Although this tidbit may seem off topic, one of my goals in life is to stimulate applied research on how to visualize multivariate financial data and other performance data (including qualitative data). I’m hoping other researchers can find success where I’ve failed --- http://www.trinity.edu/rjensen/352wpvisual/000datavisualization.htm

"A New Graphical Representation of the Periodic Table:  But is the latest redrawing of Mendeleev's masterpiece an improvement?" MIT's Technology Review, October 6, 2009  ---
http://www.technologyreview.com/blog/arxiv/24204/?nlid=2410

The periodic table has been stamped into the minds of countless generations of schoolchildren. Immediately recognised and universally adopted, it has long since achieved iconic status.

So why change it? According to Mohd Abubakr from Microsoft Research in Hyderabad, the table can be improved by arranging it in circular form. He says this gives a sense of the relative size of atoms--the closer to the centre, the smaller they are--something that is missing from the current form of the table. It preserves the periods and groups that make Mendeleev's table so useful. And by placing hydrogen and helium near the centre, Abubakr says this solves the problem of whether to put hydrogen with the halogens or alkali metals and of whther to put helium in the 2nd group or with the inert gases.

That's worthy but flawed. Unfortunately, Abubakr's arrangement means that the table can only be read by rotating it. That's tricky with a textbook and impossible with most computer screens.

The great utility of Mendeleev's arrangements was its predictive power: the gaps in his table allowed him to predict the properties of undiscovered elements. It's worth preserving in its current form for that reaosn alone.

However, there's another relatively new way of arranging the elements developed by Maurice Kibler at Institut de Physique Nucleaire de Lyon in France that may have new predictive power.

Kibler says the symmetries of the periodic table can be captured by a group theory, specifically the composition of the special orthogonal group in 4 + 2 dimensions with the special unitary group of degree 2 (ie SO (4,2) x SU(2)).

Continued in article

Bob Jensen's threads on visualization of data ---
http://www.trinity.edu/rjensen/352wpvisual/000datavisualization.htm

October 7, 2009 reply from Jagdish Gangolly [gangolly@GMAIL.COM]

Bob,

You may like to add these sites to your data visualisation page. 

My favourite, which I require my students in Statistics to read, is:
http://www.math.yorku.ca/SCS/Gallery/).

http://www.webdesignerdepot.com/2009/06/50-great-examples-of-data-visualization/

http://www.smashingmagazine.com/2007/08/02/data-visualization-modern-approaches/

http://images.businessweek.com/ss/09/08/0812_data_visualization_heroes/index.htm

http://mashable.com/2007/05/15/16-awesome-data-visualization-tools/

http://www.datavisualization.ch/

http://www.tableausoftware.com/data-visualization-software

http://reference.wolfram.com/mathematica/guide/DataVisualization.html

Jagdish S. Gangolly
Department of Informatics
College of Computing & Information
State University of New York at Albany
Harriman Campus, Building 7A, Suite 220
Albany, NY 12222
Phone: 518-956-8251, Fax: 518-956-8247

myMISlab is a web-based tutorial tool

I generally avoid posting advertisements unless I think a large number of readers have a particular interest in the product or service.

Pearson's myMISlab is a web-based tutorial tool that integrates business applications with Microsoft Office—including Excel, Access, and SharePoint — http://www.mymislab.com/tt_training.asp

Jensen Comment
When I taught AIS or MIS, I always insisted that student learn how to use MS Access so they better understand relational database systems. myMISlab could be greatly improved with tutorials for MS Access, although such tutorials are widely available elsewhere, including in the MS Access software itself. I provide ree video helpers for MS Access at http://www.cs.trinity.edu/~rjensen/video/acct5342/

PQQ stands for Possible Quiz Question material.

Bob Jensen's helpers on Excel, JavaScript, and Other Helpers and Videos ---
http://www.trinity.edu/rjensen/HelpersVideos.htm

"All aboard the insolvency gravy train:  Insolvency practitioners are making vast sums out of the recession ... and leaving creditors with pennies," by Prem Sikka, The Guardian, October 23, 2009 ---
http://www.guardian.co.uk/commentisfree/2009/oct/23/insolvency-administration-industry-fees

"Insolvency: a licence to print money:  Chapter 11 is not all it's cracked up," by Prim Sikka, "The Guardian," July 17, 2008 --- http://www.guardian.co.uk/commentisfree/2008/jul/17/conservatives

Bob Jensen's threads on Insolvent Vultures Feeding on Insolvency ---
http://www.trinity.edu/rjensen/FraudRotten.htm#Vultures  

Question
When might you want to run Linux on your Windows computer?
"E-Banking on a Locked Down (Non-Microsoft) PC," by Brian Krebs
http://www.trinity.edu/rjensen/FraudReporting.htm#IdentityTheft 

Part II ---
http://voices.washingtonpost.com/securityfix/2009/10/e-banking_on_a_locked_down_pc.html?wprss=securityfix

FIN 48
October 21, 2009 message from Dennis Beresford [dberesfo@TERRY.UGA.EDU]

IRS Commissioner Doug Shulman spoke at a conference of the National Association of Corporate Directors that I attended earlier this week. He covered the income tax risk issues that directors should be concerned about. I thought this was a very good summary of both what auditors and tax accountants should be interested in and I refer interested parties to his posted remarks at:
http://media-newswire.com/release_1103133.html 

Denny Beresford

Bob Jensen's threads on FIN 48, 2009 ---
http://www.trinity.edu/rjensen/theory01.htm#FIN48

Bob Jensen's taxation helpers are at
http://www.trinity.edu/rjensen/BookBob1.htm#010304Taxation

Raise Your Guinness Glasses
It may not be the first company to offer pensions and health care benefits to employees, but it was one of the first companies to do so in history.

"Guinness celebrates 250 years:  In 1759, Arthur Guinness signed a 9,000-year lease on a brewery. Centuries later, his eponymous dark stout is one of Ireland's best-known exports" by Julianne Pepitone, CNN Money, September 24, 2009 ---
http://money.cnn.com/2009/09/24/news/companies/guinness_250_anniversary/

But 250 years later, it's clearly worked out well. The brewery at St. James's Gate has helped make Guinness stout one of the most successful beer brands worldwide.

To celebrate what the company has dubbed "Arthur's Day," stout-lovers around the world lifted a glass of the foamy black brew to Arthur Thursday at 17:59 Greenwich Mean Time, or 1:59 ET. (See correction, below.)

Guinness parent Diageo PLC expects thousands to attend an invitation-only party tonight at the Dublin brewery, where musical acts Tom Jones, Kasabian and Estelle will play. Additionally, other artists will perform at events being held at four major music venues and 28 smaller pubs across the city.

Guinness may be distinctly Irish, but the celebration of its birth is happening all over the world; parties are being hosted in more than 150 different countries, according to the beermaker's website.

To mark the occasion, Diageo PLC has pledged to give €2.5 million this year from the Arthur Guinness Fund to entrepreneurs.

The company says its founder was one of the first employers in Ireland to provide pensions and health care for workers, and the foundation aims to preserve that legacy.

Why single out capitalism for immorality and ethics misbehavior?

Making capitalism ethical is a tough task – and possibly a hopeless one.
Prem Sikka (see below)

The global code of conduct of Ernst & Young, another global accountancy firm, claims that "no client or external relationship is more important than the ethics, integrity and reputation of Ernst & Young". Partners and former partners of the firm have also been found guilty of promoting tax evasion.
Prem Sikka (see below)

Jensen Comment
Yeah right Prem, as if making the public sector and socialism ethical is an easier task. The least ethical nations where bribery, crime, and immorality are the worst are likely to be the more government (dictator) controlled and lower on the capitalism scale. And in the so-called capitalist nations, the lowest ethics are more apt to be found in the public sector that works hand in hand with bribes from large and small businesses.

Rotten Fraud in General --- http://www.trinity.edu/rjensen/FraudRotten.htm
Rotten Fraud in the Public Sector (The Most Criminal Class Writes the Laws) --- http://www.trinity.edu/rjensen/FraudRotten.htm#Lawmakers

We hang the petty thieves and appoint the great ones to public office.
Aesop

Congress is our only native criminal class.
Mark Twain --- http://en.wikipedia.org/wiki/Mark_Twain

Why should members of Congress be allowed to profit from insider trading?
Amid broad congressional concern about ethics scandals, some lawmakers are poised to expand the battle for reform: They want to enact legislation that would prohibit members of Congress and their aides from trading stocks based on nonpublic information gathered on Capitol Hill. Two Democrat lawmakers plan to introduce today a bill that would block trading on such inside information. Current securities law and congressional ethics rules don't prohibit lawmakers or their staff members from buying and selling securities based on information learned in the halls of Congress.
Brody Mullins, "Bill Seeks to Ban Insider Trading By Lawmakers and Their Aides," The Wall Street Journal, March 28, 2006; Page A1 --- http://online.wsj.com/article/SB114351554851509761.html?mod=todays_us_page_one

The Culture of Corruption Runs Deep and Wide in Both U.S. Political Parties:  Few if any are uncorrupted
Committee members have shown no appetite for taking up all those cases and are considering an amnesty for reporting violations, although not for serious matters such as accepting a trip from a lobbyist, which House rules forbid. The data firm PoliticalMoneyLine calculates that members of Congress have received more than $18 million in travel from private organizations in the past five years, with Democrats taking 3,458 trips and Republicans taking 2,666. . . But of course, there are those who deem the American People dumb as stones and will approach this bi-partisan scandal accordingly. Enter Democrat Leader Nancy Pelosi, complete with talking points for her minion, that are sure to come back and bite her .... “House Minority Leader Nancy Pelosi (D-Calif.) filed delinquent reports Friday for three trips she accepted from outside sponsors that were worth $8,580 and occurred as long as seven years ago, according to copies of the documents.
Bob Parks, "Will Nancy Pelosi's Words Come Back to Bite Her?" The National Ledger, January 6, 2006 --- http://www.nationalledger.com/artman/publish/article_27262498.shtml 

And when they aren't stealing directly, lawmakers are caving in to lobbying crooks
Drivers can send their thank-you notes to Capitol Hill, which created the conditions for this mess last summer with its latest energy bill. That legislation contained a sop to Midwest corn farmers in the form of a huge new ethanol mandate that began this year and requires drivers to consume 7.5 billion gallons a year by 2012. At the same time, Congress refused to include liability protection for producers of MTBE, a rival oxygen fuel-additive that has become a tort lawyer target. So MTBE makers are pulling out, ethanol makers can't make up the difference quickly enough, and gas supplies are getting squeezed.
"The Gasoline Follies," The Wall Street Journal, March 28, 2006; Page A20  --- Click Here

"Several Democrats, including some closed allied to Speaker Nancy Pelosi, are the subject of ethics complaints," by Holly Bailey, Newsweek Magazine, October 3, 2009 --- http://www.newsweek.com/id/216687

Nancy Pelosi likes to brag that she's "drained the swamp" when it comes to corruption in the House, but ethics problems could come back to haunt Democrats in 2010. Democrats are currently the subject of 12 of the 16 complaints pending before the House ethics committee. Two of the lawmakers under scrutiny—Reps. Jack Murtha and Charlie Rangel—have close ties to Pelosi, who has come under criticism for not asking them to resign their committee posts. Murtha, chairman of a key defense-appropriations subcommittee, is is not formally under investigation but the ethics committee is reviewing political contributions he and other House lawmakers received from lobbying firm whose clients received millions of dollars in Defense earmarks. Rangel, chairman of the Ways and Means Committee, is facing scrutiny for not fully disclosing assets. The ethics committee is also looking into ties between Rangel and a developer who leased rent-controlled apartments to the congressman, and whether Rangel improperly used his House office to raise funds for a public policy institute in his name. Rangel and Murtha deny any wrongdoing. (Another lawmaker under investigation: Rep. Jesse Jackson Jr., who, according to the committee, "may have offered to raise funds" for then–Illinois governor Rod Blagojevich in exchange for the president's Senate seat—a charge Jackson denies. The panel deferred its probe at the request of the Justice Department, which is conducting its own inquiry.)

Pelosi has said little about Rangel's ethics problems, or those involving other Democrats; a Pelosi spokesman, Brendan Daly, e-mails NEWSWEEK, "The speaker has said that [Rangel] should not step aside while the independent, bipartisan ethics committee is investigating."

But watchdog groups, not to mention Republicans, are calling Pelosi hypocritical (as if they weren't equally hypocritical) since Democrats won back control of the House by, in part, trashing the GOP's ethics lapses. Republicans already plan to use the ethics issue against Democrats in 2010. Though Rangel and Murtha aren't as known as Tom DeLay, the GOP poster boy for scandal in 2006, the party aims to change that: this week the House GOP plans to introduce a resolution calling on Rangel to resign his committee post.

Pelosi "promised to run the most ethical Congress in history," says Ken Spain, a spokesman for the National Republican Congressional Committee, "and instead of cracking down on corruption, she promotes it (to garner votes in Congress)." Daly responds, "Since Democrats took control of Congress, we have strengthened the ethics process." (Daly has some magnificent ocean front property for sale in Arizona.)

"Can morality be brought to market?" by Prem Sikka, The Guardian, October 7, 2009 ---
http://www.guardian.co.uk/commentisfree/2009/oct/07/bae-business-ethics-morality-markets

The BAE bribery scandal has once again brought discussions of business ethics to the fore. Politicians also claim to be interested in promoting morality in markets, but have not explained how this can be achieved.

There is no shortage of companies wrapping themselves in claims of ethical conduct to disarm critics. BAE boasts a global code of conduct, which claims that "its leaders will act ethically, promote ethical conduct both within the company and in the markets in which we operate". In the light of the revelations about the way the company secured its business contracts, such claims must be doubted.

BAE is not alone. There is a huge gap between corporate talk and action, and a few illustrations would help to highlight this gap. KPMG is one of the world's biggest accountancy firms. Its global code of conduct states that the firm is committed to "acting lawfully and ethically, and encouraging this behaviour in the marketplace … maintaining independence and objectivity, and avoiding conflicts of interest". Yet the firm created an extensive organisational structure to devise tax avoidance and tax evasion schemes. Former managers have been found guilty of tax evasion and the firm was fined $456m for "criminal wrongdoing".

The global code of conduct of Ernst & Young, another global accountancy firm, claims that "no client or external relationship is more important than the ethics, integrity and reputation of Ernst & Young". Partners and former partners of the firm have also been found guilty of promoting tax evasion.

UBS, a leading bank, has been fined $780m by the US authorities for facilitating tax evasion, but it told the world that "UBS upholds the law, respects regulations and behaves in a principled way. UBS is self-aware and has the courage to face the truth. UBS maintains the highest ethical standards."

British Airways paid a fine of £270m after admitting price fixing on fuel surcharges on its long-haul flights while its code of conduct promised that it would behave responsibly and ethically towards its customers.

These are just a tiny sample that shows that corporations say one thing but do something completely different. This hypocrisy is manufactured by corporate culture, and unless that process is changed there is no prospect of securing moral corporations or markets.

The key issue is that companies cannot buck the systemic pressures to produce ever higher profits. Capitalism is not accompanied by any moral guidance on how high these profits have to be, but shareholders always demand more. Markets do not ask any questions about the quality of profits or the human consequences of ever-rising returns. Behind a wall of secrecy, company directors devise plans to fleece taxpayers and customers to increase profits, and are rewarded through profit-related remuneration schemes. The social system provides incentives for unethical behaviour.

Within companies, daily routines encourage employees to prioritise profit-making even if that is unethical. For example, tax departments within major accountancy firms operate as profit centres. The performance of their employees is assessed at regular intervals, and those generating profits are rewarded with salary increases and career advancements. In time, the routines of devising tax avoidance schemes and other financial dodges become firmly established norms, and employees are desensitised to the consequences.

With increasing public scepticism, and pressure from consumer groups and non-governmental organisations (NGOs), companies manage their image by publishing high-sounding statements. Ethics itself has become big business, and armies of consultants and advisers are available for hire to enable companies to manage their image. No questions are raised about the internal culture or the economic incentives for misbehaviour. It is far cheaper for companies to publish glossy brochures than to pay taxes or improve customer and public welfare. The payment of fines has become just another business cost.

Making capitalism ethical is a tough task – and possibly a hopeless one. Any policy for encouraging ethical corporate conduct has to change the nature of capitalism and corporations so that companies are run for the benefit of all stakeholders, rather than just shareholders. Pressures to change corporate culture could be facilitated by closing down persistently offending companies, imposing personal penalties on offending executives and offering bounties to whistleblowers.

Rotten Fraud in General --- http://www.trinity.edu/rjensen/FraudRotten.htm

Rotten Fraud in the Public Sector (The Most Criminal Class Writes the Laws) --- http://www.trinity.edu/rjensen/FraudRotten.htm#Lawmakers

Among Friends
FBI Arrest in What Appears to Be the World's Largest Case Involving Insider Information
More and more keeps coming out, including revelations of wiretapping

"8 trades the insiders allegedly made The government's case against the Galleon crew includes transactions in companies like Google, AMD, Hilton and Sun," by Michael Copeland, Fortune, October 19, 2009 --- Click Here
http://money.cnn.com/2009/10/19/markets/insider_trading_arrests.fortune/?postversion=2009101912

The government's case in what it is calling the largest insider trading case involving a U.S. hedge fund contains a detailed list of trades involving household-name companies.

Investigators have pieced together a case that alleges more than $25 million in illegal gains based on trading in 2006-09 on companies including Advanced Micro Devices (AMD, Fortune 500), Akamai (AKAM), Clearwire (CLWR), Google (GOOG, Fortune 500), Hilton, Polycom (PLCM) and Sun Microsystems (JAVA, Fortune 500), among others.

