) Again, refer to the last analyst's reaction in stating that these issues were "never material". Define materiality, citing an authoritative source for your definition. In what ways do the GE issues seem material, and in what ways do they not?

    5. (Advanced) Refer to the related article and to the statement by SEC's new enforcement director, Robert Khuzami, linked in the online version of that article. (Available at http://s.wsj.net/public/resources/documents/WSJ_KhuzamiSpch090805.pdf ) How do the actions evidenced in this GE case exemplify the "Four Ss" or principles instituted by Mr. Khuzami to improve SEC operations after criticism over its handling of the Madoff fraud case?

    Reviewed By: Judy Beckman, University of Rhode Island

    RELATED ARTICLES: 
    SEC to Give Attorneys More Power
    by Kara Scannell
    Aug 06, 2009
    Online Exclusive

     

    "GE Settles Civil-Fraud Charges:  Fine of $50 Million Resolves SEC Probe Into Firm's Accounting Practices," by Paul Glader and Kara Scannell, The Wall Street Journal, August 5, 2009 --- http://online.wsj.com/article/SB124939838428504935.html#mod=todays_us_marketplace

    General Electric Co. agreed to pay a $50 million fine to the Securities and Exchange Commission to settle civil fraud and other charges that GE's financial statements in 2002 and 2003 misled investors.

    The fine settles a probe that started in 2005 into GE's accounting procedures, including financial hedges and revenue recognition. In a complaint filed with U.S. District Court in Connecticut, the SEC said the Fairfield, Conn., conglomerate used improper accounting methods to boost earnings or avoid disappointing investors.

    "GE bent the accounting rules beyond the breaking point," said Robert Khuzami, director of the SEC's Division of Enforcement, in a prepared statement. "Overly aggressive accounting can distort a company's true financial condition and mislead investors."

    GE agreed to pay the fine without admitting or denying the SEC's allegations. The SEC noted efforts by GE's audit committee to correct and improve the company's accounting during the probe. GE twice restated its financial results and disclosed other errors. The probe led to several employees being disciplined or fired.

    "We are committed to the highest standards of accounting," said GE spokeswoman Anne Eisele. "While this has been a difficult and costly process, our controllership processes have been strengthened as a result, and GE is a stronger company today." GE said it doesn't need to further correct or revise its financial statements related to the investigation.

    The SEC complaint focused on GE's accounting for four items over various periods: derivatives, commercial-paper funding, sales of spare parts and revenue recognition. The commission said GE in 2002 and 2003 reported locomotive sales that hadn't yet occurred in order to boost revenue by $370 million. A 2002 change in accounting for spare parts in its aircraft-engine unit increased that year's net income by $585 million, the commission said.

    In early 2003, the SEC alleges, GE changed how it accounted for hedges on its issuances of short-term borrowings known as commercial paper. The commission said the change boosted GE's pretax earnings for 2002 by $200 million. Had it not changed the methodology, the commission said, GE would have missed analysts' earnings estimates for the first time in eight years, by 1.5 cents.

    "Every accounting decision at a company should be driven by a desire to get it right, not to achieve a particular business objective," said David P. Bergers, director of the commission's Boston office, which led the investigation. "GE misapplied the accounting rules to cast its financial results in a better light."

    The settlement resolves the GE accounting inquiry, but Mr. Bergers said similar SEC investigations of other companies continue.

    GE's shares were up 10 cents to $13.82 in 4 p.m. composite trading on the New York Stock Exchange. Investors and analysts said the settlement represented closure.

    "I feel as though the company has corrected its practices," said David Weaver, a portfolio manager at Adams Express in Baltimore, which owns about 1.5 million GE shares. "Going forward, I feel a little more comfortable with the cleanliness of [GE's earnings] numbers."

    Matt Collins, an industrial analyst at Edward Jones in St. Louis, said the accounting issues had been "frustrating for investors, but they were never material." He said investors are now focused on the recession and losses at GE's finance unit.

    The SEC under enforcement chief Mr. Khuzami is trying to close cases older than three years unless they are critical to the agency's program. The goal is to clear out the pipeline so attorneys can work on current cases, although one person familiar with the matter said that wasn't a consideration in this case.

    Jensen Comment
    GM's auditor, KPMG, is not named in the court paper such that the role auditors played in allowing GE to push these alleged accounting abuses is not disclosed.

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

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


    "SEC Charges Terex Corporation With Accounting Fraud," SEC News, August 12, 2009 ---
    http://www.sec.gov/news/press/2009/2009-183.htm

    The Securities and Exchange Commission today charged Terex Corporation, a Westport, Conn.-based heavy equipment manufacturer, with accounting fraud for making material misstatements in its own financial reports to investors, as well as aiding and abetting a fraudulent accounting scheme at United Rentals, Inc. (URI), another Connecticut-based public company.

    Terex has agreed to settle the SEC's charges and pay a penalty of $8 million. The SEC previously charged URI with fraud as well as officers of URI and Terex.

    "Terex is being charged with helping United Rentals pull off a sophisticated accounting scheme," said Fredric D. Firestone, Associate Director in the SEC's Division of Enforcement. "These two public companies inflated year-end results in order to mislead investors during a period of industry recession."

    The SEC's complaint, filed in U.S. District Court for the District of Connecticut, alleges that Terex aided and abetted the fraudulent accounting by URI for two year-end transactions that were undertaken to allow URI to meet its earnings forecasts. These fraudulent transactions also allowed Terex to prematurely recognize revenue from its sales to URI. The fraud occurred through URI's sales of used equipment to a financing company and its lease-back of that equipment for a short period. As part of the scheme, Terex agreed to sell the equipment at the end of the lease period and guarantee the financing company against any losses. URI separately guaranteed Terex against losses it might incur under the guarantee it had extended to the financing company.

    The SEC's complaint also alleges that from 2000 through June 2004, Terex's accounting staff failed to resolve imbalances arising from certain intercompany transactions. Instead of investigating and correcting the imbalances, Terex offset the imbalances with unsupported and improper entries. As a result, costs were not recorded as expenses, and, on a consolidated basis, Terex appeared to be more profitable than it was.

    Without admitting or denying the SEC's charges, Terex agreed to settle the Commission's action by consenting to be permanently enjoined from violating the antifraud, reporting, books and records and internal control provisions of the federal securities laws and by paying the $8 million penalty. The settlement is subject to court approval.

    The Commission acknowledges the assistance of the U.S. Attorney's Office for the District of Connecticut and the New Haven Field Office of the Federal Bureau of Investigation in this matter.

    Question
    What does Bernie Madoff have in common with Terex?

    Answer
    At one time, Madoff and Terex used unregistered auditors.

    Terex restated its financial statements in 2005 --- http://www.highbeam.com/doc/1G1-132061896.html

    Terex Resources Inc. (TSX VENTURE:TRR) ("Terex" or the "Company") announces that it is filing on SEDAR today new financial statements in respect of its year ended December 31, 2003 that have been audited by Parker Simone LLP. The new financial statements have been prepared and are being filed on SEDAR today as a result of the former financial statements in respect of its year ended December 31, 2003 having been audited by an auditor that was not registered with the Canadian Public Accountability Board.

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


    Should known fiction be added to financial statements?
    There’s a huge controversy as to how much fiction we should allow in financial statements under fair value accounting. In my viewpoint, we should not allow fiction that we’re 99.999999% certain it's fiction. Keep in mind that all the fair value ups and downs of earnings totally wash out over the lifetime of an HTM security. Interim value changes are pure fiction, especially under IFRS where the penalties are too severe to turn fiction into cash.

    Some argue that HTM fair value adjustments reflect opportunity gains and losses when evaluating management. But these opportunity gains and losses may be so inaccurate that they remain in the realm of total fiction.

    Bob Jensen

     

    "FASB Could Finally Get Loan Accounting Right – Well, Less Wrong," by Tom Selling, Accounting Onion, August 13, 2009  ---
    Click Here
    http://accountingonion.typepad.com/theaccountingonion/2009/08/fasb-could-finally-get-loan-accounting-right-almost.html

     

    Jensen Comment

    Tom selling wrote:
    I can an think of two responses to the argument. The obvious one is that much has changed since 1993, when the FASB voted 5-2 to adopt FAS 115, and acceded to the held-to-maturity camp, to allow issuers to blissfully disregard readily available market values.

     

    Tom and I will forever disagree on that earnings should be allowed to fluctuate for the fiction of price movements in held-to-maturity (HTM) securities and the asymmetry of fair value movements of hedging contracts that hedge unbooked items (such as forecasted transactions). My differences with Tom on these two issues vary with respect to HTM securities versus unbooked hedged items.

     

    Suppose a firm borrows $100 million by selling 10-year bonds at 5% with the holding that debt to maturity. Letting earnings fluctuate for 40 quarters for fictional gains and losses of value changes on those bonds is more misleading than helpful investors in my viewpoint. It may be especially fiction if there are cost-profit-volume considerations. Just because a few investors in those bonds are willing to sell at current market (thereby making a market) does not mean that all investors are willing to sell at current market rates. There are issues of blockage costs of trying to by all the bonds back versus buying only $1 million of those bonds back. The fair value of all $100 million bonds is very, very difficult to estimate. Level 1 of FAS 157 can be very misleading in this instance.

    But even if we can accurately measure the value of the $100 million in debt, I still do not think it adds value to actually book repeated gains and losses that automatically wash out over the 10 year life of the bonds. This is especially the case in IFRS where severe penalties are incurred for firms that the IASB imposes on companies that renege on their held-to-maturity pledges.

    Debtors could book debt at current call back values, but these call back values often have penalty clauses that make them poor surrogates of current value, especially when penalties are severe.

    I might ask Tom how he would adjust fair market value of HTM securities for the penalty clauses of the IASB for reneging on HTM pledges.

    There are also hedge accounting considerations.

    Paragraph 79 of IAS 39 does not allow interest rate risk hedge accounting for HTM securities. Paragraph 21(d) of FAS 133 similarly precludes hedge accounting treatment for interest rate risk and FX risk, although credit default hedges are permitted. AFS securities can get hedge accounting relief.

    Tom could argue that elimination of HTM designations and valuation of all financial securities at fair value eliminates some of the complexity of having hedge accounting available for AFS securities and unavailable for HTM securities. However, in my viewpoint having hedge accounting for securities that the company pledges will truly be held to maturity causes more problems by having both hedge accounting and fair value adjustments on these securities set in stone for the duration of their life.

    There’s a huge controversy as to how much fiction we should allow in financial statements under fair value accounting. In my viewpoint, we should not allow fiction that we’re 99.999999% certain is fiction. Keep in mind that all the fair value ups and downs of earnings totally wash out over the lifetime of an HTM security. Interim value changes are pure fiction, especially under IFRS where the penalties are too severe to turn fiction into cash.

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


    SERIOUS Doubts Over Proposed Changes to FAS 133 and IAS 39

    The FASB proposes dubious changes in FAS 133 on Accounting for Derivative Financial Instruments and Hedging Activities while the IASB is studying similar changes in IAS 39. With the SEC currently sitting on the fence in deciding if and when to replace FASB standards with IASB standards, I fully predict that IAS 39 will pretty much follow the revise FAS 133 as it did when IAS 39 was initially adopted, although IAS 39 will continue to have wider coverage of financial instruments in general whereas FAS 133 will narrowly focus on derivative financial instruments and hedge accounting.

    When the FASB initially signaled possible revisions for changing hedge accounting rules in FAS 133, a wave of protests from industry hit the fan. The article below is the response of Ira Kawaller who serves on the FASB's Derivatives Implementation Group (DIG) and who is one of the leading consultants on FAS 133 and hedging in general which is his where he has historic roots as a PhD in economics --- http://www.kawaller.com/about.shtml
    Ira has written nearly 100 trade articles on FAS 133. I don't think he consults on IAS 39. Ira's home page is at http://www.kawaller.com/about.shtml
    Ira also maintains a small hedge fund where he walks the talk about interest rate hedging. However, I'm no expert on hedge funds and will not comment on any particular hedge fund.

    I might note in passing for enthusiasts of the new FASB Codification Database for all FASB standards that FAS 133 coverage in the Codification database is relatively sparse. Professionals and students in hedge accounting most likely will have to connect back to original (non-codified) FASB literature. For example, none of the wonderful illustrations in Appendices A and B of FAS 133 are codified. And the extremely helpful, albeit complicated, pronouncements of the FASB's Derivatives Implementation Group (DIG) are excluded from the Codification database --- http://www.fasb.org/derivatives/
    Most of the DIG pronouncements are included in context at http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm
    I will never have a lot of respect for the Codification database until it includes much, much more on FAS 133.

    Below is a publication in which Dr. Kawaller presents serious doubts regarding revisions to FAS 133 that the FASB is now considering (and the IASB is now considering for IAS 39).

    The problem is even more severe for entities with fixed-rate exposures. In this case, there’s a clear disconnect between what swaps are designed to do versus what the FASB requires for hedge accounting.
    "Paved With Good Intentions:  The Road to Better Accounting for Hedges," The CPA Journal, August 2009 --- http://www.kawaller.com/pdf/CPA_Paved_w_Good_Intent_Aug_2009.pdf

    With 10 years of experience under the current regime of accounting for derivative contracts and hedging transactions, the FASB has determined that it’s time to make some adjustments. Accountants should be wary of the changes. Besides affecting the accounting procedure relating to these instruments and activities, the proposed changes may also seriously impact the manner in which certain derivative hedges are structured— particularly in connection with interest rate risk management activities.

    Accounting rules for derivatives and hedging transactions were put forth by the FASB in SFAS 133, Accounting for Derivative Instruments and Hedging Activities. This standard was initially issued in June 1998. It has been amended twice since then, with relatively minor adjustments, but in 2008 the FASB issued a more substantive exposure draft with significant proposed changes. Although the comment period on this exposure draft is over, the project appears to be in limbo. Proposed changes have neither been accepted nor rejected. Further adjustments are likely to be made as the FASB moves to harmonize U.S. accounting guidance with International Financial Reporting Standards (IFRS). When attention turns to derivatives, this latest exposure draft could very likely serve as a starting point. The prospective decisions about the accounting treatment for these derivatives could have a profound impact on the structure and composition of derivatives transactions

    The Current Standard SFAS 133 has long been recognized as one of the most complicated accounting standards the FASB has ever issued. A core principle of this standard is that derivative instruments must be recognized on the balance sheet as assets or liabilities at their fair market value. The critical issue, then, is the question of how to handle gains or losses. Should they be reported in current income or elsewhere? Ultimately, SFAS 133 ended up providing different answers for different situations. The “normal” treatment simply requires gains and losses recognized in earnings. This treatment, however, is often problematic for companies that use derivatives for hedging purposes. For such entities, the preferred treatment would recognize gains or losses of derivatives concurrently with the earnings impacts of the items being hedged. The normal accounting treatment generally won’t yield this desired result, but the alternative “hedge accounting” will.

    For purposes of this discussion, attention is restricted to the two primary hedge accounting types: cash flow and fair value. For cash flow hedges, the exposure being hedged (i.e., the hedged item) must be an uncertain cash flow, forecasted to occur in a later time period. In these cases, effective gains or losses on derivatives are originally recorded in other comprehensive income (OCI) and later reclassified from OCI to earnings when the hedged item generates its earnings impact. Ineffective results are recorded directly in earnings. In essence, this accounting treatment serves to defer the derivatives’ gains or losses—but only for the portion of the derivatives’ results that are deemed to be effective—thus pairing the earnings recognition for the derivative and the hedged item in a later accounting period.

    Continued in article

    Bob Jensen and Tom Selling have been having an active, to say the least, exchange over hedge accounting where Tom Selling advocates elimination of all hedge accounting (by carrying all derivatives at fair value with changes in value being posted to current earnings). Bob Jensen thinks this is absurd, especially for derivatives that hedge unbooked transactions such as forecasted transactions or unbooked purchase contracts for commodities. Not having hedge accounting causes asymmetric distortions of earnings where the changes in value of the hedging contracts cannot be offset by changes in value of the (unbooked) hedged items. You can read more about our exchanges under the terms "Insurance Contracts" at
    http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm#I-Terms
    Scroll down to "Insurance Contracts"

    Bob Jensen's free tutorials, audio clips, and videos on FAS 133 and IAS 39 are linked at http://www.trinity.edu/rjensen/caseans/000index.htm


    Big Four (Alumni) Blog (actually covering more than the Big Four) --- http://www.bigfouralumni.blogspot.com/
    Accent the positive, eliminate the negative

    Bob Jensen's threads on listservs, blogs, and social networking ---
    http://www.trinity.edu/rjensen/ListservRoles.htm


    "FASB and XBRL US Align XBRL US GAAP Tags to New Accounting Codification," SmartPros, August 4, 2009 --- http://accounting.smartpros.com/x67333.xml

    The Financial Accounting Standards Board (FASB) and XBRL US, the nonprofit consortium for XML business reporting standards, announced today that they have completed the work to revise the XBRL US GAAP Taxonomy to reflect the FASB Accounting Standards Codification(TM) that was released on July 1, 2009. The Codification is the single source of authoritative nongovernmental US generally accepted accounting principles (GAAP) and is effective for interim and annual periods ending after September 15, 2009.

    In 2008, the FASB created an XBRL project team that worked closely with the XBRL US team to release the new Codification extension taxonomy. The FASB's XBRL project team reviewed the authoritative references in the current taxonomy and added the related Codification references. Public companies using the US GAAP Taxonomy to create XBRL-formatted financial statements can now link directly from the taxonomy extension to the specific Codification reference as posted on FASB's Codification website. The Codification references, in conjunction with the element labels and definitions, provide companies the information they need to select the right element in the taxonomy to accurately reflect their financial statements.

    "The FASB Accounting Standards Codification(TM) simplifies the process of researching accounting issues by providing a single authoritative source of US GAAP. The work that FASB and XBRL US have done to bring these references into the US GAAP Taxonomy further streamlines the process of financial statement preparation for public companies," stated Robert H. Herz, chairman of the FASB. "Incorporating the Codification into the US GAAP Taxonomy will give preparers an easy tool that will help them select the appropriate elements for filing their XBRL financial statements."

    The Codification reorganizes the thousands of US GAAP pronouncements into roughly 90 accounting topics and displays all topics using a consistent structure. It also includes relevant Securities and Exchange Commission (SEC) guidance that follows the same topical structure in separate sections in the Codification.

    The US GAAP Taxonomy was developed by XBRL US under contract with the SEC as a comprehensive set of reporting elements that include GAAP requirements and common reporting practices. Public companies use this digital dictionary when creating XBRL-formatted financials. The SEC mandated the use of XBRL for all public companies over a three year period; the largest public companies, with a worldwide public float greater than $5 billion, began filing for interim financial statements with periods ending on or after June 15, 2009.

    "We will continue to work closely with the FASB to align the US GAAP reporting elements with all new accounting standards. Public company reporting must change to reflect investor and marketplace needs. The appropriate level of support and maintenance will ensure that the XBRL reporting elements used by public companies reflect the most current industry and accounting standards," said Mark Bolgiano, president and CEO, XBRL US. "Proper maintenance of the taxonomy is key to giving preparers the tool to create consistent, high-quality financial data that gives investors greater transparency and ultimately better accuracy in their own analysis."

    Jensen Comment
    It would seem that all this effort is a race against time before the FASB's Codification might self destruct if and when international standards (IFRS) replace all FASB domestic standards for public companies. The SEC has yet to issue a new roadmap to IFRS, but the Big Four firms (PwC insists that IFRS is absolutely certain to replace FASB standards) are all betting that FASB standards will self destruct very soon (odds place the funeral in 2014).

    Codification of the FASB standards, interpretations, and other hard copy FASB documentation into a searchable "Codification" database, like the road to hell, is paved with good intentions. Bits and pieces of hard copy dealing with a given topic are scattered in many different hard copy FASB references and bringing this all together in newly coded Codification numbered sections and subsections is a fabulous "paving" idea.

    FASB News Release --- Click Here

    Just to see how important this is for accounting and finance students as well as faculty, go to
    http://www.cfo.com/article.cfm/13854787/c_2984368/?f=archives

    Also see http://www.journalofaccountancy.com/Web/July1Codification

    And see http://www.journalofaccountancy.com/Web/Codification

    At least Codification of FASB hard copy was a great "paving" idea until it became evident that FASB standards most likely will be entirely replaced by IASB international standards (IFRS). It's still uncertain when and if IFRS will replace the FASB standards, but recent events in Washington DC suggest that the transition will most likely happen at the end of 2014. This means that millions of dollars and millions of professional work time hours by accountants, auditors, educators, and financial analysts will be spent using the FASB's new Codification database that commenced on July 1, 2009 and will most likely self destruct on December 31, 2014. As I indicated, when and if IFRS will take over is still uncertain and controversial, but I'm betting the shiny new FASB Codification database will self destruct in 2014 --- http://www.trinity.edu/rjensen/theory01.htm#MethodsForSetting

    As a result of scheduled obsolescence, what commenced as a Codification smart idea became dumb and dumber in 2009.

    Furthermore, the Codification database has some huge limitations because it contains only a subset of the FASB hard copy material that it ostensibly is replacing. This greatly complicates XBRL tagging for some standards and interpretations and implementation guidelines.

    But the biggest problem remains that all this effort to develop XBRL tagging for the new Codification database codes may be a waste of time if the Big Four firms are correct in their expectations of death for FASB standards that comprise the Codification database.

    Previously one of the top experts on XBRL tagging said developing Codification tags will be a "trivial exercise," but some of us lesser novices cannot fathom that it will be so trivial to tag the huge Codification referencing and cross referencing system.

    There's an added problem that Louis does not address. Companies themselves have not shown a whole lot of enthusiasm for the Codification referencing system, in part, because they too anticipate a funeral for the Codification referencing of FASB standards and interpretations EITFs and implementation guidelines.

    June 28, 2009 reply from Louis Matherne [matherne@OPTONLINE.NET]

    Bob,

    I don't agree with the following...

    "... This year early adopters of XBRL who tagged their financial statements with FASB hard copy references will be putting out obsolete XBRL tagging. All the U.S. standard XBRL tagging software and financial analysis software will have to be rewritten..."

    While there will undoubtedly be some impact to the current USGAAP taxonomies, I expect it to be minimal. The references that are currently in the taxonomy are largely in sync with their codification replacements as the FAF and XBRL US have been working on this expected transition for some time.

    From a mechanical point of view it will be a fairly simple exercise to "slip stream" in the codification references.

    Louis

    June 28, 2009 reply from Zane Swanson [ZSwanson@UCO.EDU]

    Askaref (which I developed with 2 others) is designed for handheld internet devices to do that cross-referencing between line item accounts, XBRL tags, and GAAP references (FASBs, etc). Having gone through the database machinations to make this function work, I would say that effort is nontrivial, but not rocket science. Until I see what a official release of the XBRL tagging for the Codification, I would suggest that blanket statements are premature about the ease to “slip stream” references or the rendering of databases as useless. In any event, it will make users and support individuals mad if this feature is delayed … like the Boeing 787 dreamliner (the launch date keeps getting delayed and there is a corresponding loss of value). With respect to XBRL tagging errors being generated by the inclusion of Codification, it is difficult to get into the mind of the user/preparer who is selecting the “best match” of a XBRL tag with an accounting line item. I do agree that referencing the appropriate GAAP is critical in order to select the “best match” of an XBRL tag. If this referencing activity is made more difficult or has incomplete links, then it is logical that more errors will occur.

    With regard to textbooks, one fix that I have seen is a cross reference table which lists textbook pages and their FASB references with the Codification references. Hardly elegant, but it works.

    Zane Swanson

    June 28, 2009 reply from Bob Jensen

    Hi Louis

    I was influenced by the following quotation that does not make it sound so slip stream and mechanical as firms struggle to update the XBRL tags:

    Any company with a scheduled filing date before July 22 for a quarter ending June 15 or later can opt to file its report using the out-of-date 2008 taxonomy. The SEC, though, is encouraging filers to use the current set of data tags. To accommodate that request, a company with a line item affected by new FASB literature will have to create its own extensions to the core taxonomy. Not only would that require extra effort by companies, Hannon lamented that "a bunch of rogue XBRL elements" not formed the same way from company to company would inevitably hinder analyses of the effect of FASB's new pronouncements on financial statements.
    David McCann, "Speed Bumps for Early XBRL Filers, Users," CFO.com, June 26, 2009 ---
    http://www.cfo.com/article.cfm/13932485/c_2984368/?f=archives

    I hope you are correct because it will be a race to update all the tagging software and implement these tags in corporate annual reports before the FASB Codification archive database self destructs.

    Another problem is that companies that are affected by FAS 133 often refer to DIGG documents that will not be updated for Codification references. This could lead to rather confusing outcomes where a footnote quotation from a DIGG refers to Paragraph 243 of FAS 133 and the XBRL tag refers to Section 8-15-38 of the Codification database that is not part of the DIGG document.. It will be especially troublesome with FAS 133 since there is so much FAS 133 hard copy that was left out of the Codification database such that searches and references of the database cannot even find many hard copy references originally issued by the FASB.

    I don't think it's as easy as you make it sound and for what purpose with an archival database that will most likely self destruct in such a relatively short period of time?

    Thanks,
    Bob Jensen

    August 10, 2009 reply from Louis Matherne [matherne@OPTONLINE.NET]

    Bob,

    The 2009 US GAAP taxonomy, as has the 2008 taxonomy before it, includes references to the authoritative literature. Effective July 2009, XBRL US / FAF also made available references to the codification. As you can see at this link
    http://viewer.xbrl.us/yeti/resources/yeti-gwt/Yeti.jsp#tax~(id~7*v~34)!net~(a~118*l~30)!lang~(code~en-us)
     the codification references are now available in the current 2009 taxonomy.

    For anyone using the US GAAP taxonomy to build a company extension taxonomy, XBRL US has provided a new “industry entry point” that includes the codification references right alongside the legacy references. The references include links into the cod. For example, the element “AssetsHeldForSaleCurrent” includes the uri http://asc.fasb.org/extlink&oid=6360116&loc=d3e1107-107759 .

    For any filer that has already built an extension taxonomy based on the existing references, they may want to confirm that these new references don’t change their prior choices but given the extent to which the references factored into the prior selections (just my opinion) and the level of consistency you should expect to see between the legacy references and the cod, I don’t expect this to take much time or effort.

    Louis Matherne

    August 11, 2009 reply from Zane Swanson [ZSwanson@UCO.EDU]

    Louis,

    You are right. It was the latter. I think that this message discussion will be a caution for some faculty situations presenting information in class room settings [i.e., in regards to some complexities using XBRL with respect to linkages (e.g., GAAP Codification), etc]. But, it also is a light of hope for showing XBRL information sytems are flexible in terms of work-a-rounds.

    Zane,

    August 10, 2009 reply from nhannon@gmail.com

    Hi Bob,

    I just sent Compliance Week an answer to an email question that they will publish in their next hard copy.  See attached.  I will let you know when I have a web address for the piece.

    Meanwhile, there are a few problems.

    So it appears we have three levels of GAAP material to deal with.  1) the high level public access literature in the Cod; 2) the professional view additional detail and explanations, and 3) the stuff the FASB left out of the COD that was in the hard copy literature but didn't make the COD cut.  The last category contains information that is officially non-GAAP (as of July 1, 2009).

    Neal

    August 11, 2009 reply from Bob Jensen

    Thank you so much for the clarification Neal.

    All this complexity seems so pointless for a self destructing database (FASB Codification)

    Bob Jensen

    August 11, 2009 reply from John Brozovsky [jbrozovs@VT.EDU]

    I agree with what Neal says and am very happy to have the codification available for all the reasons Neal mentioned (caveat-I did work as a consultant on the project and so may have a biased view). However, the SEC was given cart blanche to put into the codification what they thought should be included. The SEC personnel themselves put the information into the system. If the SEC information is inadequate then that would be a matter for the SEC not the FASB. Of course there is the issue that the SEC material is in its own sections and not fully integrated. This was done because not everyone has to follow the incremental SEC guidance. On the issue of codifying discussion memorandum, exposure drafts, etc.; those are not GAAP and so really should not be in the codification. Access to this material is critical as it gives a view of what may happen but it is not yet GAAP. Codifying something as amorphous as a discussion memorandum may not be a good use of professional resources. As it becomes GAAP it will be included in the codification. All new standards will be included in the codification and will be written with inclusion in mind.