The six people charged include hedge fund billionaire Raj Rajaratnam, founder of Galleon Group; Robert Moffat, IBM's (IBM, Fortune 500) top hardware executive and an oft-discussed CEO candidate; Mark Curland and Danielle Chiesi, executives of the hedge fund New Castle Partners; Anil Kumar, a director at consulting firm McKinsey & Co.; and Rajiv Goel, an executive in Intel's treasury department.

Just what did they allegedly do? Using information gleaned from wiretapped conversations between the accused and others, along with the statements of an apparent informant, SEC investigators have pieced together a series of episodes alleging to show how the defendants used inside information and well-timed trades to turn million-dollar profits.

Those charged have yet to enter pleas in the case. Jim Waldman, a lawyer for Rajaratman, told the Wall Street Journal that the hedge fund chief "is innocent. We're going to fight the charges." Lawyers for some of the other accused said their clients are shocked by the charges and deny wrongdoing.

What follows is a condensed account of eight major trades the suspects made and the inside information they capitalized on, according to the the SEC investigation and complaint. At the center of some of the trades is an unnamed "Tipper A," a person who gathered a great deal of information on companies for Rajaratnam, and whose identity presumably will be made public as the case unfolds in court.

Polycom beats the Street

On Jan. 10, 2006, the unnamed source identified in the SEC's complaint as "Tipper A" told Galleon's Rajaratnam that, based on information received from a Polycom insider, revenues at the video-conferencing company for the fourth-quarter of 2005 were about to beat Wall Street estimates. Polycom was set to announce its earnings more than two weeks later.

Rajaratnam sent an instant message to his trader instructing him to "buy 60 [thousand shares] PLCM" for certain Galleon Tech funds. All told, from Jan. 10 through Jan. 25, the date of the Polycom earnings release, Rajaratnam and Galleon bought 245,000 shares of Polycom and 500 Polycom call-option contracts. Polycom did beat the Street, and collectively, the Galleon Tech funds made over $570,000 in connection with their Polycom trades based on Tipper A's tip.

The same scenario was repeated for Polycom's first-quarter 2006 earnings, the complaint says. Galleon made $165,000 on the information. Tipper A made $22,000.

The Hilton takeover

Tipper A allegedly obtained confidential information in advance of a July 3, 2007, announcement that a private equity group would be buying Hilton for $47.50 per share, a premium of $11.45 over the July 3 closing price. Tipper A obtained the information from an analyst who, at the time, was working at Moody's, a rating agency that was evaluating Hilton's debt in connection with the planned buyout. Tipper A bought call option contracts based on the information, and passed on the tip to Rajaratnam.

On July 3, Rajaratnam and Galleon bought 400,000 shares of Hilton in the Galleon Tech funds. That evening, the Hilton transaction was announced. Tipper A sold all of the Hilton call option contracts for a profit of more than $630,000, the complaint says. To compensate the source for the Hilton tip, Tipper A paid the source $10,000. The Galleon Tech funds sold their Hilton shares after the July 3 announcement for a profit of more than $4 million.

Google Misses

Around July 10, 2007, a PR consultant to Google allegedly told Tipper A that Google's second-quarter earnings per share would be down about 25 cents. The Street had estimated yet another strong quarter for the search giant, which was scheduled to report earnings July 19.

Two days later Tipper A bought put options in Google and passed along details of the pending Google miss to Rajaratnam. He and Galleon began buying Google put options for the Galleon Tech funds, and continued buying them through July 19. In addition, Galleon funds bought other options betting on a fall in Google shares and sold short Google stock beginning July 17.

On July 19, Google announced its earnings results, disclosing that its earnings-per-share was indeed 25 cents lower than the prior quarter. Google's share price fell from over $548 per share to almost $520 per share. The Galleon Tech funds' profits from the Google tip were almost $8 million. Tipper A sold all of the put options the day after the July 19 announcement for a profit of over $500,000.

Trading in Intel

Rajaratnam allegedly tapped former Wharton classmate and Intel executive Rajiv Goel just before Intel's (INTL) scheduled fourth-quarter 2006 earnings announcement to get inside information on the world's largest chipmaker. On Jan. 8, 2007, Rajaratnam contacted Intel's Goel. The next day, Rajaratnam bought 1 million shares of Intel at $21.08 per share. On Jan, 11, he bought 500,000 more at $21.65 per share.

Goel and Rajaratnam communicated again multiple times over the Martin Luther King Day weekend that followed. On Tuesday, Jan. 16, the day the markets reopened, Rajaratnam reversed course, selling the Galleon Tech funds' entire 1.5 million share long position in Intel at $22.03 per share, and making a profit of a little over $1 million

Later that day, after the markets closed, Intel released its fourth-quarter 2006 earnings. Although the company's earnings beat analysts' projections, its guidance was below expectations. Intel's stock price fell nearly 5% on the news, but Rajaratnam was already out of the stock.

According to Intel officials, Goel has been placed on administrative leave pending the court case.

Clearwire Gets a Partner

In early February 2008, Goel allegedly tipped Rajaratnam that there was a pending joint venture between wireless broadband company Clearwire and Sprint (S, Fortune 500). Intel was a huge shareholder in Clearwire. Over the next three months, Galleon Tech funds bought and sold Clearwire shares on three occasions. Each time, the Galleon Tech funds traded in advance of news reports relating to the deal between Clearwire and Sprint, and shortly after calls between Goel and Rajaratnam. Overall, the Galleon Tech funds realized gains of about $780,000 on their Clearwire trading between February and May 2008. On May 8, the joint venture between Sprint and Clearwire was publicly announced.

As payback for Goel's tips, Rajaratnam (or someone acting on his behalf) executed trades in Goel's personal brokerage account based on inside information concerning Hilton and PeopleSupport (the government notes that a Galleon director sits on the PeopleSupport's board of directors though no charges of wrongdoing have been brought against that person), which resulted in nearly $250,000 in profits for Goel.

Shorting Akamai

Another hedge fund executive, New Castle's Danielle Chiesi, is an acquaintance of Rajaratnam. When an Akamai executive told her that the Internet infrastructure company would trend lower in the company's second-quarter 2008 guidance to investors, the government claims she passed along the information to Rajaratnam. The consensus among Akamai's management was that Akamai's stock price would decline in the wake of the lowered guidance scheduled for July 30.

Chiesi and the Akamai source spoke multiple times between July 2 and July 24. Chiesi told what she had learned from the Akamai source to her colleague at New Castle, Mark Kurland. On July 25, several New Castle funds took short positions in Akamai shares. The positions grew through July 30. Rajaratnam's Galleon funds also built up a short position during the same period.

In its second-quarter 2008 earnings announcement on July 30, Akamai's results disappointed investors. The stock fell nearly 20% following the announcement. New Castle made $2.4 million. The Galleon Tech funds took home more than $3.2 million.

IBM knows Sun

In January 2009, IBM was conducting due diligence on Sun Microsystems in preparation for an offer to buy it (Sun was ultimately bought by Oracle (ORCL, Fortune 500)). As part of that process, Sun opened its books to IBM, providing its second-quarter 2009 results in advance of the scheduled Jan. 27 announcement.

Because much of Sun's business is hardware, IBM's top hardware executive Robert Moffat was involved in the evaluation of Sun. Moffat allegedly had access to Sun's earnings results. He and Chiesi were also friends and contacted each other repeatedly during January 2009. The frequency of contact between the two increased just prior to the Sun earnings release, investigators say.

On Jan. 26, New Castle began acquiring a substantial long position in Sun. On Jan. 27, after the market close, Sun reported earnings that exceeded Wall Street's estimates, posting a two-cent per-share profit when analysts had expected a loss. Sun shares soared 21% on the news. New Castle made almost $1 million.

AMD gets out of manufacturing

On June 1, 2008, McKinsey & Co. began advising Advanced Micro Devices over its negotiations with two Abu Dhabi sovereign entities. One, a joint venture with the Abu Dhabi government, Advanced Technology Investment Co., would take over AMD's chip manufacturing. The other, an Abu Dhabi sovereign wealth fund, Mubadala Investment Co., would provide a large investment in AMD (in the end, it would total $314 million). According to the SEC, Anil Kumar was one of the McKinsey team briefed on the negotiations. Kumar also knew Rajaratnam.

On Aug. 14, Kumar learned that the two deals were finally getting done. The next day he told Rajaratnam, investigators say. Almost immediately, Rajaratnam and Galleon increased their long position in AMD by buying more than 2.5 million shares in Galleon funds and continuing to build their long position until just before the announcement of the AMD transactions. Rajaratnam and Galleon bought 4 million AMD shares on Sept. 25 and 26, and 1.65 million more on Oct. 3. On Oct. 8, the deals were announced publicly. AMD's stock price increased by about 25%. All told, the value of Galleon's entire position in AMD increased approximately $9.5 million in Oct. 6-7.

However, the allegedly ill-gotten gain was wiped out by the financial crisis of the time. Because the Galleon Tech funds had accumulated much of their AMD position beginning in August, before the crisis sent stock prices, including AMD's, tumbling in September and October, the funds lost money on the overall trade

"Billionaire among 6 nabbed in inside trading case:  Wall Street wake-up call: Hedge fund boss, 5 others charged in $25M-plus insider trading case," by Larry Neumeister and Candice Choi,  Yahoo News, October 16, 2009 --- Click Here

One of America's wealthiest men was among six hedge fund managers and corporate executives arrested Friday in a hedge fund insider trading case that authorities say generated more than $25 million in illegal profits and was a wake-up call for Wall Street.

Raj Rajaratnam, a portfolio manager for Galleon Group, a hedge fund with up to $7 billion in assets under management, was accused of conspiring with others to use insider information to trade securities in several publicly traded companies, including Google Inc.

U.S. Magistrate Judge Douglas F. Eaton set bail at $100 million to be secured by $20 million in collateral despite a request by prosecutors to deny bail. He also ordered Rajaratnam, who has both U.S. and Sri Lankan citizenship, to stay within 110 miles of New York City.

U.S. Attorney Preet Bharara told a news conference it was the largest hedge fund case ever prosecuted and marked the first use of court-authorized wiretaps to capture conversations by suspects in an insider trading case.

He said the case should cause financial professionals considering insider trades in the future to wonder whether law enforcement is listening.

"Greed is not good," Bharara said. "This case should be a wake-up call for Wall Street."

Joseph Demarest Jr., the head of the New York FBI office, said it was clear that "the $20 million in illicit profits come at the expense of the average public investor."

The Securities and Exchange Commission, which brought separate civil charges, said the scheme generated more than $25 million in illegal profits.

Robert Khuzami, director of enforcement at the SEC, said the charges show Rajaratnam's "secret of success was not genius trading strategies."

"He is not the master of the universe. He is a master of the Rolodex," Khuzami said.

Galleon Group LLP said in a statement it was shocked to learn of Rajaratnam's arrest at his apartment. "We had no knowledge of the investigation before it was made public and we intend to cooperate fully with the relevant authorities," the statement said.

The firm added that Galleon "continues to operate and is highly liquid."

Rajaratnam, 52, was ranked No. 559 by Forbes magazine this year among the world's wealthiest billionaires, with a $1.3 billion net worth.

According to the Federal Election Commission, he is a generous contributor to Democratic candidates and causes. The FEC said he made over $87,000 in contributions to President Barack Obama's campaign, the Democratic National Committee and various campaigns on behalf of Hillary Rodham Clinton, U.S. Sen. Charles Schumer and New Jersey U.S. Sen. Robert Menendez in the past five years. The Center for Responsive Politics, a watchdog group, said he has given a total of $118,000 since 2004 -- all but one contribution, for $5,000, to Democrats.

The Associated Press has learned that even before his arrest, Rajaratnam was under scrutiny for helping bankroll Sri Lankan militants notorious for suicide bombings.

Papers filed in U.S. District Court in Brooklyn allege that Rajaratnam worked closely with a phony charity that channeled funds to the Tamil Tiger terrorist organization. Those papers refer to him only as "Individual B." But U.S. law enforcement and government officials familiar with the case have confirmed that the individual is Rajaratnam.

At an initial court appearance in U.S. District Court in Manhattan, Assistant U.S. Attorney Josh Klein sought detention for Rajaratnam, saying there was "a grave concern about flight risk" given Rajaratnam's wealth and his frequent travels around the world.

His lawyer, Jim Walden, called his client a "citizen of the world," who has made more than $20 million in charitable donations in the last five years and had risen from humble beginnings in the finance profession to oversee hedge funds responsible for nearly $8 billion.

Walden promised "there's a lot more to this case" and his client was ready to prepare for it from home. Rajaratnam lives in a $10 million condominium with his wife of 20 years, their three children and two elderly parents. Walden noted that many of his employees were in court ready to sign a bail package on his behalf.

Rajaratnam -- born in Sri Lanka and a graduate of University of Pennsylvania's Wharton School of Business -- has been described as a savvy manager of billions of dollars in technology and health care hedge funds at Galleon, which he started in 1996. The firm is based in New York City with offices in California, China, Taiwan and India. He lives in New York.

According to a criminal complaint filed in U.S. District Court in Manhattan, Rajaratnam obtained insider information and then caused the Galleon Technology Funds to execute trades that earned a profit of more than $12.7 million between January 2006 and July 2007. Other schemes garnered millions more and continued into this year, authorities said.

Bharara said the defendants benefited from tips about the earnings, earnings guidance and acquisition plans of various companies. Sometimes, those who provided tips received financial benefits and sometimes they just traded tips for more inside information, he added.

The timing of the arrests might be explained by a footnote in the complaint against Rajaratnam. In it, an FBI agent said he had learned that Rajaratnam had been warned to be careful and that Rajaratnam, in response, had said that a former employee of the Galleon Group was likely to be wearing a "wire."

The agent said he learned from federal authorities that Rajaratnam had a ticket to fly from Kennedy International Airport to London on Friday and to return to New York from Geneva, Switzerland next Thursday.

Also charged in the scheme are Rajiv Goel, 51, of Los Altos, Calif., a director of strategic investments at Intel Capital, the investment arm of Intel Corp., Anil Kumar, 51, of Santa Clara, Calif., a director at McKinsey & Co. Inc., a global management consulting firm, and Robert Moffat, 53, of Ridgefield, Conn., senior vice president and group executive at International Business Machines Corp.'s Systems and Technology Group.

The others charged in the case were identified as Danielle Chiesi, 43, of New York City, and Mark Kurland, 60, also of New York City.

According to court papers, Chiesi worked for New Castle, the equity hedge fund group of Bear Stearns Asset Management Inc. that had assets worth about $1 billion under management. Kurland is a top executive at New Castle.

Kumar's lawyer, Isabelle Kirshner, said of her client: "He's distraught." He was freed on $5 million bail, secured in part by his $2.5 million California home.

Kerry Lawrence, an attorney representing Moffat, said: "He's shocked by the charges."

Bail for Kurland was set at $3 million while bail for Moffat and Chiesi was set at $2 million each. Lawyers for Moffat and Chiesi said their clients will plead not guilty. The law firm representing Kurland did not immediately return a phone call for comment.

A message left at Goel's residence was not immediately returned. He was released on bail after an appearance in California.

A criminal complaint filed in the case shows that an unidentified person involved in the insider trading scheme began cooperating and authorities obtained wiretaps of conversations between the defendants.

In one conversation about a pending deal that was described in a criminal complaint, Chiesi is quoted as saying: "I'm dead if this leaks. I really am. ... and my career is over. I'll be like Martha (expletive) Stewart."

Stewart, the homemaking maven, was convicted in 2004 of lying to the government about the sale of her shares in a friend's company whose stock plummeted after a negative public announcement. She served five months in prison and five months of home confinement.

Prosecutors charged those arrested Friday with conspiracy and securities fraud.

A separate criminal complaint in the case said Chiesi and Moffat conspired to engage in insider trading in the securities of International Business Machines Corp.

According to another criminal complaint in the case, Chiesi and Rajaratnam were heard on a government wiretap of a Sept. 26, 2008, phone conversation discussing whether Chiesi's friend Moffat should move from IBM to a different technology company to aid the scheme.

"Put him in some company where we can trade well," Rajaratnam was quoted in the court papers as saying.

The complaint said Chiesi replied: "I know, I know. I'm thinking that too. Or just keep him at IBM, you know, because this guy is giving me more information. ... I'd like to keep him at IBM right now because that's a very powerful place for him. For us, too."

According to the court papers, Rajaratnam replied: "Only if he becomes CEO." And Chiesi was quoted as replying: "Well, not really. I mean, come on. ... you know, we nailed it."

Continued in article

"Arrest of Hedge Fund Chief Unsettles the Industry," by Michael J. de la Merced and Zachery Kouwe, The New York Times, October 18, 2009 --- http://www.nytimes.com/2009/10/19/business/19insider.html?_r=1

The firm made no secret that its investors included technology executives. Among them was Anil Kumar, a McKinsey director who did consulting work for Advanced Micro Devices and was charged in the scheme. Another defendant, Rajiv Goel, is an Intel executive who is accused of leaking information about the chip maker’s earnings and an investment in Clearwire.

Prosecutors also say that a Galleon executive on the board of PeopleSupport, an outsourcing company, regularly tipped off Mr. Rajaratnam about merger negotiations with a subsidiary of Essar Group of India. Regulatory filings by PeopleSupport last year identified the director as Krish Panu, a former technology executive. He was not charged on Friday.

Galleon has previously been accused of wrongdoing by regulators. In 2005, it paid more than $2 million to settle an S.E.C. lawsuit claiming it had conducted an illegal form of short-selling.

The Deep Shah Insiders Leak at Moody's:  What $10,000 Bought
Leaks such as this are probably impossible to stop
What disturbs me is that the Blackstone Group would exploit investors based up such leaks

"Moody's Analysts Are Warned to Keep Secrets," by Serena Ing, The Wall Street Journal, October 20, 2009 ---
http://online.wsj.com/article/SB125599951161895543.html?mod=article-outset-box

From their first day at Moody's Investors Service, junior analysts are warned against sharing confidential information with outsiders. They are even told not to mention company names in the elevators at the credit-rating firm's Lower Manhattan headquarters.