    John Brozovsky

    August 11, 2009 reply from Neal Hannon [neal@GILBANE.COM]

    Bob,

    My take is that the codification was a necessary step in the evolution of US GAAP. I believe that having one source for publishing authoritative literature will greatly simplify the task of learning GAAP. I'm disappointed, however, that the FAF revenue model, which includes earning revenues to pay for GASB (not covered by Sar-Ox fees) charges such a high amount to view the wealth of guidance available in FASB discussion papers and other guidance materials. I would encourage FASB to go the next step and "codify" all written materials within their publication family so that we do not miss anything currently available.

    For the FAF/FASB, i think the move to the Cod is a necessary step to a) cut the complexity of GAAP, b) to eliminate GAAP conflicts in the literature, c) to finally purge the AICPA of GAAP publishing status, d) to help prepare for further convergence analysis and e) come up to speed with the codification of IFRS, which is already in place today. Regardless of the movement to IFRS, I believe this step was necessary and correct.

    We do need, however, to strongly encourage the FAF to go all the way and codify all literature published by the organization and to do a much better job of incorporating SEC literature into the codification.

    Neal

     

    Bob Jensen's free tutorials on FAS 133, IAS 39, and DIGG pronouncements are at
    http://www.trinity.edu/rjensen/caseans/000index.htm 

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

     

     


    First, kudos to the Audit Committee (John McCartney, Dubose Ausley and James Edwards) for unearthing this issue and pursuing it fearlessly to its terrible end at Huron Consulting.

    From The Wall Street Journal Weekly Accounting Review on August 6, 2009
     

  • Huron Takes Big Hit as Accounting Falls Short
    by Gregory Zuckerman
    Aug 05, 2009
    Click here to view the full article on WSJ.com

    TOPICS: Accounting Changes and Error Corrections, Advanced Financial Accounting, Mergers and Acquisitions

    SUMMARY: Huron Consulting Group, Inc., was formed in May 2002 by partners from the now-defunct Arthur Andersen LLP. "Today, fewer than 10% of the company's employees came directly from Arthur Andersen." The firm provides "...financial and legal consulting services, including forensic-style investigative work...." The firm announced restatement of earnings for fiscal years 2006, 2007, and 2008 and the first quarter of 2009 due to inappropriate accounting for payments made to acquire four businesses between 2005 and 2007. The payments were made after the acquisitions for earn-outs: additional amounts of cash payments or stock issuances based on earning specific financial performance targets over a number of years following the business combinations. However, portions of these earn-out payments were redistributed to employees remaining with Huron after the acquisitions based on specific performance measures by these employees rather than being based on their relative ownership interests in the firms prior to acquisition by Huron. Consequently, those payments are deemed to be compensation expense. The amounts restated thus reduce net income for the periods of restatement and reduce future income amounts, but do not affect cash flows of the firm. Negative shareholder reaction to this announcement by a firm which provides consulting services in this area certainly is not surprising.

    CLASSROOM APPLICATION: Accounting for allocation of a purchase price in a business combination is covered in this article.

    QUESTIONS: 
    1. (Introductory) In general, how do we account for assets acquired in business combinations? How are cash payments and stock issued to selling shareholders accounted for?

    2. (Introductory) What are contingent payments in a business combination? What are the two main types of contingent payments and what are their accounting implications?

    3. (Introductory) Which of the above 2 types of contingent payments were employed in the Huron acquisition agreements for businesses it acquired over the years 2005 to 2008?

    4. (Advanced) Obtain the SEC 8_k filing by Huron for the restatement announcement, dated July 31, 2009, and the filing answering subsequent questions and answers as posted on its web site, dated August 3, 2009 available at http://www.sec.gov/Archives/edgar/data/1289848/000119312509160844/d8k.htm and http://www.sec.gov/Archives/edgar/data/1289848/000128984809000017/exh99-1.htm respectively. What was the problem which made the original acquisition accounting improper? What accounting standard establishes requirements for handling corrections of errors such as this? In your answer, explain why the company discloses that investors must not rely on the previously released financial statements.

    5. (Advanced) Refer specifically to the August 3, 2009, filing obtained above. What were the ultimate journal entries made to correct these errors? Explain the components of these entries.

    6. (Advanced) The author of this article writes that this error in reporting and subsequently required restatement "...suggests [that] a closer alliance between consulting and accounting isn't such a bad idea." What is the SEC requirement that divides consulting and accounting? Do you think this problem with reporting would have arisen had the firm been allowed to perform both auditing, accounting, and consulting services to its clients? Support your answer.

    Reviewed By: Judy Beckman, University of Rhode Island

    "Huron Takes Big Hit as Accounting Falls Short," by Gregory Zuckerman, The Wall Street Journal, August 5, 2009 ---
    http://online.wsj.com/article/SB124943146672806361.html?mod=djem_jiewr_AC

    Financial downturns often expose accounting problems at companies, but scandals have been noticeably absent in the recent turmoil. Not so anymore.

    Late Friday, Huron Consulting Group Inc. said it would restate the last three years of financial results, withdraw its 2009 earnings guidance and lower its outlook for 2009 revenue. The accounting snafu, which has decimated the company's shares, was all the more surprising because Huron traces its roots to Arthur Andersen LLP, the accounting firm at the heart of the last wave of scandals.

    A dose of added irony is that Huron makes its money providing financial and legal consulting services, including forensic-style investigative work, and tries to help clients avoid these types of mistakes.

    "One of their businesses is forensic accounting -- they're experts in this," says Sean Jackson, an analyst at Avondale Partners in Nashville, Tenn., who dropped his rating to the equivalent of "hold" from "buy." "Investors are saying, 'These guys had to know what happened with the accounting, or they should have known.'"

    Investors fear the accounting issues, which will reduce net income by $57 million for the periods in question, might damage the firm's credibility. Huron's shares fell 70% on Monday, well below the price of its initial public offering in 2004. On Tuesday, Huron shares rose four cents to $13.73.

    Huron, based in Chicago, was started in May 2002 by refugees from Arthur Andersen who fled the firm after it was indicted for its role in the collapse of Enron Corp. At the time, the group said that it would specialize in bankruptcy and litigation work, as well as education and health-care consulting, and that it would work with more than 70 former clients of Arthur Andersen. Arthur Andersen's guilty verdict was later overturned, but it was too late to save the firm, which was dismantled. Today, fewer than 10% of the company's employees came directly from Andersen, according to a Huron spokeswoman.

    Huron on Friday also announced preliminary second-quarter revenue that was shy of analyst expectations, along with the resignation of Gary Holdren, its board chairman and chief executive, along with the resignations of finance chief Gary Burge and chief accounting officer Wayne Lipski. "No severance expenses are expected to be incurred by the company as a result of these management changes," Huron's regulatory filing said.

    After its founding by 25 Andersen partners and more than 200 employees, Huron grew rapidly. It soon had 600 employees and counted firms like Pfizer, International Business Machines and General Motors as clients. Growing scrutiny of accounting firms that also did consulting made Huron's consulting-only business look promising, and shares soared from below $20 five years ago to nearly $44 before the news on Friday.

    That is when Huron dropped its bombshell -- one that suggests a closer alliance between consulting and accounting isn't always such a bad idea. Huron is restating financial statements to correct how it accounted for certain acquisition-related payments to employees of four businesses that Huron purchased since 2005.

    Huron said the employees shared "earn-outs," or financial rewards based on the performance of acquired units after the transaction was completed, with junior employees at the units who weren't involved in the original sale. They also distributed some of the proceeds based on performance of employees who remained at Huron, not based on the ownership interests of those employees in the businesses that were sold.

    The payments were legal. The problem was how Huron accounted for these payouts. The compensation should have been booked as a noncash operating expense of the company. Huron said the payments "were not kickbacks" to Huron management, but rather went to employees of the acquired businesses.

    The method the company used to book the payments served to increase its profit. The adjustments reduced the company's net income, earnings per share and other measures, though it didn't affect its cash flow, assets or liabilities.

    Part of investors' concern is that they aren't entirely sure what happened at Huron. The company's executives aren't speaking with analysts, some said on Tuesday.

    Employees and big producers now might bolt from Huron, Avondale Partners' Mr. Jackson says.

    "It's still unclear what happened, but it's almost irrelevant at this point," says Tim McHugh, an analyst at William Blair & Co., who has the equivalent of a "hold" on the stock, down from a "buy" last week. "The company's brand has been impaired and turnover of key employees is a significant risk."

    "Shocking Accounting Scandal at Huron Consulting Group," The Big Four Blog, August 5, 2009 ---
    http://bigfouralumni.blogspot.com/2009/08/shocking-accounting-scandal-at-huron.html

    First, kudos to the Audit Committee (John McCartney, Dubose Ausley and James Edwards) for unearthing this issue and pursuing it fearlessly to its terrible end.

    Second, shame on senior management to succumb to greed and not complying strictly with accounting standards

    Third, shame also on the auditor, PricewaterhouseCoopers for failing to spot this issue, especially in 2008, when the amount of money kept in goodwill was $31 million, three times the true net income of Huron of only $10 million

    Fourth, shame on Huron itself for providing accounting, internal audit, internal controls, Sarbanes, and similar advice to its corporate clients, while following shady accounting practices. Physician, heal thyself first.

    Finally, our sympathies for all the hard working and honest Huron consultants who had nothing to do with acquisitions or their accounting, and are likely as mad as anyone that this could happen to them.

    Continued in article

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

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

    Bob Jensen's threads on audit professionalism ---
    http://www.trinity.edu/rjensen/Fraud001.htm#Professionalism


    From The Wall Street Journal Accounting Weekly Review on August 6, 2009

    Latest Starbucks Buzzword: 'Lean' Japanese Techniques
    by Julie Jargon
    Aug 04, 2009
    Click here to view the full article on WSJ.com

    TOPICS: Managerial Accounting

    SUMMARY: Starbucks Corporation is adopting lean manufacturing techniques. The effort is lead by Scott Heydon, 'vice president of lean thinking," with consulting work by John Shook, a former Toyota Motor Corp. executive. Mr. Heydon and a 10 person team have traveled to Starbucks locations with a Mr. Potato-Head toy and a stopwatch to demonstrate how time efficiency improvements can be made in any process through thoughtful observance and subsequent process change.

    CLASSROOM APPLICATION: Introducing lean manufacturing techniques in management accounting classes can be accomplished with this article. The article also can be used to show the common areas between traditional manufacturing and service-oriented businesses such as Starbucks. A fun way to introduce the article can be to replicate the Mr. Potato-Head exercise that is described in the article.

    QUESTIONS: 
    1. (Introductory) What type of operation would you use to describe Starbucks-service or manufacturing? Support your answer with quotes from the article about Starbucks in-store activities.

    2. (Advanced) Define the terms "delivery cycle time", "throughput" (or manufacturing cycle) time, and "manufacturing cycle efficiency". Do these concepts, typically applied to manufacturing firms, apply to Starbucks? If so, identify each of these items for a Starbucks store operation as described in this article.

    3. (Introductory) Why have companies selling premium products needed to focus on cost-cutting techniques in recent economic times, as opposed to developing new products and other items to increase revenues?

    4. (Introductory) What is lean manufacturing? How have lean manufacturing techniques been implemented at Starbucks?

    5. (Advanced) One analyst claims that "Broader economic pressures need to ease and traffic needs to increase before [Starbucks] can benefit from those efforts [to implement lean processing techniques]." What store evidence contradicts this assessment for Starbucks? Do you think those results are possible at every Starbucks location? Support your answer.

    6. (Advanced) Why must employee recommendations be incorporated into any efficiency plan begun through top-down management initiatives? How is this empowerment evident in Starbucks' implementation of lean techniques?

    SMALL GROUP ASSIGNMENT: 
    Introduce the article by forming groups in class to replicate the Mr. Potato-Head exercise described in the article. You also may introduce the concept of employee empowerment by introducing "plants" into one or more groups who have received instructions on how "top management" (the professor) says to put together the toy.

    Reviewed By: Judy Beckman, University of Rhode Island

    "Latest Starbucks Buzzword: 'Lean' Japanese Techniques," by Julie Jargon, The Wall Street Journal, August 4, 2009 ---
    http://online.wsj.com/article/SB124933474023402611.html?mod=djem_jiewr_AC

    Starbucks Corp. built its business as the anti-fast-food joint. Now, the recession and growing competition are forcing the coffeehouse giant to see the virtues of behaving more like its streamlined competitors.

    Under a new initiative being put into practice at its more than 11,000 U.S. stores, there will be no more bending over to scoop coffee from below the counter, no more idle moments waiting for expired coffee to drain and no more dillydallying at the pastry case.

    Starbucks says the efforts are already helping its bottom line, as shown by quarterly results last month that beat analysts' expectations. Still, some baristas fear the drive will turn them into coffee-making automatons and take away some of the things that made the chain different.

    Pushing Starbucks's drive is Scott Heydon, the company's "vice president of lean thinking," and a student of the Toyota production system, where lean manufacturing got its start. He and a 10-person "lean team" have been going from region to region armed with a stopwatch and a Mr. Potato Head toy that they challenge managers to put together and re-box in less than 45 seconds.

    Mr. Heydon says reducing waste will free up time for baristas -- or "partners," as the company calls them -- to interact with customers and improve the Starbucks experience. "Motion and work are two different things. Thirty percent of the partners' time is motion; the walking, reaching, bending," he says. He wants to lower that.

    If Starbucks can reduce the time each employee spends making a drink, he says, the company could make more drinks with the same number of workers or have fewer workers.

    Some say lean techniques aren't a panacea. "Those efficiencies only help when people come in the door," says Jeffrey Bernstein, a restaurant-industry analyst at Barclays Capital. "Broader economic pressures need to ease and traffic needs to increase before they can benefit from those efforts." Starbucks's U.S. transactions fell 4% in the most recent quarter.

    Starbucks's efficiency quest is an example of how even premium brands are re-engineering how they do business amid an economic crisis. Unlike in boom times, offering ever-fancier products and opening new stores is no longer a recipe for growth. The recession has resulted in a new thrift among consumers. In an April poll of 1,500 people, research firm WSL Strategic Retail found 28% said they were putting more money into savings, up from 19% six months earlier.