Federal prosecutors now allege that a former junior analyst, identified by a person familiar with the matter as Deep Shah, breached that trust in July 2007 when he passed on inside information about Blackstone Group's pending $26 billion takeover of Hilton Hotels.

Mr. Shah and other employees of the ratings firm, owned by publicly traded Moody's Corp., had advance notice about the takeover as part of a standing practice to prebrief credit analysts about planned deals. Prosecutors allege that the junior analyst shared the Hilton information with an unidentified third party, who in turn passed the tip to Galleon Group's Raj Rajaratnam. The tip enabled Mr. Rajaratnam to reap $4 million in profits from trading Hilton shares, a federal complaint alleges.

While Mr. Shah's role in the alleged insider-trading affair is small, his link to the third party -- now a key cooperating witness in the probe -- could shed light on how investigators uncovered the trading ring. Unusual trading in Hilton's shares was one of the first events that attracted scrutiny from regulators in 2007. The same cooperating witness was friends with an executive at Polycom Inc. and also passed on information about Google Inc.

The complaint said the cooperating witness arranged to pay $10,000 to the Moody's associate analyst, a title that describes staffers who aren't considered full analysts but assist them in analyzing data. Mr. Shah hasn't been charged with a crime. It isn't known if he is under investigation or if he will face charges.

Mr. Shah couldn't be reached for comment. A Moody's spokesman declined to comment on the alleged role of Mr. Shah. He reiterated the company's statement last week, saying that the alleged wrongdoing by one of its employees "would be an egregious violation" of the rating firm's policies.

Moody's has drawn flak in the past year for inaccurate credit ratings on mortgage securities and has had to battle recent accusations from a former employee that it still issues inflated ratings on complex securities. Throughout the financial crisis, however, Moody's credit ratings on corporate bonds have largely conformed to expectations.

Still, critics say the Hilton incident may raise questions about whether ratings firms should be privy to inside information. Companies often inform rating analysts about mergers, acquisitions or other transactions ahead of time, to let analysts digest and analyze the information and announce rating actions soon after the deals become public.

Like law firms and investment banks, credit-rating agencies have policies and controls to limit the number of people privy to inside information. "But you can't watch everyone all the time, and if someone is determined to violate the law they will do so," said Scott McCleskey, a former Moody's compliance officer who is now U.S. managing editor of Complinet Inc.

Mr. Shah, who is in his mid-20s, left Moody's more than a year ago and is believed to have returned to his home country of India, according to former colleagues. One ex-colleague described him as "mellow."

He joined the ratings firm in an entry-level position, and worked with analysts who rated companies in the technology, lodging and gaming sectors, according to Moody's reports that listed Mr. Shah's name from 2005 to early 2008.

According to the U.S. attorney's complaint, Hilton executives contacted a Moody's lead analyst by phone on the afternoon of July 2, the day before Blackstone Group announced it would acquire Hilton. The complaint said that, shortly afterward, an associate analyst "involved" in the rating called the unidentified third party three times from a cellphone with information that Hilton was to be taken private. The information was passed to Mr. Rajaratnam who traded Hilton's stock, according to the complaint.

As an associate analyst, Mr. Shah would have been paid roughly $90,000 in annual salary, plus a bonus that could reach $30,000, according to former Moody's employees.

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

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

"SEC Proposes Changes for 'Dark Pools'," SmartPros, October 21, 2009 --- http://accounting.smartpros.com/x67909.xml 

Federal regulators are proposing tighter oversight for so-called "dark pools," trading systems that don't publicly provide price quotes and compete with major stock exchanges.

The Securities and Exchange Commission voted Wednesday to propose new rules that would require more stock quotes in the "dark pool" systems to be publicly displayed. The changes could be adopted sometime after a 90-day public comment period.

The alternative trading systems, private networks matching buyers and sellers of large blocks of stocks, have grown explosively in recent years and now account for an estimated 7.2 percent of all share volume. SEC officials have identified them as a potential emerging risk to markets and investors.

The SEC initiative is the latest action by the agency seeking to bring tighter oversight to the markets amid questions about transparency and fairness on Wall Street. The SEC has floated a proposal restricting short-selling - or betting against a stock - in down markets.

Last month, the agency proposed banning "flash orders," which give traders a split-second edge in buying or selling stocks. A flash order refers to certain members of exchanges - often large institutions - buying and selling information about ongoing stock trades milliseconds before that information is made public.

Institutional investors like pension funds may use dark pools to sell big blocks of stock away from the public scrutiny of an exchange like the New York Stock Exchange or Nasdaq Stock Market that could drive the share price lower.

"Given the growth of dark pools, this lack of transparency could create a two-tiered market that deprives the public of information about stock prices," SEC Chairman Mary Schapiro said before the vote at the agency's public meeting.

Republican Commissioners Kathleen Casey and Troy Paredes, while voting to put out the proposed new rules for public comment, cautioned against rushing to overly broad regulation that could have a negative impact on market innovation and competition.

Dark pools might decide to maintain stock trading at levels below those that trigger required public display under the proposed rules, Paredes said. "Darker dark pools" could be worse than the current situation, he suggested.

When investors place an order to buy or sell a stock on an exchange, the order is normally displayed for the public to view. With some dark pools, investors can signal their interest in buying or selling a stock but that indication of interest is communicated only to a group of market participants.

That means investors who operate within the dark pool have access to information about potential trades which other investors using public quotes do not, the SEC says.

The SEC proposal would require indications of interest to be treated like other stock quotes and subject to the same disclosure rules.

Continued in article

Bob Jensen's threads on mutual fund and index fund and insurance company scandals are at
http://www.trinity.edu/rjensen/FraudRotten.htm#MutualFunds

This tutorial includes how to edit video in Windows 7
"Manage All Your Media in Windows 7 From online streaming to all-new library controls, here's how to get more out of Windows 7's new multimedia features," by Zack Stem, PC World via The Washington Post, October 22, 2009 --- Click Here
http://snipurl.com/windows7multimedia    [www_washingtonpost_com] 

 Whether you're leaping directly from Windows XP to Windows 7 or you stopped in Vista territory along the way, you'll find that the latest version of Microsoft's operating system handles media files in several new ways. The methods for photo and video importing, editing, and exporting have been all updated. You have new options for sharing and streaming files between computers. And media libraries become more-versatile vessels for finding and managing media files. I'll explain how to get started with these and other entertainment features of Windows 7

Check Out the Libraries

Windows 7 manages media files differently than previous Windows OSs did. It retains the familiar Pictures, Videos, Music, and Documents folders, but you can assign additional library locations in order to collect your media files more dynamically.

The libraries in Windows 7 organize file types to help applications find media more easily. By default, programs look to the Pictures, Videos, Music, and Documents folders instead of having to scrutinize your whole disk. Windows XP and Vista tied media libraries to those specific folder locations. For example, Windows Media Player watched vigilantly over C:\Users\[username]\Music. Then, anytime you added new audio files to that folder, Media Player showed them in your music library. If you wanted Media Player to look for media in other areas--say, in the iTunes music folder or in another user's music library--you had to add the new locations manually within the program.

In Windows 7, the Pictures, Videos, Music, and Documents folders are not the only doors into those libraries; you can add any other disk location you like, and library-savvy applications will automatically pool media wherever it's stored.

Add Libraries

Instead of manually curating media in the traditional user folders, you can turn any folder into a library. Applications will know where to find media, and you can keep your computer organized in whatever way you want.

For example, you can turn a networked folder into an auxiliary library, or even pool music files from a different user on the same PC. Or transform your Downloads folder into a library, instantly putting MP3 and video downloads into media applications. Here's how (the process is the same for any of these situations).

Open the Start Menu, and click your username. Open the Downloads folder, and pick Include in library, Music. Then select Include in library, Movies. Henceforth, without your having to open them immediately after downloading them, your PC will automatically slurp music and movie files into Windows Media Player.

To remove the library status of a folder, open a window in the desktop and then navigate to that library folder in the left pane. In our case, the menu path is Libraries, Music, Downloads. Right-click the library-enabled folder--Downloads--and choose Remove location from library.

Get Windows Live Essentials

Windows 7's standard installation omits some previously bundled Windows software, including Photo Gallery and Movie Maker, but you can still download these apps at the Windows Live Essentials download page. Click Download on the right side, and save and run the file.

In the installer, mark the checkbox for each piece of software you want to add. If you're on the prowl for useful multimedia options, check Photo Gallery, Movie Maker Beta, and Silverlight. (You're likely to encounter Silverlight video-streaming sites such as Netflix, so you might as well add it to Windows 7 now.) Click Install, and after several minutes, okay the final prompts to exit the installation. (I skipped changing my default home page and other needy-relationship-style requests.)

You can sign up

Use these groupings to your advantage. Click Next and then click Add tags next to any of the groups. Enter a few keywords from that particular photo session, separating them with semicolons. Click Import.

If you shot RAW files, the program may prompt you to download and install an additional codec. I had to go through that process to accommodate photos from my digital SLR camera; but once you've installed the extra piece of software, Windows 7 can display the higher-end RAW files in the same manner as it does JPEGs.

Publish a Photo Gallery Online

Your friends and family can view your photos through the Windows Live site. After importing and arranging an album, you can upload the images within Windows Live Photo Gallery.

Within that application, right-click My Pictures, and pick Create new folder. Name the new folder. Drag in pictures that you want to publish online. Click the name of the folder within the main window near the top to select all of the pictures. Choose Publish, Online album. Sign into your Windows Live account if needed.

Give the album a title and in the pop-up menu choose who can view the pictures. Change the value for 'Upload size' in the pop-up menu if you wish; Medium gives enough detail for Web viewing; Large and Original allow ample size for displaying on a big TV, printing, and otherwise downloading. Then click Publish.

After the photos have finished uploading, the program will prompt you with the option to view them. Click View Album to open the page in your Web browser. If you miss that option, click your account name in the upper right corner of Windows Live Photo Gallery, and select View your photos. Copy the link from the Web page, and share it with your friends.

If you decide to limit who can see one of your albums, visit that album's Web page, and click Shared with: Everyone (public) at the bottom of the page. Click Edit Permissions on the following page, and uncheck the Everyone (public) box. If you've made friends through the Network area of Windows Live, pick the My network box instead. Otherwise, you can add individual e-mail contacts at the bottom. (Press the spacebar to speed up entry of the next address.)

Back in Photo Gallery, you can add more photos to a published group by selecting the new pictures and choosing Publish, [gallery name]. Hold Shift and click the first and last images to select pictures in sequence, or hold down Ctrl and click pictures to group them in any order you like.

Import Photos and Videos Into Windows Live Movie Maker

Windows Live Movie Maker eschews video capture tools in favor of relying on the rest of Windows 7. If you connect a DV camcorder to a Win 7 PC, the capture process should automatically launch outside Movie Maker.

Click the Import the entire video radio button, enter a name, and click Next. Click the Import videos as multiple files checkbox, and the tool will splice the tape into your individual shots. Approve the next windows to import the tape; the importing process will take exactly as much time as your footage does to play.

Once your PC has captured your media, you have some options for adding clips to a video in Windows Live Movie Maker. From the desktop, drag your photos and videos into the right pane in that program. If that area is blocked, drag the files over the Movie Maker icon in the Taskbar, continue to hold the mouse down, and then drop them into the right pane. Alternatively, select Add above Videos and photos in the software, select the media, and click Open.

You'll want to rearrange and trim various clips during the editing process, but at this point all of them are part of your movie. If you added too many clips or images, delete them from the storyboard by clicking the files and then clicking Remove.

Edit Your Movie

Windows Live Movie Maker cuts the timeline view, focusing instead on arranging clips in a storyboard. Just drag and drop each clip and each image to place them in the desired order within the right pane. Since some video clips run too long, you'll need to trim them into shape.

Click a video clip to select it; then click the Edit tab at the top of the window, and click Trim. At this point, you can adjust the in- and out-point sliders (which govern the length of the clip, by trimming from one or both extremities) at the beginning and end of the timeline. Press the spacebar or click the Play icon to view a sample from the full clip, playing only between the edited points.

If you're satisfied, click Save and close to finish. You'll make the edit here, but the original video file will stay the same, in case you want to reimport it later.

Continued in this long article

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

"Saturn (Now Defunct Automobile): A Wealth of Lessons from Failure," University of Pennsylvania's Knowledge@Wharton, October 28, 2009 --- http://knowledge.wharton.upenn.edu/article.cfm?articleid=2366

Another one from that Ketz guy
He knows about Altman’s Z-score model for non-manufacturers ---
http://en.wikipedia.org/wiki/Bankruptcy_prediction

"Hertz Diverts and Subverts (Where Are You, Mary?)," by: J. Edward Ketz, SmartPros, October 2009 ---
http://accounting.smartpros.com/x67864.xml 

In a recent perversion, Hertz Global Holdings (HTZ) sued Audit Integrity because it had the audacity to predict that Hertz was in danger of bankruptcy. This is another example of issuer retaliation and it must stop. The Congress and the SEC need to rein in corporate America when it attempts to enforce censorship against anybody that criticizes them.

The facts in the case are simple.  Earlier this year Audit Integrity moved Hertz on to its watch list for companies in financial distress.  Hertz demanded a retraction and sent a copy of the letter to 19 other firms that made the list, encouraging them to join Hertz  in “protecting the investing public.”  Then Hertz sued Audit Integrity for defamation.  (See Sue Reisinger, “Hertz GC Sues Analyst Who Said Company Could Go Bankrupt”)

Audit Integrity responded with an open letter to the SEC.  James Kaplan, Chairman of Audit Integrity, wrote “As Hertz’s ultimate goal was to silence an independent research firm calling regulatory and investor attention to the company’s real and material financial risk, the matter warrants an investigation by the Securities and Exchange Commission.”

Quite frankly, the court should just toss out the case.  Any introductory student of mine can compute the Altman Z-score and indeed discover that Hertz is in financial distress.  Its 2008 10-K is quite revealing, with net income a negative $1.2 billion and EBIT a negative $164 million.  Retained earnings has a deficit of almost one billion dollars.  And its capital structure is heavily tilted on the debt side as its debt-equity ratio exceeds 10.  Any neophyte would agree with Audit Integrity.

Altman’s Z-score model for non-manufacturers is:

 Z = 6.56 * WC/TA + 3.26 * RE/TA + 6.72 * EBIT/TA + 1.05 * BVE/TD

where WC = working capital
TA= total assets
RE = retained earnings
EBIT = earnings before interest and taxes
BVE = book value of equity and
TD = total debts.

One interprets the Z-score as follows.  If Z>2.6, then we predict the firm is healthy and relatively free from financial distress.  If 1.1<Z<2.6, the company is in the indeterminate zone.  It faces some financial distress, but more investigation is needed to determine how serious it is.  But, if Z<1.1, then the model predicts that the firm faces a serious chance of going into bankruptcy.

When I plug Hertz’s 2008 numbers into the model, I obtain a Z-score of 0.417.  Altman’s model therefore predicts bankruptcy.  I guess Hertz should sue Professor Altman for inventing such a model.  After all, if the firm goes under, it must be his fault.

A few years ago Senator Wyden expressed concerns about corporate managers who attempt to intimidate those who issue research reports critical of them and their operations.  He correctly stated that the impact of such retaliation could have an adverse reaction on the publication of objective research, which in turn could have a negative impact on the quality of information that is employed by the investment community and could lead to an inefficient allocation of resources.

Chairman Cox responded to the Senator on September 1, 2005.  He stated that he shared Sen. Wyden’s concerns about issuer retaliation and its adverse impact on the investment community.  He promised to tackle the issue, but never did. 

Mary Schapiro, it is your turn.  Are you going to embrace the mission statement of the SEC and be an advocate for investors or are you going to be like your predecessor and say one thing but behind the scenes enable managers and directors to defraud the investment community?

Issuer retaliation is an incredible problem in this country.  If it isn’t stopped, independent investors will stop performing independent research analyses.  And there will be more and more Enrons bursting on the scene. 

Mary, where are you?  Where do you stand on the issues of the day?

Jensen Comment
An enormous problem faced by security analysts, credit rating agencies, and auditors is that when a company is on the edge of bankruptcy, these professionals are no longer confined to professionalism in evaluation. They become decision makers to the extent that "yelling fire" greatly increases the odds of helping to cause a fire.

Bob Jensen's threads on difficulties security analysts encounter when trying (or not trying) to issue negative reports on companies --- http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking

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

Here’s an expanded view of questions raised about which constituencies credit rating agencies (and by analogy auditing firms) really serve.

A message forwarded by my anonymous friend Larry on October 18, 2009

How Moody's sold its ratings -- and sold out investors | McClatchy ---
http://www.mcclatchydc.com/politics/story/77244.html
Instead, Moody's promoted executives who headed its "structured finance" division, which assisted Wall Street in packaging loans into securities for sale to investors. It also stacked its compliance department with the people who awarded the highest ratings to pools of mortgages that soon were downgraded to junk. Such products have another name now: "toxic assets."

"In 2001, Moody's had revenues of $800.7 million; in 2005, they were up to $1.73 billion; and in 2006, $2.037 billion. The exploding profits were fees from packaging . . . and for granting the top-class AAA ratings, which were supposed to mean they were as safe as U.S. government securities," said Lawrence McDonald in his recent book, "A Colossal Failure of Common Sense."

Nobody cared about due diligence so long as the money kept pouring in during the housing boom. Moody's stock peaked in February 2007 at more than $72 a share.

Billionaire investor Warren Buffett's firm Berkshire Hathaway owned 15 percent of Moody's stock by the end of 2001, company reports show. That stake, largely still intact, meant that the Oracle from Omaha reaped huge financial rewards while Moody's overlooked the glaring problems in pools of subprime mortgages.