    Retail sales in June, excluding gasoline and autos, declined for the fourth consecutive month, according to the Commerce Department. Upscale brands are reacting in a variety of ways. In June, Coach Inc. introduced "Poppy," a new line with handbags that sell for about 20% less than most Coach purses. J.Crew Group Inc. recently opened its first boutique dedicated to accessories, which often bring in higher margins. Department stores including Saks Inc. and Nordstrom Inc. are culling inventory.

    The economy has forced Seattle-based Starbucks to plan for the closure of 900 stores, renegotiate rents and trim its number of bakery suppliers. The company recently cut the price on "grande" iced coffees, and began offering pairings of breakfast sandwiches and drinks for $3.95. Starbucks is facing heightened competition from McDonald's Corp. and Dunkin' Brands Inc. trying to lure customers with new, cheaper specialty-coffee drinks.

    Continued in article

     


    "Deloitte’s New Shift Index – Elegant Framework For A Complex World," The Big Four Blog, July 9, 2009 ---
    http://bigfouralumni.blogspot.com/2009/07/deloittes-new-shift-index-elegant.html

    We were intrigued by Deloitte’s newly unveiled “Shift Index” which “pushes beyond cyclical measurement and looks at the long-term rate of change and its impact on economic performance.” The Shift Index is “designed to measure the rate of change and magnitude of these long-term forces that spawn the extreme events currently observed in today’s business world.”

    And here is how this is put together: the Shift Index has three constituent indices:

    First Wave: Foundations Index
    This involves the evolution of a new digital infrastructure and shifts in global public policy, quantifying the rate of change in the foundational forces taking place today. A leading indicator since it shapes opportunities for new business practices.

    Second Wave: Flow Index
    Increasing flows of capital, talent, and knowledge across geographic and institutional boundaries, shifting the sources of economic value from “stocks” of knowledge to “flows” of new knowledge.

    Third Wave: Impact Index
    How companies are exploiting foundational improvements in the digital infrastructure by creating and sharing knowledge, and what impacts those changes are having on markets, firms, and individuals.

    And what has this shift index shown?

    U.S. firms’ ROA has steadily fallen to almost one-quarter of 1965 levels at the same time that we have seen improvements in labor productivity
    The ROA performance gap between corporate winners and losers has increased over time, with the “winners” barely maintaining previous performance levels while the losers experience rapid performance deterioration — falling from positive returns in 1965 to largely negative ones today
    The “topple rate” at which big companies lose their leadership positions has more than doubled, suggesting the “winners” have increasingly precarious positions
    The benefits of productivity improvements increasingly accrue not to the firm or its shareholders, but to two stakeholders: top creative talent, or knowledge workers, who have experienced significant growth in compensation, and customers, who are gaining and wielding unprecedented power as reflected in increasing customer disloyalty

    A write up on the index and the actual report (142 pages in pdf) are available here:

    http://blogs.harvardbusiness.org/bigshift/2009/06/measuring-the-big-shift.html
    http://www.deloitte.com/dtt/press_release/0,1014,cid%253D267047,00.html


    August 10, 2009 message from Steve Sutton [ssutton@BUS.UCF.EDU]

    I would like to take this opportunity to thank the many members of the AIS community that have contributed to IJAIS’s success over the years as authors, reviewers, and participants in our many sponsored conferences. At most North American research intensive universities with AIS research faculty, we are recognized as a top specialty journal in AIS. In countries using more formalized national journal lists, we are consistently rated as a top journal. For instance, the new Australian Business Deans Council’s journal list rates IJAIS as an A journal in accounting. We are also listed on the SCOPUS Citation Index and our citations compare well with other top specialty journals in accounting. This success has only been made possible through the excellent contributions from many in our research community.

    There is another reason I write this letter today. It was 20 years ago at the 1989 American Accounting Association Annual Meeting that we announced we were launching Advances in Accounting Information Systems under our editorship. In 1998, we converted AiAIS to the International Journal of Accounting Information Systems in recognition of our global presence and our desire to support the global research community. After 20 years of service I believe that the journal should have a new visionary at the helm, a new editor that can bring fresh energy and vision to the journal as it continues to progress. As such, I have asked to step down as editor.

    I am very pleased to be able to announce that one of our associate editors, one of our most cited authors, and one of our best reviewers over the journal’s history, has agreed to take over as editor-in-chief. Professor Andreas Nicolaou will begin handling new submissions this month and will completely take over the journal from 2011. Our current editorial team will continue to process the manuscripts under review already and we will continue our work through the publication of the 2010 issues. I hope that you will provide Andreas with the same support that you have provided me over these many years.

    Thank you for your support over the years. It has been a wonderful journey.

    With warm regards,

    Steve G. Sutton
    www.bus.ucf/ssutton/ 

     




    Humor Between August 1-31, 2009

    Bumper Stickers


    Ole and Lena --- http://en.wikipedia.org/wiki/Ole_and_Lena

    Jeanne Robertson "Mothers vs Teenage Daughters" ---
    http://www.youtube.com/watch?v=RE82Gt93UYc&feature=related#watch-main-area

    Jeanne Robertson "Don't send a man to the grocery store!" ---
    http://www.youtube.com/watch?v=-YFRUSTiFUs


    Funny commercial for the L.A. County Fair --- http://www.youtube.com/watch?v=Wmn38FqWlBk


    Darwin Awards --- http://www.darwinawards.com/

    Possible Darwin Award Nominee
    The chief of staff of former President Bill Clinton when he was governor of Arkansas was charged on Wednesday with smuggling tattoo needles into the death row unit of the state prison. Betsey Wright, a death penalty opponent, reportedly plans to surrender to authorities next week. According to a police report posted online by the Arkansas Times, Wright tried to bring in contraband into the maximum security unit during a May 22 visit. The items were an ink pen with tweezers and a needle, a knife, a boxcutter and 48 tattoo needles hidden in a Nachos...
    New Republic, August 13, 2009 --- http://www.freerepublic.com/focus/f-news/2315317/posts

    Possible Darwin Award Nominee
    A Connecticut woman who authorities say spent more than $2,000 to stage a dinner honoring her as "Nurse of the Year" has been charged with pretending to be a nurse at a doctor's office. Betty Lichtenstein, 56, of Norwalk was charged Thursday. Prosecutors say Dr. Gerald Weiss believed Lichtenstein was a registered nurse, especially after she was named the Connecticut Nursing Association's "Nurse of the Year" in 2008.
    "'Nurse of the Year' charged with not being a nurse," Yahoo News, August 6, 2009 ---
    http://news.yahoo.com/s/ap/20090807/ap_on_fe_st/us_odd_fake_nurse

    Possible Darwin Award Nominee
    A 60-year-old man has been convicted of groping a woman in a Minnie Mouse costume at Walt Disney World.
    TBO.com, August 11, 2009 ---
    http://hosted.ap.org/dynamic/stories/U/US_MINNIE_MOUSE_GROPING?SITE=FLTAM&SECTION=US
    Jensen Comment
    It's probably going a bit too far to imply that he was after tail. Mickey always held out cheese before trying to cop a feel.

    Possible Darwin Award Nominee (not the hot honeymoon she'd envisioned)
    A bride in Germany spent her wedding night passed out next to a crate of vodka in the back seat of a car and had to be rescued by police when the BMW began to overheat in the sun. Police in the western city of Cologne said Monday the inebriated 30-year-old remained unconscious even after they smashed the car window to get her out. "Only after being shaken several times did she eventually regain consciousness," police said in a statement. Still clad in her wedding dress, the dazed woman had to scramble through the broken window because she had no idea where the car keys or her husband were, police said.
    Reuters, August 11, 2009 --- http://www.reuters.com/article/newsOne/idUSTRE57A5C520090811

    Possible Darwin Award Nominee
    A man walked into a Midtown bank last week, gave his name and account number to the teller and showed his ID. It was his real name and it was his own account. The ID had his picture.</p> <p>Then he handed over a piece of paper -- a receipt -- with a note scribbled on the back.
    Anchorage Daily News, August 12, 2009 --- http://www.adn.com/news/alaska/crime/story/896505.html


    Forwarded by Maureen

    The light turned yellow, just in front of him. He did the right thing by stopping at the crosswalk even though he could have beaten the red light by accelerating through the intersection. 

    The tailgating woman was furious and honked her horn, screaming in frustration, as she missed her chance to get through the  intersection, dropping her cell phone and makeup. As she was still in mid-rant, she heard a tap on her window and looked up  into the face of a very serious police officer.

    The officer ordered her to exit her car with her hands up. He took her to the police station where she was searched, fingerprinted, photographed, and placed in a holding cell. 

    After a couple of hours, a policeman approached the cell and opened the door. She was escorted back to the booking desk where the arresting officer was waiting with her personal effects. 

    He said, ''I'm very sorry for this mistake. You see, I pulled up behind your car while you were blowing your horn, flipping off  the guy in front of you and cussing a blue streak at him. I noticed the  'What Would Jesus Do' bumper sticker, the 'Choose Life'  license plate holder, the 'Follow Me to Sunday-School' bumper sticker, and the chrome-plated Christian fish emblem on the trunk,  so naturally...I assumed you had stolen the car.''


    Forwarded by Doug Jensen

    An Iowa corn farmer walks into a NYC bank and tells the loan officer he is going to Norway on business for two weeks and needs to borrow $5,000. The bank officer tells him that they will need security for the loan, so the farmer hands over the keys to his new Ferrari. The car is parked in front of the bank. The corn farmer produces the title and everything checks out. The loan officer agrees to accept the car as collateral for the loan.

    An employee of the bank then drives the Ferrari into the bank's underground garage and parks it there. The bank's president enjoys a good laugh over this farmer using a $250,000 Ferrari as collateral against a $5,000 loan.

    Two weeks later, the farmer returns, repays the $5,000 and interest, which comes to $15.41. The loan officer says, "Sir, we are very happy to have had your business, and this transaction has worked out very nicely, but we are a little puzzled. While you were away, we checked you out and found you are a multimillionaire. What puzzles us is, why would you bother to borrow $5,000?"

    The farmer replies: "Where else in New York City can I park my car for two weeks for only $15.41, and expect it to be there when I return?"

    Ah, ya gotta love those Iowa corn farmers.

     


    Forwarded by Auntie Bev

  • A TEST FOR OLD(er) KIDS

    I was picky who I sent this to. It had to be those who might actually remember. So have some fun my sharp-witted friends. This is a test for us 'older kids'! The answers are printed below, but don't cheat.

    01. After the Lone Ranger saved the day and rode off into the sunset, the grateful citizens would ask, Who was that masked man? Invariably, someone would answer, I don't know, but he left this behind. What did he leave behind?________________.

    02. When the Beatles first came to the U.S. In early 1964, we all watched them on The _______________ Show.

    03 'Get your kicks, __________________.'

    04. 'The story you are about to see is true. The names have been changed to ___________________.'

    05. 'In the jungle, the mighty jungle, ________________.'

    06. After the Twist, The Mashed Potato, and the Watusi, we 'danced' under a stick that was lowered as low as we could go in a dance called the '_____________.'

    07. Nestle's makes the very best . . . . _______________.'

    08. Satchmo was America 's 'Ambassador of Goodwill.' Our parents shared this great jazz trumpet player with us. His name was _________________.

    09. What takes a licking and keeps on ticking? _______________.

    10. Red Skeleton's hobo character was named __________________ and Red always ended his television show by saying, 'Good Night, and '________ ________. '

    11. Some Americans who protested the Vietnam War did so by burning their______________.

    12. The cute little car with the engine in the back and the trunk in t he front was called the VW. What other names did it go by? ____________ & _______________.

    13. In 1971, singer Don MacLean sang a song about, 'the day the music died.' This was a tribute to ___________________.

    14. We can remember the first satellite placed into orbit. The Russians did it. It was called ___________________.

    15. One of the big fads of the late 50's and 60's was a large plastic ring that we twirled around our waist. It was called the __ ______________.

    ANSWERS: 01. The Lone Ranger left behind a silver bullet. 02. The Ed Sullivan Show 03. On Route 66 04. To protect the innocent. 05. The Lion Sleeps Tonight 06. The limbo 07. Chocolate 08. Louis Armstrong 09. The Timex watch 10. Freddy, The Freeloader and 'Good Night and God Bless.' 11. Draft cards (Bras were also burned. Not flags, as some have guessed) 12. Beetle or Bug 13. Buddy Holly 14. Sputnik 15. Hoola-hoop

     


  • For those who never saw any of the Burma Shave signs, here is a quick lesson in our history of the 1930's and '40's. Before there were interstates, when everyone drove the old 2 lane roads, Burma Shave signs would be posted all over the countryside in farmers' fields.

    They were small red signs with white letters. Five signs, about 100 feet apart, each containing 1 line of a 4 line couplet......and the obligatory 5th sign advertising Burma Shave, a popular shaving cream.

    Here are more of the actual signs:

    DON'T STICK YOUR ELBOW OUT SO FAR IT MAY GO HOME IN ANOTHER CAR. Burma Shave

    TRAINS DON'T WANDER ALL OVER THE MAP 'CAUSE NOBODY SITS IN THE ENGINEER'S LAP Burma Shave

    SHE KISSED THE HAIRBRUSH BY MISTAKE SHE THOUGHT IT WAS HER HUSBAND JAKE Burma Shave

    DON'T LOSE YOUR HEAD TO GAIN A MINUTE YOU NEED YOUR HEAD YOUR BRAINS ARE IN IT Burma Shave

    DROVE TOO LONG DRIVER SNOOZING WHAT HAPPENED NEXT IS NOT AMUSING Burma Shave

    BROTHER SPEEDER LET'S REHEARSE ALL TOGETHER GOOD MORNING, NURSE Burma Shave

    CAUTIOUS RIDER TO HER RECKLESS DEAR LET'S HAVE LESS BULL AND A LITTLE MORE STEER Burma Shave

    SPEED WAS HIGH WEATHER WAS NOT TIRES WERE THIN X MARKS THE SPOT Burma Shave

    THE MIDNIGHT RIDE OF PAUL FOR BEER LED TO A WARMER HEMISPHERE Burma Shave

    AROUND THE CURVE LICKETY-SPLIT BEAUTIFUL CAR WASN'T IT? Burma Shave

    NO MATTER THE PRICE NO MATTER HOW NEW THE BEST SAFETY DEVICE IN THE CAR IS YOU Burma Shave

    A GUY WHO DRIVES A CAR WIDE OPEN IS NOT THINKIN' HE'S JUST HOPIN' Burma Shave

    AT INTERSECTIONS LOOK EACH WAY A HARP SOUNDS NICE BUT IT'S HARD TO PLAY Burma Shave

    BOTH HANDS ON THE WHEEL EYES ON THE ROAD THAT'S THE SKILLFUL DRIVER'S CODE Burma Shave

    THE ONE WHO DRIVES WHEN HE'S BEEN DRINKING DEPENDS ON YOU TO DO HIS THINKING Burma Shave

    CAR IN DITCH DRIVER IN TREE THE MOON WAS FULL AND SO WAS HE. Burma Shave

    PASSING SCHOOL ZONE TAKE IT SLOW LET OUR LITTLE SHAVERS GROW Burma Shave

    Do these bring back any old memories? If not, you're merely a child. If they do - then you're old as dirt... LIKE ME!


    From the Ace of Spades Blog on August 18, 2009 --- http://ace.mu.nu/archives/291070.php#291070

  • Overnight Open Thread (Mætenloch)

    Good evening all morons and moronettes. Genghis is taking a much needed vacation so you are once again spared from teh kittehmageddon. Hopefully after the intervention his vacation the threat will have passed and we'll be back to that good old snarky love that we're used to.

    So here are a few items that you may enjoy:

    Item #1: 7 Signs That You Might Be An Adult
    [minor warning: the site seemed to have added some NQSFW pics since I linked it]
    All of these are pretty good signs that you are no longer a kid, but here are some specific ones that I've discovered along the way:

    1. You no longer have a burning desire for sea monkeys or anything else you can buy from a comic book.
    2. You own your own vacuum cleaner. And use it.
    3. You don't have a subscription to Playboy even though you promised yourself you'd get one as soon as you got old enough.
    4. If something falls into the toilet, you're the one that has to get it out. Also you're the one responsible for both breaking and fixing the toilet.
    5. Having insurance on something actually does give you peace of mind.
    6. You've got a $20 bill in your pocket yet you still don't buy 10lbs of M&Ms and Now-and-Laters.
    7. You think about things before you do them. (OK this might be specific to me since my father begged me to do this through most of my childhood. I mean who could possibly have foreseen that building a vinegar-baking soda volcano in the living room could lead to permanent carpet damage)
    8. You don't buy a brick of Black Cats and M-80s every time you get the chance.
    9. Getting a good night's sleep before a big event actually seems like prudent, useful advice.
    10. You have unfettered access to a motorized vehicle and can go anywhere anytime you want, yet you choose to stay home and watch TV.


  • Forwarded by Wendy

  •              Dentist's Hymn................................Crown Him with Many Crowns
     
                 Weatherman's Hymn.....................There Shall Be Showers of Blessings
     
                 Contractor's Hymn.........................The Church's One Foundation
     
                  The Tailor's Hymn..........................Holy, Holy, Holy
     
                 The Golfer's Hymn..........................There's a Green Hill Far Away
     
                 The Politician's Hymn.....................Standing on the Promises
     
                 Optometrist's Hymn.......................Open My Eyes That I Might See
     
                 The IRS Agent's Hymn....................I Surrender All
     
                 The Gossip's Hymn..........................Pass It On
     
                 The Electrician's Hymn...................Send The Light
     
                 The Shopper's Hymn..........................Sweet Bye and Bye
     
                 The Realtor's Hymn...........................I've Got a Mansion Just over the Hilltop
     
                 The Massage Therapists Hymn.......He Touched Me
     
                 The Doctor's Hymn.........................The Great Physician


                 AND for those who speed on the highway - a few hymns:
     
                 45mph.....................God Will Take Care of You
     
                 65mph...................Nearer My God To Thee
     
                 85mph....................This World Is Not My Home
     
                 95mph.....................Lord, I'm Coming Home
     
                 100mph..................Precious Memories

     


  • Things You Wish (an do possibly) Say on Student Papers
    This link was found in the Financial Rounds Blog on August 3, 2009 --- http://financialrounds.blogspot.com/

    Here's a pretty good list of things I wish I could write on some students' papers, from Sapience Speaks. #6, while harsh even for this list, is my favorite. Feel free to add your own in the comments.

    1.      "You certainly have a way with words. A long, long way."

    2.      "You seem to be attempting a very delicate approach to the assignment--so delicate, in fact, that you fail to touch on it at all."

    3.      "Every one of the words in this sentence is utterly devoid of meaning."

    4.      "I can't help feeling that you treat the ideas in your paper much as a black hole treats its neighboring star systems: forcefully and vigorously synthesizing them, you condense them beyond recognition, leading to utter destruction and chaos."

    5.      "like the broad swift stream / a thesaurus will go far / but yields no great depth."

    6.      "This paper isn't even bulls*&t. Bulls*&t has substance. This is diarrhea."

    7.      "I find your rhetorical strategy in this expository to be similar to that of a rhinoceros in extracting a tooth: large, blunt, and wholly ineffective."

    8.      "This entire page says exactly NOTHING."

    9.      "Every teacher wishes she could read a paper like this one. It makes the rest of her life so much brighter by contrast."

    10.  "As I was reading, I felt that you were trying to include in your paper every type of fallacy possible. If so, you only missed one."

    11.  "The level of disorganization in your paper suggests that your true topic must be chaos theory, not, as your title implied, Wordsworth."

    12.  "the wind speaks all day / yet with only empty breath: / you have no thesis"

    13.  "I'm not sure even you believe this sentence."

     


    LA GRANDE, Ore. (AP) - A mouse found inside an automatic teller machine - along with a nest it had built with chewed-up $20 bills - gave an Oregon gas station employee the surprise of her life. The mouse, discovered Thursday, had thoroughly torn up two bills and damaged another 14 to line his nest. Employee Millie Taylor said she screamed and slammed the machine's door shut.
    MyWay, August 7, 2009 --- http://apnews.myway.com/article/20090808/D99UD8R00.html

    The bank replaced all the money that wasn't extensively damaged, and the ATM has continued to work just fine. The mouse also got a reprieve: He was evicted from his nest but set free outside the station.


    "On the Effectiveness of Aluminium Foil Helmets: An Empirical Study," by Ali Rahimi1, Ben Recht 2, Jason Taylor 2, Noah Vawter 2, MIT Department of Electrical Engineering, February 17, 2005 ---
    http://people.csail.mit.edu/rahimi/helmet/
    Link forwarded by Rose Cohen-Brown [Rose.Cohen-Brown@trinity.edu]


    So much for the veil of secrecy surrounding money hidden in Swiss bank accounts. We've been hearing about those clandestine arrangements for decades, where wealthy Americans could stash their cash away from the prying eyes of the Internal Revenue Service. It was almost romantic. But after a protracted fight between U.S. authorities and the Swiss banking giant, UBS, the veil is about to be pierced. UBS agreed on Wednesday to turn over identifying information on 4,450 accounts which the IRS believes hold undeclared assets belonging to Americans. Those accounts were believed to hold about $18 billion at one time, though some may have been closed since the battle began.
    UBS bank caves in to the IRS
    ---
    http://www.accountingweb.com/topic/tax/swiss-bank-ubs-agrees-reveal-us-secret-accountholders

    Forwarded by Doug Jenson

    The last penny

    A father walks into a restaurant with his young son. He gives the young boy 3 pennies to play with to keep him occupied.

    Suddenly, the boy starts choking, going blue in the face. The father realizes the boy has swallowed the pennies and starts slapping him on the back..

    The boy coughs up 2 of the pennies, but keeps choking. Looking at his son, the father is panicking, shouting for help.

    A well dressed, attractive, and serious looking woman, in a blue business suit is sitting at a coffee bar reading a newspaper and sipping a cup of coffee. At the sound of the commotion, she looks up, puts her coffee cup down, neatly folds the newspaper and places it on the counter, gets up from her seat and makes her way, unhurried, across the restaurant.

    Reaching the boy, the woman carefully drops his pants; takes hold of the boy's testicles and starts to squeeze and twist, gently at first and then ever so firmly. After a few seconds the boy convulses violently and coughs up the last penny, which the woman deftly catches in her free hand.

    Releasing the boy's testicles, the woman hands the penny to the father and walks back to her seat at the coffee bar without saying a word.

    As soon as he is sure that his son has suffered no ill effects, the father rushes over to the woman and starts thanking her saying, "I've never seen anybody do anything like that before, it was fantastic. Are you a doctor?"

    "No, IRS"

    Now you know why UBS bankers are hunched over and not smiling ---
    http://www.accountingweb.com/topic/tax/swiss-bank-ubs-agrees-reveal-us-secret-accountholders

    More tax humor --- http://www.taxguru.net/


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

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

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

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

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

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

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

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




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

     

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

     

    International Accounting News (including the U.S.)

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

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

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

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

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

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

     

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

     

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

     

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

     

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

     

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

     

     

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

     

     

     

     

    July 31, 2009

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

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

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

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

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

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

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

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

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

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

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

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

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

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




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

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

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

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

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

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

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

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

    Cash for Clunkers Fuel Economy Guidelines --http://www.fueleconomy.gov/feg/cars.shtml 


    "Microsoft Office to Go Online for Free," Fortune, July 13, 2009 --- Click Here
    This will not be the full-featured version of Office that you can purchase, but it will compete head on with Google Office.
    Free Alternatives to/for MS Office (Word, Excel, PowerPoint, etc.) --- http://www.trinity.edu/rjensen/Bookbob4.htm#MSofficeAlternatives

    Unfortunately none of the free alternatives to MS Office will have all the new and supposedly wonderful features of the 2010 Version of MS Office
    Richard Campbell forwarded this link describing the new features to look forward to with the MS Office 2010 --- http://download.cnet.com/8301-2007_4-10284013-12.html?tag=smallC
    Also see http://reviews.zdnet.co.uk/software/productivity/0,1000001108,39674807,00.htm




    The June 30, 2009 edition of Fraud Updates is available at http://www.trinity.edu/rjensen/FraudUpdates.htm

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


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


    Comparisons of IFRS with Domestic Standards of Many Nations
    http://www.iasplus.com/country/compare.htm


    Even when the economy is down, there is room for top students in the profession. The National Association of Colleges and Employers’ 2009 Student Survey found that, even though students in the class of 2009 were graduating with fewer jobs available, accounting majors are still in high demand. Accounting and engineering graduates were among those majors most likely to have already found jobs. Accounting majors expect to earn an average starting salary of about $45,000, while engineering grads expect to earn $58,000.
    Journal of Accountancy
    , July 2009 --- http://www.journalofaccountancy.com/Issues/2009/Jul/AccountingMajors.htm

    Hot Academic Jobs of the Future

    Note that due to shortage of supply of PhD accountants, newly-hired accounting PhDs are generally among the highest paid faculty in their ranks such as newly hired assistant professors of accounting now being paid well over $120,000 for nine-month contracts in major universities. In most instances accounting assistant professors get significantly higher offers than their counterparts in science, humanities, and engineering. They may not do much better than new hires in law schools. Medical schools have such complicated ways of paying faculty, that comparisons of salaries of medical schools with all other disciplines in a university are virtually impossible. For example, medical faculty sometimes get bonuses for clinical services in university hospitals.

    A June/July 2009 AACSB report says the shortage of accounting PhDs is getting worse instead of better, particularly as the supply of new PhD graduates in accounting declines while demand for accounting faculty explodes (accounting is probably the only business discipline where demand for graduates has either held steady in corporations or increased in public accounting):
    "Doctoral-Level Faculty Numbers Continue to Decline," AACSB, June/July 2009 --- http://www.aacsb.edu/publications/enewsline/datadirect.asp

    And yet opportunities for graduates of accounting doctoral programs is totally ignored in the latest article in the Chronicle of Higher Education about the hottest academic jobs of the future. If I were advising a confused undergraduate student who is contemplating a career in academe, I would say look more closely at accounting, including the warts of virtually all accounting doctoral programs --- http://www.trinity.edu/rjensen/theory01.htm#DoctoralPrograms

    "Hot Academic Jobs of the Future: Try These Fields," by Lee Roberts, Chronicle of Higher Education, July 10, 2009 --- http://chronicle.com/weekly/v55/i41/41b02201.htm?utm_source=at&utm_medium=en

    Green chemistry

    Green chemistry focuses on eliminating the use of toxic chemicals in chemistry without stifling scientific progress. Paul T. Anastas, a Yale University chemist, founded the field in 1991. As it grows in importance, more institutions are expected to offer master's degrees and doctorates. Among the universities with green-chemistry programs are Carnegie Mellon and Yale Universities and the Universities of Oregon, Scranton, and Massachusetts at Lowell.

    Terry Collins, a chemistry professor at Carnegie Mellon who heads the university's Institute for Green Science, thinks the intellectual rationale for the field is strong. "It hasn't gotten a lot of federal support, but I think that's going to change," he says. One reason: Mr. Anastas has been nominated by President Obama to head the Environmental Protection Agency's Office of Research and Development.

    Energy

    Threats to human society by the consumption of limited resources have sparked a race to find alternative energy sources that are sustainable, efficient, and safe for the environment. Among the leaders in this research mission is the Energy and Resources Group at the University of California at Berkeley. The interdisciplinary group has been devising technical and policy alternatives to unsustainable energy and resource use for the past 30 years.

    The Energy Efficiency Center at the University of California at Davis identifies promising energy-efficient technologies and develops viable business ventures around them. Established in 2006 with a challenge grant from the state, the center focuses on transferring technology from academe to the marketplace.

    Boston University's Center for Energy and Environmental Studies, meanwhile, specializes in the fields of energy and environmental analysis.

    Gerontology

    Not only are professors aging — everybody else is, too. The aging process will take on a more prominent role in society as the baby-boom generation ages, making studies like gerontology a growth area, says Arthur Levine, president of the Woodrow Wilson National Fellowship Foundation.

    The oldest and largest school of gerontology in the world is the Davis School of Gerontology at the University of Southern California. It has conducted research in molecular biology, neuroscience, dem-ography, psychology, sociology, and public policy on aging since 1975.

    The Universities of Kansas, Kentucky, Maryland at Baltimore, and Massachusetts at Boston are among those offering doctoral programs in the field.

    Education

    The Bureau of Labor Statistics projects that the number of postsecondary educational administrators will increase by 14 percent from 2006 to 2016.