A Berkshire spokeswoman had no comment.

Moody's wasn't alone in ignoring the mounting problems. It wasn't even first among competitors. The financial industry newsletter Asset-Backed Alert found that Standard & Poor's participated in 1,962 deals in 2006 involving pools of loans, while Moody's did 1,697. In 2005, Standard & Poor's did 1,754 deals to Moody's 1,120. Fitch was well behind both.

http://www.mcclatchydc.com/politics/story/77244.html

Jensen Comment
I’m frantically searching the writings of my very technical hero, Janet Tavakoli, to discover that all this is not true about my other hero, Warren Buffett. Of course there are huge and unknown, at this points, degrees of culpability.

Janet is pretty rough on the ratings agencies in her writings. However, she’s always kind to Warren. One of my all-time favorite books is her Dear Mr. Buffet book. On Page 107, Janet writes as follows:

At the end of 2007, Berkshire Hathaway owned 78 million shares of Moody’s Corporation, one of the top three rating agencies (the same shares owned when I first met Warren Buffett in 2005), representing just over 19 percent of the capital stock. The cot basis of the shares is $499 million. At the end of 200, the value was just under $1 billion. By the end of 2006, the value was around $3.3 billion, but it dropped to $1.7 billion at the end of 2007. The sharp increase in revenues is due chiefly to revenues generated from rating structured financial products, and the sharp decrease was due to the disillusionment of the market with the integrity of the ratings.

On Page 109, Janet continues to berate the rating agency cartel (where I think it might be possible to substitute auditors for rating agencies interchangeably):

The rating agencies seem to not care about the market’s forgiveness since not only have they not apologized ---  a necessary but not sufficient condition --- they seem to feel the market should change. Specifically, the market should change its point of view about what it expects from the rating agencies. Yet it seems that the market has the right to expect rating agencies to follow the basic principles of statistics.

The tactic has mainly been successful because the rating agencies act as a cartel, leveraging their joint power to have fees magically converge and have ratings so similar that they have participated overrating AAA structured products backed by dodgy loans in 2007 that took substantial principal losses. Meanwhile, many market professionals, including me, pointed out in print that the AAA ratings were maeaningless. The rating agencies presented a farily united front in defending their methods (except for Fitch, which also participated on overrated CDOs and later seemed more responsive to downgrading structured products.

. . .

“Ma and pa” retail investors found that AAA product ended up in their pension funds and mutual funds because their money managers gave too much credence to an AAA rating.

But nowhere have I yet found where Janet alludes to any insider profiteering on the part of Warren Buffett who also lost billions of dollars in the crash The difference between “ma and pa” and Mr. Buffet is that a billion dollars is pocket change to Warren Buffet. He can easily recoup his losses legitimately in trades with stupid hedge fund managers and bankers that rely too much on fallible models (at least that’s what mathematician Janet Tavakoli tells us in a very enlightening way).

Expert Financial Predictions (Jon Stewart's hindsight video scrapbook) --- http://www.technologyreview.com/blog/post.aspx?bid=354&bpid=23077&nlid=1840
You have to watch the first third of this video before it gets into the scrapbook itself
The problem unmentioned here is one faced by auditors and credit rating agencies of risky clients every day:  Predictions are often self fulfilling
If an auditor issues going concern exceptions in audit reports, the exceptions themselves will probably contribute to the downfall of the clients
The same can be said by financial analysts who elect to trash a company's financial outlook
Hence we have the age-old conflict between holding back on what you really secretly predict versus pulling the fire alarm on a troubled company
There are no easy answers here except to conclude that it auditors and credit rating agencies appeared to not reveal many of their inner secret predictions in 2008
Auditing firms and credit rating agencies lost a lot of credibility in this economic crisis, but they've survived many such stains on their reputations in the past
By now we're used to the fact that the public is generally aware of the fire before the auditors and credit rating agencies pull the alarm lever
On the other hand, financial wizards who pull the alarm lever on nearly every company all the time lose their credibility in a hurry

Bob Jensen's threads on credit rating agencies are at
http://www.trinity.edu/rjensen/FraudRotten.htm#CreditRatingAgencies

Bob Jensen's threads on auditor professionalism are at
http://www.trinity.edu/rjensen/fraud001.htm#Professionalism

The Economist's Big Mac Index and the new iPod Nano Index from CommSec are both cute ways of getting attention for the organizations that produce them. But do they really measure anything economically significant?
 
The idea is that the indexes are supposed to expose the relative under- or over-valuation of various currencies. In theory, the same good should trade at broadly the same price across the globe if exchange rates are adjusting properly. When goods wind up priced very differently in different locations, it suggests something is out of whack.

But a side-by-side comparison of the Big Mac Index and the iPod Nano Index suggests that these might not really be good metrics for measuring currency valuations. As you can see, the two indexes result in wildly uncorrelated results. If it were really a matter of currency valuation, you’d expect both to show similar valuation problems. Instead, the pattern just seems random.

Quality of Earnings, Restatements, and Core Earnings

From The Wall Street Journal Accounting Weekly Review, September 25, 2009

Investors, It Pays to Mind the GAAP Gaps
by Mark Gongloff
Sep 18, 2009
Click here to view the full article on WSJ.com

TOPICS: Earning Announcements, Earnings Per Share, Earnings Quality, Generally accepted accounting principles, Impairment, Income from Continuing Operations, Income Statement, Operating Income, SEC, Securities and Exchange Commission

SUMMARY: The article analyzes the historical differences between operating earnings and net income, or "GAAP earnings" since the first quarter of 2000 and relates the earnings per share to current stock prices via P/E ratios. In the second-quarter of 2009, "so-called operating earnings, which exclude one-time items such as credit-market write-downs, nearly matched earnings conforming to...GAAP....Companies in the Standard & Poor's 500-stock index earned an estimated $13.81 a share in the quarter on an operating basis, compared with $13.51 in GAAP earnings."

CLASSROOM APPLICATION: The article is useful for discussing quality of earnings disclosures in any financial accounting class.

QUESTIONS: 
1. (Introductory) What do you think the author is referring to when he uses the term "GAAP earnings"? According to the article, how may GAAP earnings differ from operating earnings as reported by publicly-traded companies?

2. (Introductory) What are the implications for stock market prices of the relationship, or differences, between reported GAAP earnings and operating earnings as disclosed by the companies analyzed for this article (those in the S&P 500)?

3. (Introductory) What other implications are highlighted by analysts as stemming from this difference in reported earnings numbers?

4. (Advanced) What does it mean to say that GAAP earnings "...get reported to the government but get less attention on earnings day"? To whom in the government are these earnings reported?

5. (Advanced) What is the difference between operating earnings and net income? Do you think that the operating earnings described in this article agree with operating earnings as presented on an income statement prepared in accordance with GAAP? In your answer, specifically consider treatment required for impairment charges for goodwill or other long-lived assets.

Reviewed By: Judy Beckman, University of Rhode Island

"Investors, It Pays to Mind the GAAP Gaps," by Mark Gongloff, The Wall Street Journal,  September 18, 2009 ---
http://online.wsj.com/article/SB125322419751520977.html?mod=djem_jiewr_AC

Two earnings data points that tend to coexist in parallel universes have lately come notably close to colliding.

In the second-quarter earnings season, so-called operating earnings, which exclude one-time items such as credit-market write-downs, nearly matched earnings conforming to Generally Accepted Accounting Principles, or GAAP, which get reported to the government but get less attention on earnings day.

Companies in the Standard & Poor's 500-stock index earned an estimated $13.81 a share in the quarter on an operating basis, compared with $13.51 in GAAP earnings.

That is the closest those two earnings measures have been since the first quarter of 2000. The gap widens in recessions and did so significantly in the latest downturn. That they nearly matched last quarter offers another sign of market stability.

Still, the relative harmony of the second quarter seems a fluke. For the past 14 years, the gap between the two measures has grown persistently, with operating earnings topping GAAP earnings by an average of $2.47 a share per quarter.

When using a 10-year trailing average of earnings to erase cyclical gyrations, operating earnings are nearly 24% higher than GAAP earnings, the highest ever.

It isn't clear why the difference has grown so wide. One inescapable conclusion is that, since 1995, either by happy accident or accounting shenanigans, one-time losses have grown more quickly than one-time gains, elevating the operating earnings that Wall Street watches.

The investment implications are many. For one thing, two earnings measures produce two market valuations. The S&P 500 trades at 21 times the past 10 years' GAAP earnings and 17 times operating earnings. Neither is exactly cheap, but one is much pricier than the other.

Operating earnings help investors get a feel for a company's long-term profitability, but companies pay dividends out of GAAP earnings, notes Capital Economics market economist John Higgins.

Investors are well advised to watch both figures for another reason: Some companies have bigger differences between GAAP and operating earnings than others. According to research by Société Générale quantitative strategist Andrew Lapthorne, those with bigger gaps tend to underperform in the long run.

S&P Core Earnings
For years Standard and Poors has recognized that GAAP earnings can be misleading to investors relative to what are called the S&P Core Earnings that adjust for some "deficiencies" in GAAP. Sometimes the adjustments are for disclosures that are not booked. For example, for years the S&P Core earnings adjusted for unbooked employee stock options that, prior to revision of FAS 123, were not expensed by most companies (only one of the Fortune 500 companies expensed employee stock options before FAS 123 was revised).

"Beyond The Balance Sheet Earnings Quality," by  Kurt Badanhausen, Jack Gage, Cecily Hall, Michael K. Ozanian, Forbes, January 28, 2005 --- http://www.forbes.com/home/business/2005/01/26/bbsearnings.html 

It's not how much money a company is making that counts, it's how it makes its money. The earnings quality scores from RateFinancials aim to evaluate how closely reported earnings reflect the cash that the companies' businesses are generating and how well their balance sheets reflect their true economic position. Companies in the winners table have the best earnings quality (they are generating a lot of sustainable cash from their operations), while companies in the losers table have been boosting their reported earnings with such tricks as unexpensed stock options, low tax rates, asset sales, off-balance-sheet financing and deferred maintenance of the pension fund.

Krispy kreme doughnuts is the latest illustration of the fact that stunning earnings growth can mask a lot of trouble. Not long ago the doughnut maker was a glamour stock with a 60% earnings-per-share growth rate and a multiple to match-70 times trailing earnings. Now the stock is at $9.61, down 72% from May, when the company first issued an earnings warning. Turns out Krispy Kreme may have leavened profits in the way it accounted for the purchase of franchised stores and by failing to book adequate reserves for doubtful accounts. So claims a shareholder lawsuit against the company. Krispy Kreme would not comment on the suit. 

Investors are not auditors, they don't have subpoena power, and they can't know about such disasters in advance. But sometimes they can get hints that the quality of a company's earnings is a little shaky. In Krispy's case an indication that it was straining to deliver its growth story came three years ago in its use of synthetic leases to finance expansion. Forbes described these leases in a Feb. 18, 2002 story that did not please the company. Another straw in the wind: weak free cash flow from operations. You get that number by taking the "cash flow from operations" reported on the "consolidated statement of cash flows," then subtracting capital expenditures. Solid earners usually throw off lots of positive free cash flow. At Krispy the figure was negative.

 Is there a Krispy Kreme lurking in your portfolio? For this, the fifth installment in our Beyond the Balance Sheet series, we asked the experts at RateFinancials of New York City ( www.ratefinancials.com ) to look into earnings quality among the companies included in the S&P 500 Index. The tables at right display the outfits that RateFinancials puts at the top and at the bottom of the quality scale. The ratings are to a degree subjective and, not surprisingly, some of the companies at the bottom take exception. General Motors feels that RateFinancials understates its cash flow. But at minimum RateFinancials' work warns investors to look closely at the financial statements of the suspect companies. 

A lot of factors went into the ratings produced by cofounders Victor Germack and Harold Paumgarten, research director Allan Young and ten analysts. A company that expenses stock options is probably not straining to meet earnings forecasts, so it gets a plus. Overoptimistic assumptions about future earnings on a pension fund artificially prop up earnings and thus rate a minus. A low tax rate is a potential indicator of trouble: Maybe the low profit reported to the Internal Revenue Service is all too true and the high profit reported to shareholders an exaggeration. Other factors relate to discontinued operations (booking a one-time gain from selling a business is bad), corporate governance (companies get black marks for having poison pills), inventory (if it piles up faster than sales, then business may be weakening) and free cash flow (a declining number is bad).

Continued in this section of Forbes

For more on S&P Core Earnings see Quality of Earnings, Restatements, and Core Earnings --- http://www.trinity.edu/rjensen/theory01.htm#CoreEarnings

Oil and Gas Accounting Under IFRS

October 16, 2009 message from Ed Scribner

Does anyone know where U.S. oil companies stand on adoption of IFRS? Presumably their current accounting methods fall within “the overall accounting framework established by the IASB,” so they would be able to continue to use those methods for at least awhile.

Ed Scribner
New Mexico State University
Las Cruces, NM, USA

October 18, 2009 reply from Bob Jensen

Hi Ed,

Exxon-Mobil and other large multinational companies want badly to bury U.S. GAAP in favor of IFRS. They are the wind beneath the wings of the Big Four auditing firms’ advocacy of IFRS. They are also active behind the scenes in setting IFRS they way they want IFRS. (see the quotation below)

Actually, the large companies were not a problem when the SEC caved in to the “oil industry” when it dropped the requirement that dry holes be fully expensed when declared hopeless. The political heat came from smaller wildcatting operators who would see their earnings fluctuate from enormous losses to enormous gains year-to-year because of the impact of one or two dry holes in some years and no dry holes in other years. A few dry holes have negligible impact on Exxon year in and year out.

Also the big oil companies benefit when small operations go bankrupt, because the big players can then buy up the drilling rights of small players in the industry.

"Powerful players: How constituents captured the setting of IFRS 6, an accounting standard for the extractive industries," by Corinne L. Cortesea, Helen J. Irvineb and Mary A. Kaidonisa, ScienceDirect, 2008 ---
Click Here
 

Abstract
This paper illustrates the influence of powerful players in the setting of IFRS 6, a new International Financial Reporting Standard (IFRS) for the extractive industries. A critical investigative inquiry of the international accounting standard setting process, using Critical Discourse Analysis (CDA), reveals some of the key players, analyses the surrounding discourse and its implications, and assesses the outcomes. An analysis of small cross-section of comment letters submitted to the International Accounting Standards Committee (IASC) by one international accounting firm, one global mining corporation and one industry group reveal the hidden coalitions between powerful players. These coalitions indicate that the regulatory process of setting IFRS 6 has been captured by powerful extractive industries constituents so that it merely codifies existing industry practice.

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

"71% of senior financial executives say that FASB should set U.S. accounting standards, not IASB or U.S. Congress," by Kristi Grgeta, Grant Thornton, October 29, 2009

October 30m 2009 message from Tom Selling [tom.selling@GROVESITE.COM]

For Immediate Release

For more information, please contact:
Kristi Grgeta
T 312.602.8720
E Kristi.Grgeta@gt.com

71% of senior financial executives say that FASB should set U.S. accounting standards, not IASB or U.S. Congress

More than half of public companies still have no plans to use XBRL even after SEC mandate

 CHICAGO, October 29, 2009 – In a national survey of U.S. CFOs and senior comptrollers conducted by Grant Thornton LLP, the U.S. member firm of Grant Thornton International Ltd, the majority (71%) believe that the Financial Accounting Standards Board (FASB) should set U.S. accounting standards, not the SEC, the International Accounting Standards Board (IASB) or the U.S. Congress.

 EXtensible Business Reporting Language (XBRL) usage has picked up some among public companies, increasing to 17 percent in September 2009 from 12 percent in March 2009; however, this increase is not as significant as one might expect given the SEC mandate that public companies use XBRL as early as June 2009 and no later than 2011. Even more surprising is that more than half (52%) of public companies still report that they have no plans to use XBRL.

 Fifty-nine percent of the survey respondents report that their companies would continue to use leases more or less in the same manner as they currently do, even though the FASB has tentatively decided that all lease obligations should be recognized as liabilities on the statement of financial position with a corresponding “right of use” asset. CFOs also feel that companies should report their own debt on their financial statements at amortized historical cost (43%), rather than at fair value (38%) or at the discounted amount of the expected future payments (18%).

Ideally, who should set U.S. accounting standards?

	All	Public	Private
A national independent board supervised by a national regulator (e.g., the Financial Accounting Standards Board)	71%	70%	71%
An international independent board supervised by international entities such as the International Organization of Securities Regulators, the World Bank and the International Monetary Fund (e.g., the International Accounting Standards Board)	24%	23%	25%
The global accounting profession (e.g., the International Federation of Accountants)	20%	16%	21%
A national regulator (e.g., the SEC)	16%	18%	16%
A body designated by an international entity such as the United Nations Council on Trade and Development or the World Trade Organization	3%	2%	3%
National legislatures (e.g., the U.S. Congress)	3%	4%	2%

Does your company currently report financial results using eXtensible Business Reporting Language (XBRL)?

	All	Public	Private
Yes	6%	17%	3%
No	94%	83%	97%

 

If no, when do you plan to report using XBRL?

 

	All	Public	Private
Before 2010	1%	6%	1%
Before 2011	8%	25%	5%
After 2011	6%	18%	3%
No plans at this time	84%	52%	92%

The FASB has tentatively decided that all lease obligations should be recognized as liabilities on the statement of financial position with a corresponding “right of use” asset. Would a requirement to recognize lease obligations on the statement of financial position cause you to change the way in which you finance operations?

	All	Public	Private
Yes, we would continue to use leases or lease financing, but possibly with significant changes in the provisions of the agreements.	12%	13%	12%
Yes, we would be less inclined to make use of lease financing.	14%	16%	13%
No, we would continue to use leases more or less in the same manner as we currently do.	59%	57%	61%
Don’t know	15%	14%	14%

 How should firms report their own debt on their financial statements?