    "The leadership turnover in education is going to be tremendous in the coming years," said Mark David Milliron, president and chief executive of Catalyze Learning International, an education-consulting group in Newland, N.C. "Folks are scrambling to fill the C-level pipeline; as a result, Ph.D.'s and Ed.D.'s are in high demand, and will be for some time."

    Nanotechnology

    A nanometer, one billionth of a meter, is about 10,000 times narrower than a human hair. Nanotechnology is the study of the control of matter on an atomic and molecular scale. It has the potential to create materials and devices in fields as diverse as electronics, energy production, and medicine.

    Among institutions that offer programs in the growing field are the Universities of Washington and North Carolina at Charlotte; the State University of New York at Albany; and Arizona State, Louisiana Tech, Pennsylvania State, and Rice Universities.

    Health policy

    Just as gerontology will become more important as the population ages, health-related fields and health-care policy will remain vital in coming years. Some of the influential universities for health policy and management are Harvard, Johns Hopkins, and New York Universities.

    Information technology

    Harry Lewis, a Harvard professor of computer science and one of the authors of Blown to Bits: Your Life, Liberty and Happiness After the Digital Explosion (Addison-Wesley, 2008), believes information technology will remain a growth area in the coming years. The Bureau of Labor Statistics agrees, projecting that among selected occupations requiring a doctoral degree, computer and information science will have one of the largest growth rates — 22 percent — from 2006 to 2016.

    Some of the better-known programs in information technology are those offered by the University of California at Berkeley, the Georgia Institute of Technology, the Massachusetts Institute of Technology, and Stanford University.

    Engineering

    There always seems to be a high demand for engineers of one kind or another, and the next decade should be no exception. Engineering comprises such a broad array of studies and competencies that it can lead to vastly different careers. In especially promising fields, the Bureau of Labor Statistics sees environmental engineering experiencing 25-percent growth between 2006 and 2016, and industrial and biomedical engineering each experiencing about 20-percent growth in that time.

    Jensen Comment
    I think that for many years to come, new accounting PhDs will have many more choices about where to accept job offers and what they will earn in their new jobs at colleges and universities.

    July 10, 2009 reply from Patricia Walters [patricia@DISCLOSUREANALYTICS.COM]

    Full disclosure: I'm clinical faculty and had an 12 year gap between my two academic lives. I have a 3-year contract (which I was glad didn't come up for renewal this year).

    In my view, this salary inversion (I believe your ratio is typical) is one of the costs of having tenure. I personally don't think of it as a "penalty" although I do understand why tenured faculty feel that way.

    Rather, I view this differential between tenured faculty salaries and other market-based salaries (whether in or outisde of academia) as the market price for bearing the risk of losing one's job (which tenure track faculty is still subject to).

    I don't know but wonder if there is any data on the percentage of tenure track faculty who actually are ABLE to stay at their first school.

    Pat

    July 10, 2009 reply from Bob Jensen

    Hi Pat,

    Remember that in major universities, publications in leading academic journals are the major things counted (not necessarily read) for performance raises. Teaching has a minimum threshold but is secondary to publication records.

    Salary compression arises from many suspected causes, not the least of which is that tenure protects the jobs but not the performance raises of faculty with declining research productivity. In accounting, the very few tenured faculty with increasing research productivity generally do move on to endowed chairs or at least named professorships in other universities.

    It’s surprising how many accounting faculty who are highly productive (relative to other accounting researchers and not chemists) in their non-tenure years actually burn out in terms of research. Some actually move into administrative positions because, in my viewpoint, they want out of both teaching and research and still obtain high performance raises.

    If you extract from the TAR publishing records of hot non-tenured accounting faculty, you get the picture that accounting researcher productivity generally declines as the tenure years pile on --- http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm

    Universities also take advantage of the fact that salary is only one of the factors leading to family decisions to not move to new towns. There is a stickiness due to spouse employment, children in good schools that they really like, transactions costs of home selling, unwillingness to give up friends and other neighbors, unwillingness to depart colleagues at work, and just plain fear of the unknown.

    Another factor that I tended to ignore (except for one time) was the risk of giving up tenure in the old job for having to go through the tenure process once again in a new job. Although the University of Maine gave me the Nicolas Salgo endowed chair and tenure when I moved from Michigan State, I became the KPMG Professor at Florida State without being given tenure in advance. Trinity University gave me the Jesse Jones endowed chair without giving me tenure up front.

    In hindsight, things worked out for me, but I can name at least one instance (at Notre Dame) where a well known accounting professor given a chair and then denied tenure afterwards.

    Bob Jensen

    Second June 10, 2009 replay from Patricia Walters [patricia@DISCLOSUREANALYTICS.COM]

    Bob:

    You are of course right on all counts above. I would add that perhaps the primary reason I left academic in 1994 was because I did not believe that I would have the fortitude to do the necessary research to get tenure. I knew myself well enough then to realize that I would put most of my efforts into my teaching and so be constantly on the move. I also have no regrets about my years at the CFA Institute. I believe my current teaching is better because of the work and experience I had there. There are huge personal costs to these moves, let alone the need to be thinking about a job search. This is not to say that I don't also have to write to maintain my academic qualification for AASCB purposes. It just doesn't have to be the 'accountics' research that is what's wanted in most of the top-tier journals.

    There are also trade-offs between cash and quality of life that academics must make which are not much different that those other professionals make. There is money to be made in consulting and continuing ed training by academics even though the former may be more dependent on research than the latter. One of the aspects of academia that I like, beside teaching and interacting with students at the university, surprisingly is that, if an opportunity comes along to do consulting or training work, I can say 'no'. Something one cannot do (normally) without consequences in a full-time job outside of academia. In that respect, I can create my own balance between money and quality of life.

    The current trade-off I'm personally struggling with is living in NJ when I really want to be living on my farm in VA and this struggle is despite the fact I very, very much like Fordham, its students, and my colleagues. It is a great place to work.

    Your comments about performance raises are interesting. Clinicals at Fordham are not eligible for such raises....all we can do is negotiate at contract renewal times. I have the impression that these raises are not all that terrific regardless of the amount of research one does, but I admit to not having first hand experience.

    Pat

    Bob Jensen's threads on careers are at http://www.trinity.edu/rjensen/bookbob1.htm#careers


    Typography for Lawyers --- http://www.typographyforlawyers.com/ 
    There may be something here of interest to accountants as well.


    The Secret of Why Bob Jensen Became an Accounting Professor and Not a Practicing CPA

    Nursing Schools Should Warn Students About Grueling Hours
    Nursing schools should do a better job preparing students for the grueling hours, often unrealistic expectations, and lack of respect that await them when they enter the work force, says an article scheduled for publication today in the July/August issue of Nursing Outlook.
    MIT's Technology Review, July 27, 2009 --- http://chronicle.com/article/Nursing-Schools-Should-Warn/47468/

    Jensen Comment
    Although I always mentioned the long hours faced by newly-hired CPAs, especially in tax season, I'm not sure I ever said enough about it to a point that I did not have some (I like to think only a few students) who really became upset over the long hours and pressures in CPA firms. Perhaps this has changed somewhat, but one of the problems that remains is that many newly-hired students have to travel much more than they expected as either CPA auditors or corporate internal  auditors. When out of town there's a tendency to work days and nights, sometimes in an effort to shorten the time on the road away from home.

    Truth Time
    When I became a CPA and worked for the largest accounting firm in Denver, I was also an avid, and unmarried, snow skier. I was even tempted to become a ski bum except that my entire family history made me fearful of living without income and security. I was also getting an MBA at the University of Denver and watched my professors work what seemed to me like 12 hours a week while living in the security of tenure for life. This seemed perfect for becoming having my ski time and still having guaranteed income for life.

    I even came to a point where I had an ink pen poised above a contract at Western State College in Gunnison, Colorado where I could get a tenure track position, in those days, with only a MBA-CPA credential. As I lowered the pen, I casually asked the Dean how far it was from Gunnison to Aspen (which looked to be less than 30 miles on the map). He said it depended upon whether it was summer or winter. The pass was closed in the winter such that the shortest route was over 200 miles by going around through Leadville.

    I dropped the pen and decided to accept a full-ride scholarship that Stanford University had offered me a few days earlier to enter the accounting doctoral program. The rest is history. I skied some while at Stanford, but after I got married at the dissertation stage of my studies, I gave up skiing and chasing wild women. More importantly I discovered that being a professional teacher and researcher was more fun and challenging than being a ski bum.

    It's probably a very good thing that I gave up being a ski bum. I always tended to be a bit of a hot dog skier who skied one or two notches above my real farm boy ability. Undoubtedly I would be dead or paralyzed if I'd truly become a ski bum.

    Interestingly as a professor and even as a retired professor I've worked longer hours year in and year out that most practicing CPAs. But this is a labor of love and a challenge to the mind and great relief from the boredom of leisure time.

    About 20 years ago I recorded a sloppy audio file about becoming a professor --- http://www.cs.trinity.edu/~rjensen/academ01.wav


    College of Europe: EU Diplomacy Papers ---
    http://www.coleurop.be/template.asp?pagename=EUDP
    (It would greatly help if this site added a search engine)

    If you use Google and enter something like ["College of Europe" AND IASB], you will find some links to documents that are difficult to find by any other means. These documents are not necessarily current, but some of them may be of interest to accounting historians and legal scholars.


    Using Bingo to Teach Governmental Accounting --- http://commons.aaahq.org/posts/ccef2f7950

    Unhappily the AAA Commons is available only to members of the American Accounting Association --- https://commons.aaahq.org/signin

    Bob Jensen's threads on Edutainment are at
    http://www.trinity.edu/rjensen/000aaa/thetools.htm#Edutainment


    Using Cmap Tools to Create Concept Diagrams for Accounting Classes

    You can read about Cmap at http://cmap.ihmc.us/conceptmap.html
    Also see http://en.wikipedia.org/wiki/Concept_maps

    The following module was posted by Rick Lillie at the AAA Commons on July 27, 2009 --- http://commons.aaahq.org/posts/6d0b8c8402
    Only American Accounting Association members can access the Commons

    • Using Cmap Tools to Create Concept Diagrams for...
      2 Views, 0 Comments
      activity type:
      Using Cmap Tools to Create Concept Diagrams for Accounting Classes
      delivery method:
      technology
      author name:
      IHMC (Institute for Human and Machine Cognition)
      topic(s):
      This teaching tip explains how to use Cmap Tools, a concept mapping software program, to create concept maps.  Concept maps provide a way to visually present complex concepts and rules.  Research suggests that NetGen students are visually oriented.  If true, concept maps should prove to be a useful way to present accounting concepts and rules to today's NetGen accounting students.

      Attached to this posting is a Cmap diagram that I created for my ACCT 574 Intermediate Accounting class.

      audience:
      undergraduate
      course type:
      Intermediate Accounting
      level:
      intermediate
      other file:
  • On the Leading Edge of Learning and Education Technology
    Years ago in Tidbits I featured Dan Madigan at Bowling Green State University --- http://fp.dl.kent.edu/learninginstitute/madigan.htm

    Among other things Dan proposed using Concept Maps (Cmaps) in courses (see below)

    Dan Madigan is the Director of the Scholarship and Engagement and Professor of English at Bowling Green State University.

    Dan has a newsletter on Teaching Tips (usually with respect to technology) and other helpful teaching resources --- http://www.bgsu.edu/ctlt/page12182.html

    I discovered Dan Madigan in the February 2006 issue of Accounting Education News --- http://aaahq.org/ic/browse.htm
    In that issue of AEN, a summary of provided of his Idea Paper #43 on "New Technologies that are Shaping Education and Learning." Excerpts from that summary are provided below.

    Idea Paper #43 by Dan Madigan

    New Technologies that are Shaping Teaching and Learning

    Blogs

    You can create your own blog for free by going to http://www.blogger.com/home .  Blog technology allows blogs to be syndicated and aggregators allow users to automatically search for favorite blogs on the web and have them delivered to personal accounts ( http://www.bloglines.com/ ) [using tools like RSS feed readers-Really Simple Syndication or Rich Site Summary].

    Wiki

    There are many places on the web that offer wiki support for free wiki including: http://pbwiki.com/ .  To find out more about wikis and how they can be used for teaching and learning go to http://www.writingwiki.org/default.aspx/WritingWiki/For%20Teachers%20New%20to%20Wikis.html .

     Learning Management Systems

    Many universities buy a proprietary LMS, but increasingly universities are building their own LMS based on open source software like Moodle ( http://www.moodle.org/ ).  Moodle's no-cost (excluding costs associated with hardware and support), flexibility to adapt to small or large institutions, departments, programs and individuals, and world-wide support are attractive features.
    http://www.trinity.edu/rjensen/290wp/290wp.htm
    (This includes modules on Blackboard, Moodle, and various competitors)
     

    Jensen Comment
    I have a somewhat dated module with some useful links about Moodle at http://www.trinity.edu/rjensen/290wp/290wp.htm
    In particular go to http://www.trinity.edu/rjensen/290wp/290wp.htm#Moodle

    Presentation Software

    Although PowerPoint® may be the most common example of this program, there are many other programs including Keynote, Adobe Acrobat, and the popular and free Open Office Suite package that includes IMPRESS as its presentation program ( http://www.openoffice.org/index.html ).  Simple presentations can also be created using the Simple Standards-Based Slide Show System (S5).  This open source system ( http://www.meyerweb.com/eric/tools/s5/ ) requires only basic knowledge of web skills and can be learned quickly.

    Tutorials/Self-tutorials

    A basic tutorial can be created with any text editor and delivered to students through a variety of digital technologies such as email, Portable Document Files (PDF) that can preserve the format and colors of a document, web pages, and CDs.  Tutorials that appeal to visual learners can be created with scanning software or basic screen capture software found on any operating system.  Video tutorials, like those for software applications, can be created with screen capturing software that captures the movement of a mouse as it is used to open windows and select options in a program.  A microphone, used simultaneously with the screen-capturing tool to narrate the actions and video-editing software, completes the process.  More advanced tutorials include functions that, for example, mimic teacher/student interactions and exchanges, and include an assessment of those interactions.  These interactive tutorials can be created through advanced programs such as Adobe FLASH and java scripting.

    Concept Mapping Software

    Description: Concept mapping (a method of brainstorming) is a technique for visualizing the relationships between concepts and creating a visual image to represent the relationship.  Concept mapping software serves several purposes in the educational environment.  One is to capture the conceptual thinking of one or more persons in a way that is visually represented.  Another is to represent the structure of knowledge gleaned from written documents so that such knowledge can be visually represented.  In essence, a concept map is a diagram showing relationships, often between complex ideas.  With new mapping software such as the open source Cmap ( http://www.cmap.ihmc.us/download/ ), concepts are easily represented with images (bubbles or pictures) called concept nodes, and are connected with lines that show the relationship between and among the concepts.  In addition, the software allows users to attach documents, diagrams, images other concept maps, hypertextual links and even media files to the concept nodes.  Concept maps can be saved as a PDF or image file and distributed electronically in a variety of ways including the Internet and storage devices.

    Webcast

    These live sessions are highly interactive and allow users to share applications, such as whiteboards, concept maps and word documents, and to communicate live through audio and chat.  Elluminate ( http://www.elluminate.com/educator_solutions.jsp ) is one of many server-based software programs that is enjoying popularity in educational settings.  Webcasts provide educational institutions with the ability to support conferencing and to deliver training and presentations to personnel anytime and anywhere.  Recorded and archived webcasts, because they are economical to develop and store, are increasingly becoming the preferred way for universities to deliver lectures, events and presentations to faculty and students through the web, CDs, DVDs and even TV broadcasts.

    Podcasts

    Some popular free podcatcher websites are iTunes and iPodder.  The browser Firefox also has podcatching features.  Users can create their own podcast for free by going to websites such as ( http://www.twocanoes.com/vodcaster/ ).  For a nominal fee, a more powerful and cross-platform podcast creator tool can be found at ( http://www.potionfactory.com/ ).

    ePortfolios

    Although many standard software programs can be used to create basic ePortfolios, the most dynamic programs, such as Open Source Portfolio ( http://www.osportfolio.org ) are designed specifically for developing portfolios that serve a variety of reflective and representational functions within a password protected system.

    Personal Response Systems (Clickers)

    Individuals are equipped with their own remote control keypads that have letters or numbers that correspond to choices given by a presenter.  The results of the responses are captured on a computer either through infrared or radio signals and compiled in ways that show such breakdowns as class distribution and individual responses.  Typically, the results are instantly made available to the participants via some type of graphic that is displayed with a projector.  Presenters can set automatic controls within the system that limit the time a responder has to answer a question.  Each remote "clicker" has a serial number so that all users and their responses can be individually identified and recorded.

     

    Supporting Digital Technology for Teaching and Learning

    As faculty are carefully assessing their use of technology for purposes of teaching and learning, universities need to assess whether their technology support is adequate and responsive to the needs of those instructors.  During the early phases of the digital revolution on campuses, this meant building an infrastructure, providing equipment and offering basic skills-oriented workshops to faculty and students.  Over the years, however, we have learned that basic technology support has not always been enough to ensure that digital technologies are being used effectively as ways to enhance student learning.  Some universities have heeded the challenge and are creatively building upon existing programs to develop a technology of support that is responsive to the professional lives of today's faculty.  What follows are five examples that serve to represent ways that universities are developing creative solutions for supporting a learning environment that is increasingly being influenced by a digital revolution that show no signs of abating anytime soon.

    Faculty Involvement

    Faculty need to have a critical voice in university decisions about technology improvement and deployment on campus--especially when the technology relates to teaching and learning issues...Forward thinking universities find new and inclusive ways to tap into the collective voice so that student learning and new technologies can be effectively aligned.

    Blended Workshops

    Forward thinking universities go beyond skills-based technology workshops.  They have found creative ways to blend pedagogical instruction with technology instruction...Also, universities have begun to offer blended workshops that have a distinct pedagogical focus yet blend in thinking about resources, including technology resources, which can support a strong pedagogical focus...

    Threaded Workshops

    Universities are using the threaded workshop model as a framework for teaching and learning workshops that include learning about new technologies.  Each workshop in the series is "threaded" in such a way as to relate to one another and play off of one another.  Thus, a series on integrated course design might have individual workshops on different topics like assessment, learning activities, motivation, and learning outcomes that are aligned in a way that gives participants a more comprehensive view of how to build a dynamic course.  All discussions about technology in these threaded workshops are contextualized within the larger pedagogical discussion, and are focused on how the technology serves to support the pedagogy.  Because instructors attend the series over a period of several weeks, they bring back to each workshop their applied knowledge and share it with one another as real world and relevant experiences...

    Just-In-Time Resources

    Universities are increasingly realizing that busy instructors do not need to be experts in all areas of digital technology in order to use technology effectively in the classroom.  Universities support this notion by making technology learning easy, accessible, and just-in-time.  Today's digital technology allows just-in-time resources to flourish on campus.  For example, Internet available tutorials that are home grown or licensed ( http://www.atomiclearning.com ) make it easy for instructors to learn new software/hardware in bits and pieces and when needed.  Why learn everything there is to know about PowerPoint or your computer operating system when you can learn only what you need by going to a two-minute video that is available anywhere and anytime.  In addition, just-in-time resources extend the learning environments of students.  Why spend valuable class time teaching students how to use a certain technology application for a project or activity when just-in-time resources can be made available to students at their level and at a time outside of class time?

    Open Source

    Some of the more popular open source software programs include: Moodle ( http://www.moodle.org/ ) and Bazaar ( http://www.klaatu.pc.athabascau.ca/cgi-bin/b7/main.pl?rid=1 ), two LMS programs: MySQL ( http://www.dev.mysql.com/ ), a data base program, and; Open Office ( http://www.openoffice.org/index.html ), a productivity suite that supports word processing, spreadsheet, and presentation applications.  Many open source products can be found and downloaded at SourceForge ( http://www.sourceforge.net/ ).

    Jensen Comment
    I have a somewhat dated module with some useful links about Moodle at http://www.trinity.edu/rjensen/290wp/290wp.htm
    In particular go to http://www.trinity.edu/rjensen/290wp/290wp.htm#Moodle

    Conclusions

    Universities are home to a rich diversity of student learners whose cultures have been tremendously impacted by the digital revolution of the last fifteen years.  These students grew up communicating, creating knowledge, and sharing resources through the Internet and all its applications.  As university students, they are poised to take advantage of the digital world for learning.  But are we as teachers?  We should not jump headfirst  into this potential digital cauldron without taking stock of an important detail--as with all technologies and instructional practices, we must not only understand their potential to impact deeper learning in students, we must also understand their limitations as a means to achieve a deeper learning.  It is not the lecture, cooperative learning or the problem-based method itself that enhances student learning any more than it is the Internet, podcast, or blog.  It is far more important to know how to use instructional methods and technology to support learning outcomes that are integrally linked to the student learner as a critical thinker.  Students may know how to navigate the Internet and use other forms of digital technology for purposes of their own learning, but do they know how to take full advantage of those technologies for learning at the university level?  This is where progressive universities enter the equation and lead.

    In today's educational climate of decreasing state support and public scrutiny of educational spending, universities can ill afford to squander important dollars on technology resources that have not been critically assessed in terms of supporting student learning.  But, universities cannot stop there.  Faculty and administrators must combine efforts to celebrate openly the important symbiosis between technology and learning.  Nothing less will suffice or we will suffer from our own negligence.

    The above quotes are only isolated quotes from a much longer document.

     


    Emerging Learning Technologies on the Ohio Learning Network --- http://www.oln.org/emerging_technologies/

  • July 29, 2009 reply from Steven Hornik [shornik@BUS.UCF.EDU]

    I've included Cmaps in my financial accounting class for a few years now - also using the Cmaps program.  I do it for two reasons, #1 it forces the students to read the chapter (well at least skim through it looking for concepts) and thinking about the material enough to put together a decent map, and #2 so I can "see" what is going on inside there heads.  I teach 900/700+ fall/spring so I can't assign a map for each chapter per student anymore, but I do what I can.  You can see some of the maps that students have created here: 

    http://financialaccounting.wikispaces.com/StudentCmaps_Spring2008

    Quite honestly I think some of them are quite beautiful.

    _____________________________
    Dr. Steven Hornik
    University of Central Florida
    Dixon School of Accounting
    407-823-5739
    Second Life: Robins Hermano

    http://mydebitcredit.com
    yahoo ID: shornik

     

     

     

    Bob Jensen's threads on Tools and Tricks of the Trade in education and learning are at http://www.trinity.edu/rjensen/000aaa/thetools.htm


    By now the large international accounting firms are providing helper sites
    for faculty seeking to learn more about IFRS to pass along to students

    Deloitte's Updated Free IFRS eLearning Modules, July 14,. 2009 --- http://www.deloitteifrslearning.com/
    Over three million downloads to date!

    Part of a message from Stephanie.Campbell@ey.com ; on behalf of; Ellen.Glazerman@ey.com

    I am very pleased to share with you that the Ernst & Young Academic Resource Center (EYARC), a $1.5 million investment sponsored by the Ernst & Young Foundation, has just released Phase II of our IFRS curriculum materials. Phase II materials complement the Phase I curriculum made available earlier this year. We now offer you full coverage of the three most common financial accounting and reporting courses: Intermediate I, Intermediate II and Advanced Accounting.

    Created through a virtual collaboration of faculty and Ernst & Young professionals, our curriculum is designed to be flexible and comprehensive enabling you to integrate IFRS with US GAAP in a manner unique to your teaching style.

    . . .

    Our curriculum, along with other useful faculty resources, is available to you through a private password-protected site at www.ey.com/us/arc . If you do not have account access or if you have any questions regarding the EYARC, please contact Catherine Banks, EYARC Program Director, at +1 206 654 7793 or catherine.banks@ey.com .

    In the event that you are attending the AAA national convention in New York next month, we welcome you to attend our EYARC hosted concurrent session on IFRS integration on Tuesday, August 4 from 10:15 – 11:45 a.m. We are confident that this curriculum will be helpful to you and your academic program. We look forward to continuing to support you with resources from our EYARC!

    Sincerely,
    Ellen Glazerma
    n


    Let’s quit wishing for a world that doesn’t and won’t ever exist.  That’s a child’s game.  Let’s engage the enemy in the world we have.  The FASB has something to contribute to the investment community, and its work is too important to whine about the tactics of the enemy.  Let’s take the fight to the public.  If the FASB did this, I think it would win.  And we would all be better off.
     


    "Politics of Accounting Standards Setting," by: J. Edward Ketz, AccountingWeb, July 2009 --- http://accounting.smartpros.com/x67089.xml 

    Speaking before the National Press Club, FASB chairman Robert Herz recently denounced the politicization of accounting. He correctly stated, "The investing public expects and deserves unbiased and transparent financial information." Herz also correctly pointed out that special interests can undermine the usefulness of financial reports by advocating inferior accounting methods and disclosures. However, wishing special interests to go away will never eliminate them or their pleas for bastardized accounting.

    Interference by the Congress and the SEC is not a new thing. Accounting for the investment tax credit in APB Opinion No. 2 was overturned by Congress, which by law permitted a different method (subsequently and begrudgingly conceded by the APB in Opinion No. 4). The FASB opted for successful efforts accounting in FAS 19 only to see it overturned by the SEC in ASR 253. And recently Congress threatened to intervene unless the FASB provided some relief with respect to fair value accounting.

    In addition to these instances, the FASB and its predecessors have faced intense lobbying over a number of accounting issues, including leasing, restructuring of troubled debt, pensions, business combinations, and special purpose entities. Whenever the FASB deals with an important issue, one that will produce “losers”, one should expect aggrieved parties to express themselves and to resort to the SEC or to Congress for help.

    Previous leaders of the FASB, including Armstrong, Kirk, and Wyatt, have acknowledged the presence of political factors and how they prevent standard setters from finding technical solutions to technical problems. And they yearned for a world in which standard setting would be insulated from politics. Alas, such a world does not exist.

    Leaders of the FASB would be much better off if they just accepted the world as it is instead of bemoaning the one they face. Then they should embrace the political challenges and take the offense, as staying on defense is almost always a losing proposition. And they should not wait until the political pressures are too great when little or nothing can be done.

    For example, immediately after the collapse of WorldCom, the FASB should have seized the moment. Investors and creditors were yelling and screaming for justice after the implosions of Enron and WorldCom, so much so that the almost economically comatose White House woke up, the Congress went from almost killing Sarbanes-Oxley to speeding up and ensuring its passage, and even Harvey Pitt found religion. The FASB should have taken immediate action to require the expensing of stock options. It also should have taken steps to change the accounting for special purpose entities. And, in the process, it could have dared anybody to prevent them from mandating more truthful and more transparent accounting.

    Last year was another golden opportunity that the FASB let pass. The board members should have known that politicians were going to step in and force the hand of the FASB. Bankers have lobbied Washington mercilessly for over a year. Did the FASB really expect our national politicians to ignore the hands of those who feed them?

    Continued in article

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


    PCAOB Inspection Reports --- http://www.pcaobus.org/Inspections/Public_Reports/index.aspx

    "Audit Overseer Faults BDO, Grant Thornton:  The PCAOB says BDO had trouble testing revenue-recognition controls, while Grant Thornton did not adequately identify GAAP errors. Both firms complain that the board criticized judgment calls," by Marie Leone, CFO.com, July 13, 2009 --- http://www.cfo.com/article.cfm/14026057/c_2984368/?f=archives 

    Annual inspection reports for BDO Seidman and Grant Thornton, released last Thursday by the Public Company Accounting Oversight Board, criticized some of the audit testing procedures and practices at the two large accounting firms.

    The review of BDO focused mainly on issues related to testing controls around revenue recognition, while Grant Thornton was chastised for not identifying or sufficiently addressing errors in clients' application of generally accepted accounting principles with respect to pension plans, acquisitions, and auction-rate securities.

    With regard to BDO, the inspection staff reviewed seven of the company's audits performed from August 2008 through January 2009 as a representation of the firm's work.

    The report highlighted several deficiencies tied to what it said were failures by BDO to perform audit procedures, or perform them sufficiently. According to the reports, the shortcomings were usually based on a lack of documentation and persuasive evidence to back up audit opinions. For example, the board said, BDO did not test the operating effectiveness of technology systems that a client used to aggregate revenue totals for its financial statements. The systems were used by the client company for billing and transaction-processing purposes.

    The inspection team also reported that BDO's audit of a new client failed to "appropriately test" the company's recognition of revenue practices. Specifically, the audit firm noted that sales increased in the last month of the year but it failed to get an adequate explanation from management. Also, the report concluded that BDO reduced its "substantive" revenue testing of two other clients, although more thorough testing was needed.