	All	Public	Private
At amortized historical cost	43%	47%	42%
At fair value	38%	33%	38%
At the discounted amount of the expected future payments	18%	19%	18%
Other	2%	2%	2%

- ends -

About the Survey

Grant Thornton LLP conducted the biannual national survey from Sept. 21 through Oct. 2, 2009, with 846 U.S. CFOs and senior comptrollers participating. 

About Grant Thornton LLP

The people in the independent firms of Grant Thornton International Ltd provide personalized attention and the highest quality service to public and private clients in more than 100 countries. Grant Thornton LLP is the U.S. member firm of Grant Thornton International Ltd, one of the six global audit, tax and advisory organizations. Grant Thornton International Ltd and its member firms are not a worldwide partnership, as each member firm is a separate and distinct legal entity.

In the U.S., visit Grant Thornton LLP at www.GrantThornton.com

Bob Jensen's threads on the movement to replace U.S. GAAP in favor of IASB international standards ---
http://www.trinity.edu/rjensen/theory01.htm#MethodsForSetting

Case:  Multinational Tax Controversies

From The Wall Street Journal Accounting Weekly Review on October 15, 2009

Business Fends Off Tax Hit
by Neil King Jr. and Elizabeth Williamson
Oct 13, 2009
Click here to view the full article on WSJ.com

TOPICS: Tax Laws, Tax Policy, Taxation, Treasury Department

SUMMARY: "The Obama Administration has shelved a plan to raise more than $200 billion in new taxes on multinational companies following a blitz of complaints from businesses." Obama met with business leaders over the summer of 2009 and each time discussed a proposal to end the exception to U.S. taxation of worldwide corporate earnings in cases in which the earnings are retained overseas and not repatriated. Repatriation typically occurs by subsidiaries paying dividends to parent corporations. "Lurking behind the tax debate was the administration's need for new sources of revenue to fund its...spending..." and the deficit.

CLASSROOM APPLICATION: The article can be used to introduce taxation of multinational corporations and the influence of politics on setting tax law.

QUESTIONS: 
1. (Introductory) How are U.S. companies earnings from foreign operations taxed in the U.S.? According to the article, how does that compare to taxation policies in the rest of the world?

2. (Advanced) What exception to this policy is currently a part of U.S. tax law? How does this exception result in the "counterintuitive" result that " businesses investing here are paying a higher tax rate than if they're investing overseas"?

3. (Advanced) What does it mean to repatriate earnings?

4. (Introductory) What is the reason that President Obama has proposed eliminating the exception from taxation for earnings by foreign operations that are not repatriated, at least according to some?

5. (Introductory) How did leaders of corporate America manage to stave off this tax change?

Reviewed By: Judy Beckman, University of Rhode Island

"Business Fends Off Tax Hit," by Neil King Jr. and Elizabeth Williamson, The Wall Street Journal, October 13, 2009 ---
http://online.wsj.com/article/SB125539099758581443.html?mod=djem_jiewr_AC

The Obama administration has shelved a plan to raise more than $200 billion in new taxes on multinational companies following a blitz of complaints from businesses.

A contingent of Silicon Valley chief executives, for example, traveled to Washington in late September to speak out against the proposal to change how the federal government taxes overseas profits. They came away from meetings with key congressmen relieved.

Obama aides say the administration has set the idea aside for now, but may return to it as part of a broader tax overhaul sometime next year. The White House had billed the proposed change as an overdue fix to the tax code and potentially a key revenue-raiser.

"This has gone all of a sudden from red-hot to white-cold," says Michael Klayko, chief executive of Brocade Communications Systems Inc., a large data-storage company. But he says he is concerned that if the proposed tax changes get entangled in the health-care overhaul, "it could go back to red-hot again."

The story of the business community's campaign against the tax changes and the Obama administration's eventual retreat offers a window into the often uneasy relations between the White House and the corporate world. It suggests that an administration that was critical of business at the height of the financial crisis is becoming more accommodating. The White House, through a series of presidential lunches and other outreach, is trying to soothe tensions with multinational companies.

Lurking behind the tax debate was the administration's need for new sources of revenue to fund its increased spending. Jason Furman, a White House economic adviser, made that point clear at the end of a session with a dozen or so lobbyists in March. Catherine Schultz, head of tax policy at the National Foreign Trade Council, who was at the meeting, says Mr. Furman basically told the group: "We need the money."

Critics long have complained that the provision encourages companies to avoid U.S. taxes by expanding production on foreign soil. On the campaign trail last year, President Barack Obama promised repeatedly to "end tax breaks for companies that ship jobs overseas."

U.S. businesses counter that the deferral provision allows them to better compete globally, which in turn allows them to expand their U.S. operations, too. If the deferral were eliminated, they contend, the financial damage to their businesses would require them to cut jobs in the U.S.

The issue has drawn little public attention, having been overshadowed by debates on health care, climate change and financial regulation. But it may have colored relations between the White House and the business community as much as any issue.

Companies ranging from Microsoft Corp. to General Electric Co. to International Business Machines Corp. put the topic at the top of their Washington agendas. Many CEOs and business lobbyists say the proposal -- and the rhetoric used to push it -- betrayed a tone-deafness on business issues among the president and his advisers. White House officials say the issue has often dominated discussions during meetings with CEOs.

The first sign that Mr. Obama planned to make good on his campaign promise came Feb. 26, when he released his proposed $3.6 trillion budget for fiscal 2010. The 134-page blueprint included revisions to the tax rules for U.S. companies operating overseas, which it said would raise $210 billion over 10 years.

The proposal sent tremors through the business community. Two weeks later, semiconductor chief executives and chairmen gathered in Washington. The group included Craig Barrett, then chairman of Intel Corp., and John Daane, chief executive of high-tech company Altera Corp. At a round-table discussion with reporters, the executives slammed the administration for seeking tax changes that would "punish" companies with offshore operations. They said they resented suggestions from the Obama campaign that their practices were somehow unpatriotic.

Dozens of other CEOs, from some of the country's largest companies, raised similar complaints in interviews and opinion pieces. Brian Ferguson, then-chief executive of Eastman Chemical Co., told an industry trade publication that Mr. Obama's tax plans posed "potentially devastating" challenges to those parts of the U.S. manufacturing sector that rely heavily on foreign sales.

When Mr. Obama addressed a gathering of CEOs at a Washington hotel on March 12, IBM Chief Executive Samuel Palmisano asked the president about the deferral issue. The provision, Mr. Palmisano said, "has been very, very important" in helping U.S. companies compete abroad. "So what we really are asking for," he said, "is just an open dialogue."

Mr. Obama said he would seek "the right balance," but showed little inclination to budge. Most Americans found it "counterintuitive," he said, that "businesses investing here are paying a higher tax rate than if they're investing overseas." It was important to have a tax code "that reflects those values," he told the CEOs.

Within days, the Business Roundtable, the U.S. Chamber of Commerce and the National Association of Manufacturers began releasing studies intended to show that scrapping the deferral would hurt U.S. competitiveness, spurring companies to shift jobs overseas to save money or giving a leg up to foreign competitors. One study looked at the gradual elimination of the deferral allowance for U.S. shipping companies between 1975 and 1986, and the sector's subsequent rapid contraction as foreign operators gained the upper hand. The groups also sent letters to leaders of the House and Senate, signed by nearly 200 companies, that criticized the proposal.

Hoping to clear the air, Treasury Secretary Timothy Geithner hosted a conference call March 25 with top executives from a dozen companies, including IBM, Citigroup Inc., GE, Google Inc. and Honeywell International Inc. Also on the call were Lawrence Summers, the White House economic adviser, and Valerie Jarrett, Mr. Obama's top aide for corporate outreach. The Obama aides said they were open to discussing the provision, and insisted that it wouldn't hit companies as hard as some CEOs thought, participants recall.

Tensions flared in May when Mr. Obama said in a speech he intended to push ahead with revamping the overseas tax rules. The president said the existing tax code "makes it perfectly legal for companies to avoid paying their fair share." He blasted tax cheats who were "shirking" their responsibilities and vowed to clean up "a tax code that says you should pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, New York."

Continued in article

Bob Jensen's threads on the budget crisis ---
http://www.trinity.edu/rjensen/entitlements.htm

Ford Outfoxes the Chicken Tax
From The Wall Street Journal Accounting Weekly Review on October 1, 2009

To Outfox the Chicken Tax, Ford Strips Its Own Vans
by: Matthew Dolan
Date: Sep 23, 2009 

SUMMARY: Ford goes to unusual lengths to dodge U.S. restrictions on importing trucks into America.

DISCUSSION: 

1.     What is the "chicken tax"? When did it originate? What was the reason for its implementation? Why does it continue to be in force?

2.     What does Ford do to work around the chicken tax? Do these actions comply with the law? Why or why not? What are Ford's other options? What are the pros and cons of each of these alternatives? Which do you think is the best alternative for Ford in this situation?

3.     Why does the U.S. government make these types of distinctions for similar categories of products or components? Argue a case to support that assertion that rules applying to similar categories be more consistent. What is the case to support the current situation in which different tariffs apply for similar categories?

"To Outfox the Chicken Tax, Ford Strips Its Own Vans Logic Takes a Back Seat -- and Windows, as Auto Maker Plays Tariff Games," by Matthew Dolan, The Wall Street Journal, September 23, 2009 ---
http://online.wsj.com/article/SB125357990638429655.html?mod=djem_jie_360

Several times a month, Transit Connect vans from a Ford Motor Co. factory in Turkey roll off a ship here shiny and new, rear side windows gleaming, back seats firmly bolted to the floor.

Their first stop in America is a low-slung, brick warehouse where those same windows, never squeegeed at a gas station, and seats, never touched by human backsides, are promptly ripped out.

The fabric is shredded, the steel parts are broken down, and everything is sent off along with the glass to be recycled.

Why all the fuss and feathers? Blame the "chicken tax."

The seats and windows are but dressing to help Ford navigate the wreckage of a 46-year-old trade spat. In the early 1960s, Europe put high tariffs on imported chicken, taking aim at rising U.S. sales to West Germany. President Johnson retaliated in 1963, in part by targeting German-made Volkswagens with a tax on imports of foreign-made trucks and commercial vans.

The 1960s went the way of love beads and sitar records, but the chicken tax never died. Europe still has a tariff on imports of U.S. chicken, and the U.S. still hits delivery vans imported from overseas with a 25% tariff. American companies have to pay, too, which puts Ford in the weird position of circumventing U.S. trade rules that for years have protected U.S. auto makers' market for trucks.

The company's wiggle room comes from the process of defining a delivery van. Customs officials check a bunch of features to determine whether a vehicle's primary purpose might be to move people instead. Since cargo doesn't need seats with seat belts or to look out the window, those items are on the list. So Ford ships all its Transit Connects with both, calls them "wagons" instead of "commercial vans." Installing and removing unneeded seats and windows costs the company hundreds of dollars per van, but the import tax falls dramatically, to 2.5 percent, saving thousands.

Customs officials won't discuss individual company's strategies, but Stephen Biegun, Ford's vice president for international governmental affairs, says the practice complies with the letter of the law. "We are free-traders, full stop," he says.

Foreign auto makers have long crossed swords with the chicken tax. Toyota Motor Corp., Nissan Motor Co. and Honda Motor Co. took the straightforward route and built plants in the U.S.

Subaru, owned by Fuji Heavy Industries Ltd. of Japan, imported a small pickup in the 1980s called the Bi-drive Recreational All-terrain Transporter, or BRAT. But it wasn't a taxable truck, because it had two lawn-chair-like seats bolted to the open bed. (President Reagan owned a red one, according to Subaru.)

With the globalization of the auto industry, American companies have joined the game. Until recently, Chrysler Group LLC imported Dodge Sprinter vans made in Düsseldorf, Germany, by former owner Daimler AG. The engine, transmission, axles and wheels were removed, allowing the truck bodies to cross the border as auto components, which aren't subject to the tax. Daimler then reassembled the vehicles at a factory in Ladson, S.C.

Ford launched the Transit Connect in 2002. The compact commercial van with a distinctive raised roof was designed to haul goods through urban areas with tight streets. Since then, more than 600,000 of the vehicles have been sold.

When gas prices spiked, Ford saw a market among small-business owners in the U.S. Prices start at $20,780, much lower than would have been possible if Ford had to cover the chicken tax. Sales are off to a fast start. In August, Ford sold more than 2,200 in the U.S.

"It's great for city driving," said Duff Goldman, owner of Charm City Cakes in Baltimore and star of Ace of Cakes on the Food Network. "It's shorter, smaller and has really good fuel economy." He bought a black Transit Connect last month. Since he doesn't carry passengers, his van has no windows or seats in the back.

The vans leave Turkey on cargo ships owned by Wallenius Wilhelmsen Logistics. Once they arrive in Baltimore, they are driven into a warehouse, where 65 workers from the shipping company's WWL Vehicle Services Americas Inc. convert them into commercial vehicles amid the blare of rock music and the whirring of industrial fans.

On a recent afternoon, a handful of vans passed through the warehouse unmolested as passenger wagons. But the vast majority were lined up to have windows pulled out, and they all had their rear seats removed.

In one lane, supervisor Robert Dowdy watched as two workers removed the rear side windows. They cut out the rubber seal with a special knife and popped out the glass using suction cups. The space is plugged with a metal panel that cures for 15 minutes before being tested outside for waterproofing.

At the start of that same lane, Mayso Lawrence unhooked a rear seat belt as easily as he would pop the top off a soda bottle. Using a drill, he quickly unscrewed six bolts to free the seats. Workers at the other end dump the seats into cardboard boxes, which are hoisted onto an open tractor-trailer and shipped to Ohio. Ford says the shredded seat fabric and foam become landfill cover, while the steel is processed for other uses.

"I never thought about why we take out the seats, but if that's what the customer wants, that's what we'll give them," Mr. Lawrence said.

With the seat removed, Mr. Lawrence puts in a new floor panel to cover the holes, toots the horn to signal he's finished, then gets to work on another van. The whole process takes him less than five minutes.

Rob Stevens, chief engineer for Ford's commercial vehicles, says the auto maker decided against shipping the seats back to Turkey for use in the next wave of vans for the U.S.

"We thought going through the recycling process was best," he said. "The steel is valuable."

As Bastiat showed 150 years ago, you don't create wealth by destruction.
"Clunker Cash Is Anything But Smart Money," by Randall Forsyth, Barron's, August 4, 2009 ---
http://online.barrons.com/article/SB124931671451601915.html 

Eugene Fama Lecture: Masters of Finance, Oct 2, 2009
Videos Fama Lecture: Masters of Finance From the American Finance Association's "Masters in Finance" video series, Eugene F. Fama presents a brief history of the efficient market theory. The lecture was recorded at the University of Chicago in October 2008 with an introduction by John Cochrane.
http://www.dimensional.com/famafrench/2009/10/fama-lecture-masters-of-finance.html#more
Bob Jensen's threads on the EMH --- http://www.trinity.edu/rjensen/theory01.htm#EMH

Video:  Interesting look at 8 common investment mistakes that uses Big Brown (the horse, not the delivery company). ---
http://financeprofessorblog.blogspot.com/2009/10/video-on-common-mistakes.html

Last night's (October 7, 2009) PBS NewsHour took a look at the bearish obsession du jour, the commercial real estate market. Real estate analyst Bob White took them around to show some of the ugliest cases out there. (via Square Feet)
http://www.businessinsider.com/a-guided-tour-of-nyc-commercial-real-estate-wreckage-video-2009-10

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

Way out there on (or beyond) the leading edge
"Caltech Scientists Develop Novel Use of Neurotechnology to Solve Classic Social Problem, September 10, 2009 --- http://media.caltech.edu/press_releases/13288
Jim Mahar clued me into this link

Economists and neuroscientists from the California Institute of Technology (Caltech) have shown that they can use information obtained through functional magnetic resonance imaging (fMRI) measurements of whole-brain activity to create feasible, efficient, and fair solutions to one of the stickiest dilemmas in economics, the public goods free-rider problem—long thought to be unsolvable.

This is one of the first-ever applications of neurotechnology to real-life economic problems, the researchers note. "We have shown that by applying tools from neuroscience to the public-goods problem, we can get solutions that are significantly better than those that can be obtained without brain data," says Antonio Rangel, associate professor of economics at Caltech and the paper's principal investigator.

The paper describing their work was published today in the online edition of the journal Science, called Science Express.

Examples of public goods range from healthcare, education, and national defense to the weight room or heated pool that your condominium board decides to purchase. But how does the government or your condo board decide which public goods to spend its limited resources on? And how do these powers decide the best way to share the costs?

"In order to make the decision optimally and fairly," says Rangel, "a group needs to know how much everybody is willing to pay for the public good. This information is needed to know if the public good should be purchased and, in an ideal arrangement, how to split the costs in a fair way."

In such an ideal arrangement, someone who swims every day should be willing to pay more for a pool than someone who hardly ever swims. Likewise, someone who has kids in public school should have more of her taxes put toward education.

But providing public goods optimally and fairly is difficult, Rangel notes, because the group leadership doesn't have the necessary information. And when people are asked how much they value a particular public good—with that value measured in terms of how many of their own tax dollars, for instance, they’d be willing to put into it—their tendency is to lowball.

Why? “People can enjoy the good even if they don’t pay for it,” explains Rangel. "Underreporting its value to you will have a small effect on the final decision by the group on whether to buy the good, but it can have a large effect on how much you pay for it."

In other words, he says, “There’s an incentive for you to lie about how much the good is worth to you.”

That incentive to lie is at the heart of the free-rider problem, a fundamental quandary in economics, political science, law, and sociology. It's a problem that professionals in these fields have long assumed has no solution that is both efficient and fair.

In fact, for decades it's been assumed that there is no way to give people an incentive to be honest about the value they place on public goods while maintaining the fairness of the arrangement.

“But this result assumed that the group's leadership does not have direct information about people's valuations,” says Rangel. “That's something that neurotechnology has now made feasible.”

And so Rangel, along with Caltech graduate student Ian Krajbich and their colleagues, set out to apply neurotechnology to the public-goods problem.

In their series of experiments, the scientists tried to determine whether functional magnetic resonance imaging (fMRI) could allow them to construct informative measures of the value a person assigns to one or another public good. Once they’d determined that fMRI images—analyzed using pattern-classification techniques—can confer at least some information (albeit "noisy" and imprecise) about what a person values, they went on to test whether that information could help them solve the free-rider problem.

They did this by setting up a classic economic experiment, in which subjects would be rewarded (paid) based on the values they were assigned for an abstract public good.

As part of this experiment, volunteers were divided up into groups. “The entire group had to decide whether or not to spend their money purchasing a good from us,” Rangel explains. “The good would cost a fixed amount of money to the group, but everybody would have a different benefit from it.”

The subjects were asked to reveal how much they valued the good. The twist? Their brains were being imaged via fMRI as they made their decision. If there was a match between their decision and the value detected by the fMRI, they paid a lower tax than if there was a mismatch. It was, therefore, in all subjects' best interest to reveal how they truly valued a good; by doing so, they would on average pay a lower tax than if they lied.

“The rules of the experiment are such that if you tell the truth,” notes Krajbich, who is the first author on the Science paper, “your expected tax will never exceed your benefit from the good.”

In fact, the more cooperative subjects are when undergoing this entirely voluntary scanning procedure, “the more accurate the signal is,” Krajbich says. “And that means the less likely they are to pay an inappropriate tax.”

This changes the whole free-rider scenario, notes Rangel. “Now, given what we can do with the fMRI,” he says, “everybody’s best strategy in assigning value to a public good is to tell the truth, regardless of what you think everyone else in the group is doing.”

And tell the truth they did—98 percent of the time, once the rules of the game had been established and participants realized what would happen if they lied. In this experiment, there is no free ride, and thus no free-rider problem.

“If I know something about your values, I can give you an incentive to be truthful by penalizing you when I think you are lying,” says Rangel.

While the readings do give the researchers insight into the value subjects might assign to a particular public good, thus allowing them to know when those subjects are being dishonest about the amount they'd be willing to pay toward that good, Krajbich emphasizes that this is not actually a lie-detector test.

“It’s not about detecting lies,” he says. “It’s about detecting values—and then comparing them to what the subjects say their values are.”

“It’s a socially desirable arrangement,” adds Rangel. “No one is hurt by it, and we give people an incentive to cooperate with it and reveal the truth.”

“There is mind reading going on here that can be put to good use,” he says. “In the end, you get a good produced that has a high value for you.”

From a scientific point of view, says Rangel, these experiments break new ground. “This is a powerful proof of concept of this technology; it shows that this is feasible and that it could have significant social gains.”

And this is only the beginning. “The application of neural technologies to these sorts of problems can generate a quantum leap improvement in the solutions we can bring to them,” he says.

Indeed, Rangel says, it is possible to imagine a future in which, instead of a vote on a proposition to fund a new highway, this technology is used to scan a random sample of the people who would benefit from the highway to see whether it's really worth the investment. "It would be an interesting alternative way to decide where to spend the government's money," he notes.

In addition to Rangel and Krajbich, other authors on the Science paper, “Using neural measures of economic value to solve the public goods free-rider problem,” include Caltech's Colin Camerer, the Robert Kirby Professor of Behavioral Economics, and John Ledyard, the Allen and Lenabelle Davis Professor of Economics and Social Sciences. Their work was funded by grants from the National Science Foundation, the Gordon and Betty Moore Foundation, and the Human Frontier Science Program.

Jensen Comment
Are Rangel and Kribich overlooking a fundamental problem in economic theory or are they overcoming that problem?
http://www.trinity.edu/rjensen/theory01.htm#EconomicTheoryErrors
In particular note Economic Theory Errors. Simoleon Sense, September 23, 2009

It would seem to me that the pattern recognition approach suggested by Rangel and Kribich is a far out way of overcoming the scaling problem of utility models.

Can We Go Back to the Good Old Days?

October 2, 2009 message from PwC's CFOdirect Network [CFOdirect_Network@PWC_Assurance.messages1.com]

Today the Securities and Exchange Commission (SEC) provided many smaller companies with additional time to comply with the SEC's internal control audit requirements. Under the final extension, non-accelerated filers (generally companies with a public float below $75 million) will be required to comply with the SEC's internal control audit requirements beginning with annual reports for fiscal years ending on or after June 15, 2010. The additional extension does not affect companies with fiscal year-ends between June 15 and December 14.

October 2, 2009 message from Glen L Gray [glen.gray@CSUN.EDU]

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/6252501/KPMG-and-PwC-Reykjavik-offices-are-raided-by-Icelandic-police.html

Police raid KPMG, PwC offices regarding failure of Icelandic banks Icelandic offices of accounting firms KPMG and PricewaterhouseCoopers were raided by police during an investigation into the failure of Iceland's three biggest banks. Police seized documents and computer data related to banks Kaupthing, Glitnir and Landsbanki. Officials are looking into allegations that accounting and reporting requirements were violated at those banks, the failure of which drove the country into a financial crisis. Telegraph (London) (10/1)

Glen L. Gray, PhD, CPA
Accounting & Information Systems, COBAE
California State University, Northridge
18111 Nordhoff ST
Northridge, CA 91330-8372
818.677.3948
818.677.2461 (messages)
http://www.csun.edu/~vcact00f

"Can We Go Back to the Good Old Days?" by Dennis R. Beresford, The CPA Journal --- http://www.nysscpa.org/cpajournal/2004/1204/perspectives/p6.htm 
Note the section on Internal Controls

Recently I visited my pharmacy to pick up eyedrops for my two golden retrievers. Before he would give me the prescription, the pharmacist insisted I sign a form on behalf of Murphy and Millie, representing that they had been apprised of their rights under the new medical privacy rules. This ludicrous situation is a good illustration of how complicated life has gotten.

I was still shaking my head later that same day when I was clicking mindlessly through the 150 or so channels that my local cable TV service makes available to me. I happened to land on The Andy Griffith Show, and the few minutes I spent with Andy, Barney, Opie, and Aunt Bea got me thinking about the Good Old Days. Wouldn’t it be nice, I thought, to go back to the Good Old Days of the profession in the early 1960s when I graduated from college?

Back then, accounting was really simple. The Accounting Principles Board hadn’t issued any standards yet, and FASB didn’t exist. So we didn’t have 880 pages listing all of the current rules and guidance on derivative financial instruments, for example. The totality of authoritative GAAP at that time fit in one softbound booklet about one-third the size of the new derivatives guidance.

In those Good Old Days, the SEC had been around for quite a while but it rarely got excited about accounting matters. Neither mandatory quarterly reporting nor management’s discussion and analysis (MD&A) had yet come into being, for example. And annual report footnotes could actually be read in an hour or so.

The country had eight major accounting firms, and becoming a partner in one was a truly big deal. Lawsuits against accounting firms were rare, and almost none of them resulted in substantial damages against the accountants.

In short, accounting seemed more like a true profession, with good judgment and experience key requirements for success.

Of course, however much we might like to return to simpler times, it’s easier said than done. And most of us would never give up the many benefits of progress, such as photocopiers, personal computers, e-mail, the Internet, and cellphones. But I think that accounting rules may have become more complicated than necessary.

Let me start with a mea culpa. You may remember the famous line from the comic strip Pogo: “We have met the enemy, and he is us!” Well, you may be tempted to rephrase that quote to “We have met the enemy, and he is … Beresford!”

I plead guilty to having led the development of 40 or so new accounting standards over my time at FASB. A number of them had pervasive effects on financial statements, and some have been costly to apply. I always tried to be as practical as possible, however, although probably few would say that I was 100% successful in meeting that objective.

In any event, more-recent accounting standards and proposals seem to be getting increasingly complicated and harder to apply. Even the best-intentioned accountants have difficulty keeping up with all of the changes from FASB, the AICPA, the SEC, the EITF, and the IASB. And some individual standards, such as those on derivatives and variable-interest entities, are almost impossible for professionals, let alone laypeople, to decipher.

Furthermore, these days, companies are subject to what I’ll call quadruple jeopardy. They have to apply GAAP as best they can, but they are then subject to as many as four levels of possible second-guessing of their judgments.

First, the external auditors must weigh in. Second, the SEC will now be reviewing all public companies’ reports at least once every three years. Third, the PCAOB will be looking at a sample of accounting firms’ audits, and that could include any given company’s reports. Finally, the plaintiff’s bar is always looking for opportunities to challenge accounting judgments and extort settlements. Broad Principles Versus Detailed Rules

I suspect that all this second-guessing is what leads many companies and auditors to ask for more-detailed accounting rules. But we may have reached the point of diminishing returns. In response to the complexity and sheer volume of many current standards, some have suggested that accounting standards should be broad principles rather than detailed rules. FASB and the SEC have expressed support for the general notion of a principles-based approach to accounting standards. (It’s kind of like apple pie and motherhood: Who can object to broad principles?) Of course, implementing such an approach is problematic.

In 2002, FASB issued a proposal on this matter. And last year the SEC reported to Congress on the same topic. Specific things that FASB suggested could happen include the following:

Standards should always state very clear objectives. Standards should have a clearly defined scope and there should be few, if any, exceptions (e.g., for certain industries). Standards should contain fewer alternative accounting treatments (e.g., unrealized gains and losses on marketable securities could all be run through income rather than the various approaches used at present). FASB also said that a principles-based approach probably would include less in the way of detailed interpretive and implementation guidance. Thus, companies and auditors would be expected to rely more on professional judgment in applying the standards.

The SEC prefers to call this approach “objectives-based” rather than “principles-based.” SEC Chief Accountant Donald Nicolaisen recently repeated the SEC’s support for such an approach, agreeing with the notion of clearly identifying and articulating the objective for each standard. Although he also suggested that objectives-based standards should avoid bright-line tests such as lease capitalization rules, he called for “sufficiently detailed” implementation guidance, including real-world examples.

Although FASB and the SEC may have reached a meeting of the minds on the overall notion of more general principles, they may disagree on the key point of how much implementation guidance to provide. FASB thinks that a principles-based approach should include less implementation guidance and rely more on judgment, while the SEC thinks that “sufficiently detailed” guidance is needed, and I suspect that would make it difficult to significantly reduce complexity in some cases.

In any event, FASB recently said that it may take “several years or more” for preparers and auditors to adjust to a change to less detail. Meantime, little has changed with respect to individual standards, which if anything are becoming even harder to understand and apply.

I’ve heard FASB board members say that FASB Interpretation (FIN) 46, on variable-interest entities (VIE), is an example of a principles-based standard. I assume they say this because FIN 46 states an objective of requiring consolidation when control over a VIE exists. But the definition of a VIE and the rules for determining when control exists are extremely difficult to understand.

FASB recently described what it meant by the operationality of an accounting standard. The first condition was that standards have to be comprehensible to readers with a reasonable level of knowledge and sophistication. This doesn’t seem to be the case for FIN 46. Many auditors and financial executives have told me that only a few individuals in the country truly know how to apply FIN 46. And those few individuals often disagree among themselves!

Such complications make it difficult to get decisions on many accounting matters from an audit engagement team. Decisions on VIEs, derivatives, and securitization transactions, to name a few, must routinely be cleared by an accounting firm’s national experts. And with section 404 of the Sarbanes-Oxley Act (SOA) and new concerns about auditor independence, getting answers is now even harder. For example, in the past, companies would commonly consult with their auditors on difficult accounting matters. But now the PCAOB may view this as a control weakness, under the assumption that the company lacks adequate internal expertise. And if auditors get too involved in technical decisions before a complex transaction is completed, the SEC or the PCAOB might decide that the auditors aren’t independent, because they’re auditing their own decisions.

When things become this complicated, I wonder whether it’s time for a new approach. Maybe we do need to go back to the Good Old Days.

Internal Controls

Today, financial executives are probably more concerned about internal controls than new accounting requirements. For the first time, all public companies must report on the adequacy of their internal controls over financial reporting, and outside auditors must express their opinion on the company’s controls. Many people have questioned whether this incredibly expensive activity is worth the presumed benefit to investors. While one might argue that the section 404 rules are a regulatory overreaction, shareholders should expect good internal controls. And audit committees, as shareholders’ representatives, must demand those good controls. So this has been by far the most time-consuming topic at all audit committee meetings I’ve attended in the past couple of years.

Companies and auditors are spending huge sums this year to ensure that transactions are properly processed and controlled. Yet the most perfect system of internal controls and the best audit of them might not catch an incorrect interpretation of GAAP. A good example of this was contained in the PCAOB’s August 2004 report on its initial reviews of the Big Four’s audit practices. The report noted that all four firms had missed the fact that some clients had misapplied EITF Issue 95-22. As the New York Times (August 27, 2004) noted, “The fact that all of the top firms had been misapplying it raised issues of just how well they know the sometimes complicated rules.”

Responding to a different criticism in that same PCAOB report, KPMG noted, “Three knowledgeable informed bodies—the firm, the PCAOB, and the SEC—had reached three different conclusions on proper accounting, illustrating the complex accounting issues registrants, auditors and regulators all face.”

Fair Value Accounting

Even those who are very confident about their understanding of the current accounting rules shouldn’t get complacent: Fair value accounting is right around the corner, making things even harder. In fact, it is already required in several recent standards.

Continued in article

You can read more about Section 404 at http://en.wikipedia.org/wiki/SOX_404

European bankers don't want FASB-like approach to impairment adjustments
Tweedie noted that the IASB had heard from banks in Europe that they did not want to adopt the U.S. approach on accounting for impaired assets. “I want to emphasize that the alternative of adopting a portion of the FASB approach to impairment, promulgated in April, would not bring about a level playing field,” he said. “Furthermore, on many issues, EU financial institutions would not want us to adopt the U.S. approach on impairment. As I said in June, given the urgency of the fundamental issues surrounding IAS 39, none of us can afford the potential protracted back-and-forth resulting from piecemeal changes in international and U.S. standards that would undermine the comprehensive and desperately needed reform that is under way.”
"IASB Not Waiting for FASB," WebCPA, October 20, 2009 ---
http://www.webcpa.com/news/IASB-Not-Waiting-FASB-52087-1.html

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

"The Myth of Regulation," by J. Edward Ketz, SmartPros, October 2009 --- http://accounting.smartpros.com/x67705.xml

Mark Twain remarked that "There is no distinctively native American criminal class except Congress." He was wrong. He should have included presidents and the SEC.

On August 4 the SEC accused General Electric of accounting fraud (Litigation Release No. 21166), but it chose not to disclose who committed the frauds and it did not punish the criminals.  Instead, the SEC fined the victims—the shareholders—$50 million.  Worse, the SEC protracted the so-called investigation so long that even if the felons were indicted, the case likely would get tossed out of court because of the statute of limitations.  This is just one example of many injustices by the SEC during the last decade that reveals how this agency has supported the efforts of some managers and directors to defraud the investing public.

I infer that Congress and recent presidents have approved these activities, for Congress, Bush, and Obama have done nothing to improve matters.  They have given the appearance of caring, but thwarted any real, effective measures.
Congress enacted Sarbanes-Oxley and President Bush signed the legislation.  But Sarbanes-Oxley did little to dampen the activities of criminally-minded managers and directors.  This was because it did so little to improve enforcement activities.  Sarbanes-Oxley merely required a variety of studies and increased penalties and required auditors to report on the firm’s internal controls.  But these actions have not lessened securities fraud or accounting shenanigans.

More recently President Obama claims to fight the problems that caused the financial crisis by advocating a new agency.  “The Consumer Financial Protection Agency will have the power to ensure that consumers get information that is clear and concise, and to prevent the worst kinds of abuses.”  Many business writers have critiqued this proposal for a variety of reasons.  I agree with them, but I think there is a deeper problem and that is the myth of regulation.

What Obama is really trying to do is give American voters the impression that he is in charge, that he cares about them, and that he is improving matters so that the chances of another financial meltdown is infinitesimal.  It is political legerdemain.

As long as managers have perverse incentives to cheat investors and as long as the SEC goes after only the little guys and ignores managers at Enron, WorldCom, Madoff Investments Securities, and GE, nothing is going to change.  If the Congress and if the President want to improve matters—and I have no idea if they really do—then they must change the set of incentives and disincentives.  To effect real change, the system must punish managers and directors who lie and steal and cover it up with scandalous financial reporting.

More regulation might make society feel better, but that just is an indication that most Americans have little understanding of economics.  They will continue to lose in the stock markets until they insist elected officials do something substantive.

My fear is that Democrats will rally around Obama while Republicans vilify him, similar to the previous administration when Republicans rallied around Bush and Democrats denigrated him.  There is too much partisanship in this country and not enough rational analysis.  Americans need to understand that both presidents have failed us by supporting new legislation and by crippling better enforcement.  (For whatever it is worth, this is one of the reasons I am an Independent.)