    And while BDO identified so-called "channel stuffing" as a risk of material misstatement due to fraud, at another client, its testing related to whether the client engaged in the act was not adequate, said the inspectors. (Channel stuffing is the practice of accelerating revenue recognition by coaxing distributors to hold excess inventory.)

    Other alleged problem spots for BDO included a failure to design and perform sufficient audit procedures to test: journal entries and other adjustments for evidence of possible material misstatement due to fraud; valuation of accrued liabilities related to contra-revenue accounts; a liability for estimated sales returns in connection with an acquisition; and assumptions related to a client's goodwill impairment of a significant business unit.

    In response to the inspection report, BDO performed additional procedures or supplemented its work papers as necessary. It also noted in a letter that was attached to the report that none of the clients cited had to restate their financial results.

    In the letter, BDO acknowledged the importance of the inspection exercise, commenting that "an inherent part of our audit practice involves continuous improvement." However, the firm also said the report does not "lend itself to a portrayal of the overall high quality of our audit practice," since it reviews only a tiny sampling of audits. What's more, BDO pointed out that many of the issues reviewed "typically involved many decisions that may be subject to different reasonable interpretations."

    Deficiencies highlighted in the inspection report on Grant Thornton, meanwhile, included failures to "identify or appropriately address errors" in clients' application of GAAP. In addition, inadequacies were said to have been found with respect to performing necessary audit procedures, or lacking adequate evidence to support audit opinions. The Grant Thornton inspections were performed at on eight audits conducted between July 2008 and December 2008.

    In five audits, the PCAOB said inspectors found deficiencies in testing benefit plan measurements and disclosures. In four of those audits, Grant Thornton was said to have failed to test the existence and valuation of assets held in the issuer's defined-benefit pension plan. In one audit, the board said, the accounting firm failed to test the valuation of real estate and hedge fund investments and a guaranteed investment contract held by the client's defined-benefit pension plan.

    One client amended three of its post-retirement benefit plans to eliminate certain benefits, and Grant Thornton "failed to evaluate whether the issuer's accounting" was appropriate, said the report. In another audit, the accounting firm allegedly did not perform sufficient procedures to evaluate whether the assumptions related to the discount rate and long-term rate of return on plan assets — provided by the client's actuary — were reasonable.

    In a separate audit, a client acquired a public company that was described as having six reporting units. The client recorded the fair values of the net assets of each reporting unit according to the valuations provided by a specialist. But according to the inspection report, Grant Thornton did not audit the acquisition transaction sufficiently.

    In particular, the firm neglected to evaluate which of the fair-value estimates represented the "best estimate" with regard to two units that were hit with an economic penalty for having a lower total fair value than their net assets, the inspectors said. They also concluded that Grant Thornton did not do a sufficient auditing job when it failed to note whether it was appropriate for the specialist to use liquidation values for two other units.

    Continued in article

    Bob Jensen's threads on BDO and Grant Thornton are at
    http://www.trinity.edu/rjensen/Fraud001.htm

    Bob Jensen's threads on professionalism and independence in auditing are at http://www.trinity.edu/rjensen/Fraud001.htm#Professionalism


    Debt Versus Equity: Dense Fog on the Mezzanine Level
    Deloitte has submitted a Letter of Comment (PDF 277k) on the IASB's Discussion Paper: Financial Instruments with Characteristics of Equity. We strongly support development of a standard addressing how to distinguish between liabilities and equity. We do not support any of the three approaches outlined in the Discussion Paper, but we believe that the basic ownership approach is a suitable starting point. Below is an excerpt from our letter. Past comment letters are Here.
    IASPlus, September 5, 2008 --- http://www.iasplus.com/index.htm

    July 19, 2009 reply from John Anderson [jcanderson27@COMCAST.NET]

    Professor Jensen,

    Thanks for your very interesting post!  

    This peek into the work of the IASB illustrates much of what is happening within the IFRS iceberg … where 6/7th's of the activity is under the surface, or else seemingly ignored in the US press and perhaps intentionally under-reported by US professional organizations.  

    I have pulled the following excerpts from the IASB’s linked site in your post ---
    http://www.iasplus.com/dttletr/0809liabequity.pdf   

    The approach was prepared by staff of the Accounting Standards Committee of Germany on behalf of the European Financial Reporting Advisory Group (EFRAG) and the German Accounting Standards Board (GASB) under the Pro-active Accounting Activities in Europe Initiative (PAAinE) of EFRAG and the European National Standard Setters.

    The staff pointed out that the basic principle for the classification of equity and liability has been established but that all other components still represent work-in-progress.

    Also:

    The staff asked the Board whether there was agreement on acknowledging in the IASB's forthcoming discussion paper that the European Financial Reporting Advisory Group (EFRAG) had also issued a discussion paper on the distinction between equity and liabilities. Most Board Members disagreed with the staff's proposed wording and emphasised that the IASB should make it clear that it had not deliberated the final version of the EFRAG document, had therefore reached no final position on its merits and that the acknowledgement of the existence of the EFRAG paper should not be seen as the IASB endorsing the positions taken therein. It was decided to take the staff proposals offline to agree a suitable wording.

    Also:

     

    The FASB document describes three approaches to distinguish equity instruments and non-equity instruments:

    ·         basic ownership,

    ·         ownership-settlement, and

    ·         reassessed expected outcomes.

    The FASB has reached a preliminary view that the basic ownership approach is the appropriate approach for determining which instruments should be classified as equity. The IASB has not deliberated any of the three approaches, or any other approaches, to distinguishing equity instruments and non-equity, and does not have any preliminary view.

    The IASB's DP describes some implications of the three approaches in the FASB document for IFRSs. For instance:

    ·         Significantly fewer instruments would be classified as equity under the basic ownership approach than under IAS 32.

    ·         The ownership-settlement approach would be broadly consistent with the classifications achieved in IAS 32. However, under the ownership-settlement approach, more instruments would be separated into components and fewer derivative instruments would be classified as equity.

    The goal of the Discussion Paper is to solicit views on whether FASB's proposals are a suitable starting point for the IASB's deliberations. If the project is added to the IASB's active agenda, the IASB intends to undertake it jointly with the FASB. The IASB requests responses to the DP by 5 September 2008. Click for Press Release PDF 52k).

    My concerns are the following:

    1. About a year ago I understood that in IFRS most Preferred Stock would be classified as Debt, not Equity.  
    2. There was some question about Callable and Convertible Debt.  

    Today, going through the IASB’ abstract of all of their meetings on this subject, I cannot determine if the Germans in ERFAG are arguing for Preferred Stock to be classified as Equity or not.  Logically their issue of the Loss Absorbing nature of the Security should be the determining factor for classifications and therefore classify Preferred Stock as Equity or not.  This is critical in areas like Boston where many of our VC backed companies would be transformed into companies having little or no Equity under IFRS.  I have seen IFRS “experts” present on Route 128 in Boston and seemingly being unaware of this difference between US GAAP and IFRS.  Similarly, Tweedie’s stand-by illustrative company from Scotland that he loves to use is Johnnie Walker.  This would indicate to me that maybe McGreevy should introduce Tweedie to some of the Microsoft development now performed in Ireland, unless Johnnie Walker is about to enter the Technology Business.  

    As has been the theme in some of my prior posts, after correctly bringing the US position (FASB) into the discussions about a year ago, since then the IASB seems to have its hands full dealing with the Contingencies from the EU.  

    Clearly with 55 conventions in the EU, 2½ for each EU country, a key task for the IASB is the de-Balkanization of the EU’s Accounting.  During this necessary period of consolidation within the EU, we should not be required to mark time as the IASB planned during the EU conversion from 2005 throughout 2008.  (The Credit Crunch and Financial Meltdown in September 2008 threw  a monkey-wrench into these plans!)  

    As in their December 2008 Revenue Recognition “Discussion Paper” the IASB seems to have their hands full now introducing these revolutionary new concepts such as Equity Section Accounting and Revenue Recognition to their subscribing countries.  They are seemingly starting each exercise with a blank sheet.  Unfortunately this is no way conducive to their goal of converging with us in the US.  This methodology also will create excess fatigue within the EU’s apparently limited and diffused technical resources.  

    Given that the IASB has been struggling with Equity Accounting since 2005 this also confirms my fear of future lack of responsiveness to newly arising needs for new accounting regulations.  We are now down to only the FASB in this country.  I shudder to consider a world with only the IASB.  Could they handle Cash in 3 months, or would this require further study?  

    They were quick with Derivatives in 2008 Q4 and in recent threats to us in the US.  

    Apparently they can only be decisive in emotional moments of pique or fear!  

    Best Regards! 

     

    John

     

    John Anderson, CPA, CISA, CISM, CGEIT, CITP

    Financial & IT Business Consultant

    14 Tanglewood Road

    Boxford, MA 01921

     

    jcanderson27@comcast.net

    978-887-0623   Office

    978-837-0092   Cell

    978-887-3679    Fax

     

     


    What is debt? What is equity? What is a Trup?
    Banks are going to create huge problems for accountants with newer hybrid instruments

    From Jim Mahar's Blog on February 6, 2005 --- http://financeprofessorblog.blogspot.com/

    The Financial Times has a very cool article on financial engineering and the development of securities that combine debt and equity-like features.

    FT.com / Home UK - Banks hope to cash in on rush into hybrid securities: "Securities that straddle the debt and equity worlds are not new. They combine features of debt such as regular interest-like payments and equity-like characteristics such as long or perpetual maturities and the ability to defer payments."

    "About a decade ago, regulated financial institutions started issuing so-called trust preferred securities, or Trups, which are functionally similar to preferred stock but can be structured to achieve extra benefits such as tax deductibility for the issuing company. Other hybrid structures have also been tried.

    But bankers were still searching for what several called the “holy grail” – an instrument that looked like debt to its issuer, the tax man and investors, but like equity to credit rating agencies and regulators.

    That goal came closer a year ago when Moody’s, the credit rating agency, changed its previously conservative policies, opening the door for it to treat structures with some debt-like features more like equity."

    The link to the Financial Times article ---
    http://news.ft.com/cms/s/e22d70f2-9674-11da-a5ba-0000779e2340.html


    Question
    How do you account for and bail out a company with over $1 trillion in assets that has ownership contracting that the best experts cannot untangle?
    Denny Beresford forwarded this link to me.
    "The Professor’s Pop Quiz: Who Controls A.I.G.?" by Steven M. Davidoff, Dealbook.com, November 18, 2018 --- http://dealbook.blogs.nytimes.com/2008/11/18/the-professors-pop-quiz-who-controls-aig/?ei=5070&emc=eta1

    GM Bankruptcy Changes Business Rules?
    The partition of debt versus equity is central to balance sheet theory throughout corporate accounting history, although complicated financing contracts have created problems in recent times, notably mezzanine debt that is part debt and part equity. Now the GM bankruptcy may further complicate accounting theory for debt versus equity.

    It also brings into question some of the provisions for accounting for pensions and post-employment benefits. I don't think accounting theorists and standard setters have yet focused enough on the GM Bankruptcy aftermath.

    "GM Bankruptcy Changes Business Rules?" by Beth Eiseman Grey, The American Thinker, July 19, 2009 --- http://www.americanthinker.com/2009/07/gm_bankruptcy_changes_business.html

    If I were teaching the GM and Chrysler bankruptcy cases at a law school in Chicago, I'd start off with something unexpected -- the famous case of Shlensky v. Wrigley. I'd hook the legal eagles with the story of William Shlensky, who decided to take on the Cubs when he was a 27-year-old Chicago attorney who had owned two shares of Cubs stock since age 14.

    Over four decades ago, Shlensky sued the Wrigleys and the other Cubs corporation board members to force them to install lights at Wrigley Field. He argued that the Cubs needed night games at home to stem years of operating losses. Wrigley allegedly resisted lighting the ballpark because he considered baseball to be a "'daytime sport'" and received a petition signed by 3,000 Wrigley Field neighbors who felt the lights would lead to community deterioration.

    The Illinois Appellate Court considered the question of whether judges should step in when personal or societal concerns drive business decisions. The Court ruled in favor of Wrigley, but did point out that there were no allegations as to the profitability of the other teams' night games. The Court also explained that concern for neighborhood Cubs fans could have had a positive financial impact on revenues. Presumably, the Court might have ruled differently if Wrigley's decision had no financial merit, or was tainted by a lack of integrity or by bad faith.

    A couple of recent articles in Harvard and University of Michigan publications detail the legal issues concerning the social and political motives for business decisions. I would have students look at those issues in the GM and Chrysler cases, with particular focus on the GM opinion.

    U.S. Bankruptcy Judge Robert E. Gerber approved GM's restructuring plan and a generous UAW benefits package, veering little from the path blazed a month earlier by Judge Arthur J. Gonzalez in the Chrysler case. In a 95-page opinion, the Judge remarked that the "only truly debatable issues" involved successor liability claims for pending tort cases. He used the exigencies of the Detroit meltdown to join the Chrysler Court in transforming the Obama Administration's politically-motivated social decisions into judicially-protected business judgments.

    As Judge Gerber acknowledged, "there must be some articulated business justification, other than appeasement of major creditors'" for fast-tracking a multi-billion dollar section 363(b) bankruptcy deal in which thousands of investors, retirees, suppliers, tort victims, and others face near-wipeouts. The unofficial bondholders' committee argued that the U.S. Treasury's political decisions did not amount to sound business judgment. They pointed out that especially with the alleged lack of enabling legislation for the funding in the case, Treasury was not driven and constrained by financial, investor, and regulatory boundaries.

    The taxpayer-funded bailout of the two companies and the UAW was no ordinary commercial investment, but a very generous gift from taxpayers, for which no private lender could find business justification. According to Barron's, there is little prospect for taxpayers "to come out whole" because "GM's equity value would have to approach $70 billion -- a very unlikely outcome" considering that "Ford . . . and BMW . . . each have market values of $20 billion."

    Judge Gerber agreed that the decision to rescue the automakers was hardly motivated by the "economic merit" of the investment, "but rather to address the underlying societal interests in preserving "jobs", the "auto industry," "suppliers," "and the health of the communities." Yet, like Judge Gonzalez, he still concluded that the fast-tracked restructuring plan was a good business decision because GM continued to deteriorate during the bankruptcy, without the TARP funds GM would have had to liquidate, and th