Jensen Comment
The problem of regulation is that the industries being regulated end up owning the regulators until the next big scandal makes headlines. Bob Jensen's threads on the need for better regulation and enforcement are at
http://www.trinity.edu/rjensen/FraudRotten.htm

Madoff Accountant to Plead Guilty
The former accountant to convicted Ponzi-scheme operator Bernard Madoff is expected to plead guilty to fraud and other charges at a hearing next week, prosecutors said Friday. In a letter to U.S. District Judge Alvin K. Hellerstein, prosecutors from the U.S. Attorney's office in Manhattan said they expect David G. Friehling to plead guilty at a hearing Nov. 3 under a cooperation agreement with the government. Assistant U.S. Attorney Lisa Baroni, in her letter, said the charges Mr. Friehling is expected to plead guilty to are securities fraud, investment advisor fraud, obstructing or impeding the administration of Internal Revenue laws, and four counts of making false filings with the U.S. Securities and Exchange Commission.
Chad Bray, The Wall Street Journal, October 30, 2009 ---
http://online.wsj.com/article/SB125691406152218719.html?mod=WSJ_hps_LEFTWhatsNews

"Audit firms left unprotected against claims of negligence," by Alex Spence, London Times, September 28, 2009 ---
http://business.timesonline.co.uk/tol/business/industry_sectors/support_services/article6851623.ece

Britain’s big four auditing firms have been left exposed to a surge in negligence claims after the Government refused to limit further the damages they could face.

Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers (PwC) lobbied hard for a cap on payouts. Senior figures involved in the discussions said that Lord Mandelson, the Business Secretary, appeared receptive to their concerns but stopped short of changing the law.

The decision is a huge blow to the firms — some face lawsuits relating to Bernard Madoff’s $65 billion fraud — which believe there may not be another chance for a change in the law for at least two years. They fear that they will be targeted by investors and liquidators seeking to recover losses from Madoff-style frauds and big company failures.

At present, auditors can be held liable for the full amount of losses in the event of a collapse, even if they are found to be only partly to blame.

In April, representatives of the companies met Lord Mandelson to plead for new measures to cap their liability. They warned that British business could be plunged into chaos if one of them were bankrupted by a blockbuster lawsuit.

However, an official of the Department for Business, Innovation and Skills said: “The 2006 Companies Act already allows auditor liability limitation where companies and their auditors want to take this course.”

Under present company law, directors can agree to restrict their auditors’ liability if shareholders approve; however, to date, no blue-chip company has done so. Directors have seen little advantage in limiting their auditors’ liability, and objections by the US Securities and Exchange Commission (SEC) have also been a significant obstacle.

The SEC opposes caps on the ground that their introduction could lead to secret deals whereby directors agree to restrict liability in return for auditors compromising on their oversight of a company’s accounts. The SEC could attempt to block caps put in place by British companies that have operations in the United States.

The big four auditors had hoped to persuade Lord Mandelson to amend the legislation to address the SEC’s concerns and to encourage companies to limit their auditors’ liability.

Peter Wyman, a senior PwC partner, who was involved in the discussions, said that the Government’s lack of action was disappointing. He said: “The Government, having legislated to allow proportionate liability for auditors, is apparently content to have its policy frustrated by a foreign regulator.”

Auditors are often hit with negligence claims in the aftermath of a company failure because they are perceived as having deep pockets and remain standing while other parties may have disappeared or been declared insolvent.

In 2005 Ernst & Young was sued for £700 million by Equitable Life, its former audit client, after the insurance company almost collapsed. The claim was dropped but could have bankrupted the firm’s UK arm if it had succeeded.

This year KPMG was sued for $1 billion by creditors of New Century, a failed sub-prime lender, and PwC has faced questions over its audit of Satyam, the Indian outsourcing company that was hit by a long- running accounting fraud.

Three of the big four are also facing numerous lawsuits relating to their auditing of the feeder funds that channelled investors into Madoff’s Ponzi scheme.

Investors and accounting regulators worry that the big four’s dominance of the audit market is so great that British business would be thrown into disarray if one of the four were put out of business by a huge court action. All but two FTSE 100 companies are audited by the four.

Mr Wyman said: “The failure of a large audit firm would be very damaging to the capital markets at a time when they are already fragile.”

Arthur Andersen, formerly one of the world’s five biggest accounting firms, collapsed in 2002 as a result of its role in the Enron scandal.

Suits you

KPMG A defendant in a class-action lawsuit in the Southern District of New York against Tremont, a Bernard Madoff feeder fund

Ernst & Young Sued by investors in a Luxembourg court with UBS for oversight of a European Madoff feeder fund

PwC Included in several lawsuits in Canada claiming damages of up to $2 billion against Fairfield Sentry, a big Madoff feeder fund

KPMG Sued in the US for at least $1 billion by creditors of New Century Financial, a failed sub-prime mortgage lender, which claimed that KPMG’s auditing was “recklessly and grossly negligent”

Deloitte Sued by the liquidators of two Bear Stearns-related hedge funds that collapsed at the start of the credit crunch

Jensen Comment
After the Enron, Worldcom, and other scandals there was serious doubt as to whether private investors would abandon equity capital markets. SOX was enacted to save Wall Street. It is doubtful that we, as accountants and auditors, will ever be able to return to "the good old days."

When the banks greatly underestimated loan losses, where were the auditors?
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms

Bob Jensen's threads on CPA firm litigation losses are at
http://www.trinity.edu/rjensen/fraud001.htm

Will the large international auditing firms survive?
http://www.trinity.edu/rjensen/2008Bailout.htm#Auditors

Banks Still Cannot Resist Understating Loan Loss Reserves

BB&T Net Falls 58% as Bad Loans Surge
by Matthias Rieker and Joan E. Solsman
Oct 20, 2009
Click here to view the full article on WSJ.com

TOPICS: Allowance For Doubtful Accounts, Bad Debts, Banking, Loan Loss Allowance

SUMMARY: BB&T Corp. is a Winston-Salem, N.C., bank that has been "...considered among the best-run regional banks." The bank has "...reported a continued rise in delinquent loans in states hit by the recession, such as North Carolina, rather than those known more for being clobbered by the mortgage meltdown....BB&T Chief Executive Kelly King said during a conference call with investors that the company added $263 million to its loan-loss reserve, which he called 'a significant number.' Some investors hoped BB&T would write off bad loans more decisively than it did and build its loan-loss reserve more aggressively, analysts said."

CLASSROOM APPLICATION: Questions relate to loan loss reserve process and understanding the implications of types of loan losses-those on delinquent loans from states hit hard by recession, rather than from states with significant real estate value losses.

QUESTIONS: 
1. (Introductory) Describe the process of creating reserves against losses for loans and writing off bad loans. Specifically describe when the expense for bad debts impacts a bank's-or a company's-income calculation.

2. (Introductory) How do trends in loan write-offs and loan delinquencies inform the process of creating reserves for loan losses?

3. (Advanced) What is the significance for future profits of not creating a sufficient reserve for loan losses?

4. (Advanced) Analysts following BB&T stated that they wished the bank would write off bad loans "decisively" and build its loan-loss reserve "aggressively" even as the bank's chief executive described the balance in the loan-loss reserve as a "significant number." Why would analysts and investors prefer a "more aggressive approach." Include in your answer a comment on the notion of conservatism in accounting.

5. (Advanced) What is the significance of the source of loans going bad-that is, loans made in states hit hard by recession versus the real estate market downfall. In your answer, also comment on commercial versus personal loan categories as well.

Reviewed By: Judy Beckman, University of Rhode Island

"BB&T Net Falls 58% as Bad Loans Surge," by Matthias Rieker and Joan E. Solsman, The Wall Street Journal, October 20, 20 --- http://online.wsj.com/article/SB125595468300993939.html?mod=djem_jiewr_AC

If last week's earnings by three of the largest U.S. banks gave investors hope that the end of steep losses from soured loans might be closer, regional bank BB&T Corp. delivered a setback Monday.

The Winston-Salem, N.C., bank, long considered among the best-run regional banks, reported a continued rise in delinquent loans in states hit by the recession, such as North Carolina, rather than those known more for being clobbered by the mortgage meltdown.

"The core BB&T sees more cracks in credit," said analyst Kevin Fitzsimmons of Sandler O'Neill & Partners LP.

In 4 p.m. New York Stock Exchange composite trading, BB&T fell $1.22, or 4.3%, to $27.03, with investors also selling off other regional banks into the rising market Monday. "Regionals simply don't have any firepower to withstand rapidly eroding commercial assets" even if losses from consumer loans are stabilizing, analyst Todd Hagerman of Collins Stewart LLC said.

BB&T Chief Executive Kelly King said during a conference call with investors that the company added $263 million to its loan-loss reserve, which he called "a significant number." Some investors hoped BB&T would write off bad loans more decisively than it did and build its loan-loss reserve more aggressively, analysts said.

Third-quarter profit fell 58% to $152 million, or 23 cents a share, down from $358 million, or 65 cents a share, a year earlier.

Credit-loss provisions soared 95% to $709 million from $364 million a year earlier, while rising from the second quarter's $701 million. Nonperforming assets, or loans in danger of going bad, rose to 2.5% from 1.2% a year earlier and 2.2% from the previous quarter.

BB&T "has a lot more real-estate exposure than the money centers, plus it does not have nearly as much capital markets to offset" such losses than big banks such as Bank of America Corp. and Citigroup Inc. that reported earnings last week, said Jeff Davis of FTN Equity Capital Markets Corp.

Losses from bad loans "are going to find the peak in the next two or three quarters," Mr. King said, adding that "nonperformance of the industry and for us continue to increase probably at a declining rate of increase."

BB&T strengthened its capital base in August with a $963 million offering of common stock after it purchased Colonial Bank, a unit of Colonial BancGroup Inc., Montgomery, Ala., that was seized by regulators in August.

In June, BB&T became one of the first U.S. banks to pay back the capital infusion it got from the Treasury Department's Troubled Asset Relief Program.

In the latest quarter, average client deposits were up 20% from a year earlier amid the Colonial takeover, while average loans and leases held for investment showed a 6% increase.

Why did the auditors approve such understated loan loss reserves in the subprime scandals?  http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms

The Pending IASB Migrane
The IASB may be very, very sorry if and when IFRS replaces U.S. GAAP

It appears that financial innovation will not let up on the future, downsized, Wall Street
The International Accounting Standards Board may regret the day when and if it takes over the duties of the U.S. FASB. IFRS is way behind in dealing with U.S.-style financial innovation, and this may be one of the biggest hurdles facing the IASB.

Yale's Professor Robert Shiller has a September 27, 2009 article that I will quote below, but first there are some things to consider for accounting educators reading this tidbit.

IFRS needs huge updates on the following types of contracting and financial engineering:

• Structured Finance --- http://en.wikipedia.org/wiki/Structured_finance
• Tranches --- http://en.wikipedia.org/wiki/Structured_finance#Tranching
• Securitization --- http://en.wikipedia.org/wiki/Securitization
• Synthetic Instruments --- http://en.wikipedia.org/wiki/Synthetic_instrument
• Special Purpose Entities --- http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm

One of the huge problems that accountants, particularly auditors and accounting standard setters, have is understanding the fluid and dynamic world of financial innovation, especially as was and is still taking place on Wall Street. KPMG lost the huge Fannie Mae audit largely because of the enormous financial statement revisions caused by improper compliance with FAS 133. All the large firms are now facing huge lawsuits due to alleged negligence in accounting for loan loss reserves and poisonous traunches ---
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms

While Steve Jobs was preparing to introduce the new Apple iPod nano last week, the company's chief accountant, Betsy Rafael, was sending off a second letter to the Financial Accounting Standards Board related to revenue recognition. At issue: how FASB might rework the rules related to recognizing revenue for software that's bundled into a product and never sold separately.

The rule is especially important to Apple because it affects the revenue related to two of the company's most successful products — the iPod and the iPhone. If FASB's time line holds to form, and the rules are recast in 2011 the way Apple hopes they will be, the company could be able to book revenue faster, yielding less time between product launches and associated revenue gains. In theory, a successful launch — and its attendant revenue — would drive up Apple's earnings, and possibly stock price, in the same quarter the product is introduced, according to several news reports that came out earlier this week.

Apple and other tech companies have been lobbying for a rewrite of the so-called multiple deliverables, or bundling, rule for quite some time. They argue that current U.S. generally accepted accounting principles make it hard for product makers to reap the full reward of successful products quickly. That's mainly because U.S. GAAP is stringent about when and how companies recognize revenue generated by software sales.

"The requirements are that when you sell more than one product or service at one time, you have to break down the total sale value in[to] individual pieces. Establishing the individual values under U.S. GAAP is solely a function of how the company prices those products and services over time," PricewaterhouseCoopers's Dean Petracca told CFO in an earlier interview. Contracts typically include such multiple "deliverables" as hardware, software, professional services, maintenance, and support — all of which are valued and accounted for differently.

The complex accounting rule has left many product makers waiting for a chance to voice their displeasure at the standards, and the most recent comment period saw such giants as Xerox, IBM, Dell, and Hewlett-Packard — as well as relative newcomers like Palm and Tivo — make their case to FASB. In all, 34 companies wrote to FASB during the month-long comment period that ended in August to register their opinions on the accounting treatment of multiple elements.

A broader revenue-recognition discussion paper was issued by FASB and the International Accounting Standards Board in December 2008 for a six-month comment period. The boards are currently reviewing the comments, and an exposure draft on revenue recognition, which is the penultimate step to a new global rule, is expected out next year.

Regarding the issue of multiple deliverables, most technology companies would like to see FASB move closer to international standards with regard to bundled software, and drop the requirement for vendor-specific objective evidence. Under GAAP, VSOE of fair value is preferable when available, according to Sal Collemi, a senior manager at accounting and audit firm Rothstein Kass.

Basically, VSOE is equivalent to the price charged by the vendor when a deliverable is sold separately — or if not sold separately, the price established by management for a separate transaction that is not likely to change, explains Collemi. Third-party evidence of fair value, such as prices charged by competitors, is acceptable if vendor-specific evidence is unavailable. Many technology companies argue that it is sometimes impossible to measure the fair value of a component that is not sold separately, but rather is an integral part of the product — as is the Apple software for the iPod series of products.

At the same time, international financial reporting standards require companies to use the price regularly charged when an item is sold as the best evidence of fair value. The alternative approach, under IFRS, is the cost-plus margin, says Collemi. That is, the IFRS puts the onus on management to value a product component based on what it costs to manufacture the piece plus the profit-margin share built into the item. Management usually bases its valuation on historic sales as well as current market-established sale prices. The cost-plus margin is not allowed under GAAP.

With respect to bundled components, the IFRS focuses on "the substance of the transaction and the thought process and ingredients that go into the transaction," contends Collemi, who says the standard's objective is to make economic sense out of the transaction. FASB's take on the subject is more conservative: the U.S. rule maker calls for objective evidence to establish value.

Some critics say the IFRS approach invites abuse, because it's based on management assumptions. But Collemi contends that GAAP accounting is filled with rules and interpretations that require management estimates, and that the burden is on management to produce the correct numbers. What's more, auditors are in place to act as a backstop to verify the processes used to arrive at management estimates. "If management is following the spirit of the transaction and doing the right thing," adds Collemi, "then it is up to auditors to challenge the estimates."

Continued in article

"How to predict Apple’s gross margins," July 18, 2009 ---
http://brainstormtech.blogs.fortune.cnn.com/2009/07/18/how-to-predict-apples-gross-margins/

Apple’s (AAPL) fiscal third quarter earnings are due out Tuesday, July 21, and once again the Street is focused on the big numbers — revenues, earnings and units sold for the Mac, iPhone and iPod.

But savvy analysts will be paying closer attention to the number that is the best measure of a firm’s profitability: gross margin, expressed as the ratio of profits to revenues. Or

(Revenue – Cost of sales) / Revenue

Apple’s gross margins, which have averaged 34.8% over the past eight quarters, are the envy of the industry. Dell’s (DELL) first quarter GM, by contrast, was 17.6% and the company warned Wall Street last week that it is expecting a “modest decline” next quarter.

In its April earnings call, Apple low-balled its guidance numbers as usual, forecasting a sharp drop in gross margins over the next 6 months. Specifically, it warned analysts to expect no better than 33% in Q3 and “about 30%” in Q4.

But Turley Muller, for one, doesn’t buy those numbers, and he should know.

Muller, who publishes a blog called Financial Alchemist, is one of a small group of amateur analysts who track Apple closely and publish quarterly estimates that are as good as — and often better than — the professionals’. In fact Muller’s earnings estimates for Q2 were the best of the lot, missing the actual results by just one penny (see here.)

For Q3, he’s expecting Apple to report earnings of $1.35 per share on revenue of $8.3 billion — far higher than the Street’s consensus ($1.16 on $8.16 billion).

Why the discrepancy?

“Again the story appears to be gross margin,” he writes. “Just like last quarter, when Apple blew out the GM number with 36.4% (just as I had predicted) this quarter’s GM (3Q) should be roughly the same as last quarter.

The secret, he says, is in the profitability of the iPhone, “which is through the roof.”

“Apple tries to deflect that,” he says, but the evidence is right there, buried in a chart he found in Apple’s SEC filings (see below). It shows Apple’s schedule for deferred costs and revenue for the iPhone and Apple TV, which for legal reasons are spread out over 24 months rather than being recorded at the time of sale. Because Apple TV revenue is so small relative to the iPhone, this chart is a pretty good proxy for the iPhone alone.

This is complicated stuff, but the bottom line, as Muller points out, is that iPhone profitability has been rising to the point where gross margins on the device are over 50%.

Continued in article

Bob Jensen's investment helpers are at http://www.trinity.edu/rjensen/bookbob1.htm#InvestmentHelpers

Bob Jensen's threads on revenue accounting are at http://www.trinity.edu/rjensen/ecommerce/eitf01.htm

FASB Accounting Standards Codification™—Four Volume Set ($195.00)

You can read the following (on September 30, 2009) at the FASB Website --- Click Here
http://www.surveymethods.com/Preview.aspx?EAF4E0EDBEA4BDAFABE0E6EDE6AEB7B9ECAE&DO_NOT_COPY_THIS_LINK

In order to help us determine initial print quantities for the following FASB hard copy bound editions, please indicate your interest in the following publications. Please note that this is for informational purposes only. Your ‘yes’ response to any or all of the items below is in no way an obligation to purchase the publications.

*1. FASB Accounting Standards Codification™—Four Volume Set ($195.00)

A four-volume bound edition of the FASB Accounting Standards Codification™ will be available at the beginning of October 2009. Quantity pricing will be offered in addition to a 20 percent discount for academic users.

Jensen Question

I "cheated" and copied the link above where it says DO NOT COPY THIS LINK.
Why would the FASB put this at the end of a URL?
Will the FBI come knocking at my door?

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

"GAAP Codification: An Ontological Perspective," by Zane L. Swanson (University of Central Oklahoma) and Ron Freeze (Emporia State University), SSRN, September 2, 2008 --- http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1262059

Abstract:
The 2008 Financial Accounting Standards Board Generally Accepted Accounting Principles (GAAP) codification initiative makes a significant step in the consolidation and ease of use of standards applied to accounting practices. The objective of this article is to identify the potential benefits of enhancing the GAAP codification initiative by the application of an accounting ontology framework. These benefits include: 1) Improved decision making, 2) Faster assimilation of GAAP practices, and 3) an improved common framework for facilitating communication between FASB, IFRS and the SEC. Our study's analysis is meant to motivate discussion within the accounting community about what the ultimate codification might be and provide a starting point for creating an ontology that meets the consensus of the community.

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

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

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

From The Wall Street Journal Accounting Review on October 8, 2009

Borrowing for Dividends Raises Worries
by Liz Rappaport
Oct 05, 2009
Click here to view the full article on WSJ.com

TOPICS: Bonds, Debt, Dividends, Financial Accounting, Financial Analysis, Financial Statement Analysis, Mergers and Acquisitions

SUMMARY: "Rock-bottom interest rates and thawed credit markets are emboldening some companies to use bond-sale proceeds...to pay out special dividends, buy back stock, or finance acquisitions.... [In contrast,] most corporate-bond offerings during the recession have been used to reduce debt or stockpile cash."

CLASSROOM APPLICATION: The article can be used in covering bond issuances, ratio analysis particularly of debt-to-equity and interest versus earnings, dividend payments, and corporate acquisitions.

QUESTIONS: 
1. (Introductory) What was the effective interest rate for corporations with high credit ratings who issued bonds in September 2009? How does that rate compare to one year ago?

2. (Introductory) What reasons for that change are given in the article? Do they have anything to do with changing creditworthiness of the borrowers?

3. (Introductory) Compare the actions of Intel Corporation and TransDigm Group, Inc., with their debt issuance. How are they similar? How are they different?

4. (Advanced) What is the impact on a corporate balance sheet of issuing debt? Describe the impact ignoring use of the proceeds, in essence assuming the company will "stockpile" the cash.

5. (Introductory) Define the financial statement ratios of debt-to-equity and times interest earned.

6. (Advanced) Describe the change in impact of debt issuance on a balance sheet equation and the two financial ratios if the proceeds are used to pay dividends to shareholders.

7. (Advanced) Can a company issue bonds in order to "reduce debt" as the author says was done in during the recession and credit crisis? Explain, proposing a better term for such a transaction.

8. (Introductory) The author uses two benchmarks to make clear the impact of TransDigm Group's debt issuance and dividend payment. What are these benchmarks? How does using them increase clarity about the size of the $425 million bond offering and the $7.50 to $7.70 per share special dividend?

9. (Advanced) The author also includes use of bond proceed to finance acquisitions as a risky action. How have debt analysts reacted to Kraft's offer to buy Cadbury?

10. (Advanced) Describe the impact of a business combination financed by debt on the total combined balance sheets of the firms entering into the business combination. How does this impact compare to using bond proceeds to pay dividends to shareholders? How does it differ?

Reviewed By: Judy Beckman, University of Rhode Island

"Borrowing for Dividends Raises Worries," by Liz Rappaport, October 5, 2009 ---
http://online.wsj.com/article/SB125470107157763085.html?mod=djem_jiewr_AC

Rock-bottom interest rates and thawed credit markets are emboldening some companies to use bond-sale proceeds to go on the offensive, even if that means rewarding shareholders at the expense of bondholders.

The nascent trend is controversial because corporate borrowers are sinking themselves deeper into debt to pay out special dividends, buy back stock or finance acquisitions. While such moves were all the rage during the credit boom, most corporate-bond offerings during the recession have been used to reduce debt or stockpile cash.

Eric Felder, global head of credit trading at Barclays Capital, says the lure of low rates and companies' stables of cash increases "the risk of non-bondholder friendly events."

Last week's sale of $425 million of bonds by aircraft-parts manufacturer TransDigm Group Inc. is one of the back-to-the-past corporate-bond deals causing concern among some analysts. More than $360 million of the proceeds will be used to pay a special cash dividend to shareholders and management of the Cleveland company.

The added debt increased TransDigm's borrowings to 4.3 times its earnings before interest and taxes, compared with 3.1 times before last week's deal. The expected dividend of $7.50 to $7.70 a share is equal to nearly all of the net income that TransDigm reported since the end of fiscal 2003, according to Moody's Investors Service.

Moody's said the dividend "illustrates the company's aggressive financial policy." Moody's gave the new debt a junk rating of B3, even though the ratings firm said TransDigm's "strong operating performance will enable the company to service the increased debt level."

Sean Maroney, director of investor relations at TransDigm, says the "stability of our business, high profit margins and consistent cash flow" give the company "the ability to support this level of leverage."

Borrowing from bondholders to pay shareholder dividends is "a hallmark of an earlier credit era," Jeffrey Rosenberg, head of credit strategy at Bank of America Merrill Lynch, wrote in a report Friday. Such deals were popular in 2003 and 2004, the last time the Federal Reserve lowered its benchmark interest rate to historically low levels, keeping it at 1% for more than a year.

Companies like Dex Media Inc. took on debt to pay dividends to its private-equity owners, including Carlyle Group and Welsh, Carson, Anderson & Stowe, before taking the companies public. Dex Media filed for bankruptcy earlier this year under a mountain of debt.

With the federal-funds rate at 0% for nine months now and confidence returning to the stock and debt markets, investors have been driven to take on more risk. That is flooding the corporate-bond market with cash. Investors poured $43 billion into investment-grade corporate-bond funds in the second quarter and nearly $40 billion in the third quarter -- almost double previous peak quarters, according to Lipper AMG Data Services.

The wave of buying drove down borrowing costs for the average highly rated corporation to about 5%, according to Merrill, a level not seen since 2005. In the heat of the crisis last October, such rates averaged 9%. Through the end of September, more than 1,000 high-rated companies borrowed a record $860 billion, according to Dealogic.

In July, Intel Corp. sold $1.75 billion of convertible bonds, planning to use $1.5 billion of the proceeds to buy back shares. A spokesman for Intel declined to comment.

The computer-chip giant has a strong credit rating of single-A, so it doesn't carry a burdensome debt load. Still, the deal raised eyebrows among some analysts and investors, who say floating debt to buy back stock could become more common as companies regain confidence.

And as merger-and-acquisition activity revs up, the cheaper cost of debt compared with equity is tempting companies to use bond sales as a deal-making war chest.

Analysts are watching Kraft Foods Inc. in anticipation that the company would finance its proposed purchase of U.K. chocolate, candy and chewing gum maker Cadbury PLC by raising tons of debt. Last month's unsolicited bid by Kraft was then valued at about $16.7 billion, but it could be weeks before Kraft submits a formal offer.

Three major credit-ratings agencies have warned Kraft that they could slash the company's debt ratings if the company reaches a deal agreement with Cadbury. At the current offering price, Kraft would need to shell out at least $6 billion in cash, much of it likely from the debt markets, according to corporate-bond research firm Gimme Credit.

"Kraft is committed to maintaining an investment-grade rating," a Kraft spokesman said, declining to comment further.

So far in 2009, returns to high-grade bond investors are 19%, according to Merrill. "We've seen a feeding frenzy" because of low interest rates, says Kathleen Gaffney, portfolio manager at Loomis, Sayles & Co. She sold some bonds recently to take profits from the rally. Loomis Sayles wants to have cash on the sidelines in case the Fed raises rates soon or Treasury bonds sell off.

Jensen Comment
If you buy into the Modigliani and Miller Theorem of capital structure, how the corporation is financed, including dividend payouts, is as follows:

The Modigliani-Miller theorem (of Franco Modigliani, Merton Miller) forms the basis for modern thinking on capital structure. The basic theorem states that, under a certain market price process (the classical random walk), in the absence of taxes, bankruptcy costs, and asymmetric information, and in an efficient market, the value of a firm is unaffected by how that firm is financed. It does not matter if the firm's capital is raised by issuing stock or selling debt. It does not matter what the firm's dividend policy is. Therefore, the Modigliani-Miller theorem is also often called the capital structure irrelevance principle.

Modigliani was awarded the 1985 Nobel Prize in Economics for this and other contributions.

Miller was awarded the 1990 Nobel Prize in Economics, along with Harry Markowitz and William Sharpe, for their "work in the theory of financial economics," with Miller specifically cited for "fundamental contributions to the theory of corporate finance."

Of course these days, the assumption of market efficiency is a big stretch ---
http://www.trinity.edu/rjensen/theory01.htm#EMH

Bob Jensen's threads on debt versus equity and capital structure (including investor earn out contracts) are at
http://www.trinity.edu/rjensen/theory01.htm#FAS150

Bob Jensen's bookmarks for financial ratios --- http://www.trinity.edu/rjensen/Bookbob1.htm#010303FinancialRatios
Also see http://en.wikipedia.org/wiki/Financial_ratios

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

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

Deloitte Heads Up
"Reconfiguring the Scope of Software Revenue Recognition Guidance,"  by Rich Paul, Ryan Johnson, Sam Doolittle, and Rebecca Morrow, Deloitte & Touche LLP, Deloitte Heads Up, October 23, 2009 ---
http://www.iasplus.com/usa/headsup/headsup0910software.pdf

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

I do not even know what a course in accounting research and analysis means.

David Albrecht

 

Hi David,

Since you got your doctorate at a very fine university (Virginia Tech), I assume that you are being modest for purposes of stimulating discussion on the AECM.

A course in "accounting research" can vary across an extremely wide range from an undergraduate course that is more like a legal and archival research course showing students how to locate international financial data, accounting standards, and literature to advanced accountics doctoral seminars that typically divide a number of courses on the basis of capital markets (econometrics) research, behavioral (psychometrics, behavioral finance/economics), and analytical (economic modeling, game theory, agency theory, mathematical information economics).

The term “analysis” can also mean different things, but the usual context is mathematical analytics apart from mathematical statistical inference and data mining. The common example is economics game theory.

Since Joel Demski became dominant in the doctoral program at the University of Florida, Florida’s doctoral program has become a model of an accountics doctoral program heavy on the analytical side of research.

The outline of Florida's "accountics" doctoral program is shown below. I've highlighted in red those courses that I think fit into what would be termed "analysis" or "analytics" courses which  of course are Joel Demski's major research interests and contributions to accountics over the years --- http://www.cba.ufl.edu/fsoa/docs/phd_AccConcentration.pdf

PREREQUISITES

ACCOUNTING BACKGROUND

The Program assumes that new doctoral students have a proficiency in accounting and business similar to that of an undergraduate accounting major. This background does not necessarily require a formal accounting degree, so long as the student can establish a reasonable accounting background (such as a graduate student who has taken several accounting courses in the MBA program). Successful applicants who do not have a sufficient accounting background must take the MBA Accounting sequence and Intermediate Accounting in the coursework phase of the

Ph.D. program.

QUANTITATIVE BACKGROUND

The program assumes that new doctoral students have taken the equivalent of three semesters of calculus and one semester of linear algebra as mathematical background. Entering accounting Ph.D. students who do not have this background can take any necessary courses among the following University of Florida course offerings. We encourage students who do not meet this mathematical background to start taking the needed courses in the summer before starting the program (or earlier if they can take equivalent courses before arriving in Gainesville). Students can complete any needed mathematical courses subsequent to matriculating in the fall.

• MAC 2311 (or MAC 3472) Analytic Geometry and Calculus 1 (Honors Calculus 1)
   

• MAC 2313 (or MAC 3473) Analytic Geometry and Calculus 2 (Honors Calculus 2
   

• MAC 2313 (or MAC 3474) Analytic Geometry and Calculus 3 (Honors Calculus 3)
   

• MAS 4105 Linear Algebra
   

• STA 6329 Matrix Algebra and Statistical computing (this most likely is partly analytical and partly inferential)
   

• ECO 7408 Mathematical Methods and Application to Economics

ACCOUNTING SEMINARS

All students must successfully complete the following courses:

• Overview of Accounting Research (first semester) 3

• Archival Research in Accounting 3

• Analytical Research in Accounting 3

• Experimental Research in Accounting 3

BUSINESS CORE COURSES

All students must successfully complete or demonstrate that they have completed the

equivalent of the following courses:

• ECO 7404: Game Theory for Economists 2

• ECO 7115: Microeconomic Theory 1 3

• ECO 7113: Information Economics 2

• FIN 7446: Corporate Finance 4

• FIN 7447: Asset Pricing 2

RESEARCH METHODS CORE COURSES

All students must successfully complete or demonstrate that they have completed the

equivalent of the following courses:

• STA 6326: Introduction to Theoretical Statistics I 3

• STA 6327: Introduction to Theoretical Statistics II 3

• ECO 7424: Econometric Methods I 3

• ECO 7426: Econometric Methods II or 3

ECO 7415: Statistical Methods in Economics or MAR 7636: Research Methods in Marketing can be substituted 12

SUPPORTING FIELD

All students must take a minimum of four graduate-level courses (12 credits) in a supporting field, such as finance, economics, decision and information science, mathematics, political science, psychology or sociology.

OTHER REQUIREMENTS

1. First Year Summer Project – All students are required to execute a research project in the first summer of matriculation. The first year summer project requires students to replicate and extend, in a minor way, a published accounting paper. The intent of this project is to have the student explore a question, grapple with the data collection and analysis issues, and present the findings. The resulting paper is due no later than October 15th in the Fall semester of the second year. The presentation to the faculty of the first-year summer project constitutes the first year exam.

2. Second Year Summer Project – All students are required to execute a research project in the second summer of matriculation. The second year project entails completing, presenting, and submitting a paper that demonstrates original thinking. The project is an independent scholarly effort with faculty providing broad, informal guidance. The resulting paper must be presented at a FSOA workshop no later than the end of the Fall semester of the third year.

3. Teaching Requirement – All students are required to teach a minimum of one semester.

You can read about Joel's major works at http://en.wikipedia.org/wiki/Joel_Demski
Most of these works involve mathematical analysis.

In addition to Joel's extensive bibliography (often in partnership with Jerry Feltham) on accounting analytics, I'm virtually certain that a key component in the accountics program at Florida is the "Economics of Accounting" by Feltham and Christensen that commenced in 2002 with Volume 1 --- Click Here
 

At sales rank 588,703, Volume 1 was not a major money maker, which is probably why only Volume 2 is not available from Amazon and Barnes & Noble. The two volumes are based on lectures notes for two graduate courses on the economic analysis of accounting information in markets and in organizations. The first volume, focusing on markets, looks at the basic role of information in facilitating decisions, public information and private investor information in equity markets, and the disclosure of private owner information in equity and product markets.

Economics of Accounting · Volume I Information in Markets Christensen, P.O., Feltham, G.A., Vol. 1, 2002, ISBN 978-1-4020-7229-1, Hardcover, Usually dispatched between 3 to 5 business days ... More $185.00   Economics of Accounting · Volume I: Information in Markets Christensen, P.O., Feltham, G.A., Vol. 1, 2003, ISBN 978-0-387-23932-3, Softcover, Usually dispatched between 3 to 5 business days... More $95.00   Economics of Accounting · Performance Evaluation Christensen, P.O., Feltham, G., Vol. 2, 2005, ISBN 978-0-387-26597-1, Hardcover, Usually dispatched between 3 to 5 business days... More

There is also a 2004 paperback book (out of print) entitled Economics of Accounting by Peter O. Christensen ---
Click Here

You might be interested in the eleven students who graduated from the accountics docotral program at the University of Florida in the "Demski era" --- http://www.cba.ufl.edu/fsoa/programs/phd/former.asp

Former Ph.D. Students (since Year 2000) Degree Name Current Affiliation 2009 Monika Causholli University of Kentucky 2009 Liang Fu Oakland University 2009 Hung Yuan (Richard) Lu California State at Fullerton 2008 Jimenez, Carlos University of Texas at San Antonio 2007 MacGregor, Jason Baylor University 2006 Tian, Jie University of Alberta 2005 Vlittis, Adamos University of Cyprus 2004 Drymiotes, George University of Houston 2004 Nan, Lin Carnegie Mellon 2000 Blay, Allen D. Florida State University 2000 Jensen, Kevan University of Oklahoma

If we divided the very high cost of of one decade of Florida's accountancy doctoral program by 11, the cost per graduate is very high indeed. Of course many of the costs are joint costs among the business administration doctoral program graduates in the various disciplines in Florida's School of Business.

I did not so much answer your question David as I did point the way on where to look.

Although I'm all in favor of having some accountics programs (that require a high level of mathematics, econometrics/psychometrics, and mathematical statistics as well as data mining skills), I'm very disappointed that such programs took over all accountancy doctoral programs in North America (with the possible exception of the University of Central Florida).

The accountics monopoly is, in my viewpoint, the major cause of the extreme shortage of accounting doctoral graduates, because potential applicants from the accounting profession who would like to teach accounting are turned off by having to spend five years or more studying mathematics, econometrics, psychometrics, game theory, agency theory, mathematical information economics, etc. Sadly there is now almost no accounting in the accountics doctoral programs, especially accounting needed to teach professional course