2009 Best Places to Start/Intern According to Bloomberg/Business Week --- Click Here
Also see the Internship and Table links at http://www.businessweek.com/careers/special_reports/20091211best_places_for_interns.htm
The Top five rankings contain all Big Four accountancy firms.
Somehow Proctor and Gamble slipped into Rank 4 above PwC
The accountancy firms of Grant Thornton and RMS McGladrey make the top 40 at ranks 32 and 33 respectively.

Best Places to Intern --- http://www.businessweek.com/managing/content/dec2009/ca2009129_394659.htm?link_position=link1
I'm waiting for Francine to throw cold water on the "ever before" claim
Especially note the KPMG Experience Abroad module below
"Best Places to Intern:  Bloomberg BusinessWeek's 2009 list shows employers are hiring more interns to fill entry-level positions than ever before,"  by Lindsey Gerdes, Business Week, December 10, 2009 ---
http://www.businessweek.com/managing/content/dec2009/ca2009129_394659.htm?link_position=link1

How valuable is a summer internship in a recession? Consider Goldman Sachs, the leading choice for students interested in a career on Wall Street. This year, the investment bank hired 600 fewer entry-level employees. That's not surprising given the stunted economy and the government bailout of banks. What is noteworthy is nearly 90% of Goldman's new hires were former interns. The previous year, Goldman wasn't as concerned about hiring a high percentage of students it had already invested time and money to trainonly 58% of entry-level hires had spent a summer at the company.

The same is true for other employers. KPMG, a Big Four accounting firm that finds itself in tight competition with Deloitte, Ernst & Young, and PricewaterhouseCoopers, hired nearly 900 fewer entry-level employees this year. But 91% of those full-time hires were former interns, whereas only 71% of new hires in 2008 were interns.

Internships have long been seen as a primary recruiting tool at many top employers—a 10-week job tryout to see who would be the best fit for full-time employment. But with full-time hiring down, even the largest employers are trying to maximize the investment they've made in interns by hiring a larger percentage to fill entry-level position than ever before. "It's true for all years, but I think it's even more so in years like this," says Sandra Hurse, a senior executive at Goldman who handles campus recruiting.

Evaluating Employers

With this ranking, Bloomberg BusinessWeek has put together its third annual guide to the best internships, providing information on the number of interns each company recruits, how many are offered full-time jobs, the number of interns expected to be hired next year, even the salaries students receive.To compile our list, we judged employers based on survey data from 60 career services directors around the country and a separate survey completed by each employer.We also consider how each employer fared in the annual Best Places to Launch a Career, our ranking of top U.S. entry-level employers released in September of each year.

Our ranking of the best U.S.companies for undergraduate internships highlights employers who have put together an outstanding experience for students.Accounting firm Deloitte tops our list, followed by rivals KPMG (No.2) and Ernst & Young (No.3).The last of the Big Four accounting companies, PricewaterhouseCoopers, comes in at No.5, right behind consumer goods giant Procter & Gamble.

The employers on our list understand that an outstanding internship experience is their most effective recruiting tool to snap up the top entry-level job candidates. That's why some companies have invested a considerable amount of money in their programs. Microsoft, for example, estimates it spends on average $30,000 per intern, when you factor in pay and benefits. Considering the company hired 542 undergraduate interns in 2009, that's roughly a $16 million investment.

Experience Abroad

Two years ago KPMG realized it had to make a substantial investment in its internship program if it hoped to woo top students from larger consulting and accounting firms. So the company decided to offer interns an opportunity to gain valuable overseas experience. KPMG lets student interns spend four weeks in the U.S. and four weeks abroad. "It's extremely competitive [to recruit top students], and this is a differentiator," says Blane Ruschak, executive director of campus recruiting at KPMG.

A chance to work overseas is precisely what appealed to Andrew Fedele, 21, an accounting and economics double major at Pennsylvania State University. "I was sold pretty much when I first read about [KPMG's] global internship program." He spent four weeks in Chicago and four weeks in Johannesburg, South Africa. "South Africa has just such an interesting history. To go there and live with the locals and work with them was really exciting."

What did KPMG get in return? Exactly what it hoped: Fedele accepted a full-time job almost immediately after KPMG made its offer at the end of the summer.

Gerdes is a staff editor for BusinessWeek in New York.

Bob Jensen's threads on careers are at http://www.trinity.edu/rjensen/BookBob1.htm#careers

From Business Week Magazine
"Top Business School Stories of 2009:  The global financial crisis hammered the MBA job market, school endowments, and financial aid. Some questioned an MBA's value. Bring on 2010," by Alison Damast and Geoff Gloeckler, Business Week, December 23, 2009 ---
http://www.businessweek.com/bschools/content/dec2009/bs20091223_153201.htm?link_position=link1 

To call 2009 an interesting year for management education is perhaps an understatement bordering on the extreme. With the global financial crisis taking its toll on everything from the MBA job market and endowments to financial aid and the reputation of the MBA degree itself, 2009 promises to go down in history as a year to forget.

For students and graduates of MBA programs, 2009 was the year that jobs and internship offers became harder to find, even at the top schools; a year when the scarcity of student loans and visas for international students threatened to derail even the best-laid B-school plans; and a year when programs began to rethink the way they teach such subjects as ethics and corporate responsibility. Business school endowments were hit hard and the high cost of tuition was at the fore of every prospective student's thinking.

Of the 10 most popular business school stories on Businessweek.com in 2009, seven directly related to the financial crisis. The others looked at a new competitor on the B-school admissions test front, a GMAT cheating alert in China, and three top MBA programs currently without deans. Take some time to go back over the biggest stories of the year and reminisce. For better or worse, 2009 will be a year that the B-school world won't soon forget.

1. Job Market: The No. 1 concern this year for current MBAs, applicants, and recent grads was the job market. Students worried about finding internships and jobs after graduation, applicants wondered if joining the ranks of the unemployed to enroll in an MBA program was a good idea, and newly minted BBAs and MBAs wondered if their post-B-school jobs would hold up. These fears came out in comments readers left on the stories, with many weighing the pros and cons of accepting jobs with lower salaries and fewer responsibilities. Readers who earned MBAs in 2008 and 2007 also chimed in to voice their concerns, many saying they had yet to land that "dream job" and didn't expect to find it in the near future.

MBA Job Outlook Dims

MBA Tales: Searching for Work in a Recession

MBAs Confront a Savage Job Market

2. Loan Crisis: International students who planned to study at U.S. business schools had to scramble to find a student loan provider in 2009, when many of the loan programs they had used to fund their education disappeared. For years students had depended on the popular Citi Assist and Sallie Mae loan programs, which allowed applicants to obtain up to $150,000 without a co-signer to assume stewardship of the loan should the borrower default. Due to the credit crisis in the fall of 2008, those financial lifelines for many international students were pulled and many schools spent the first six months of 2009 trying to find alternative loan providers. It was a tense few months for foreign applicants, many of whom expressed their frustration in more than 250 comments on stories we published on the topic. For many, the uncertain H-1B visa situation, coupled with the loan situation, made the prospect of studying in America too big a risk to take.

By the time spring rolled around, many schools had come up with solutions for foreign students—often just in time for the deadline deposit to reserve a seat in next year's class.

Loan Crisis Hits the MBA World

World to U.S.B-Schools: Thanks, but No Thanks

3. MBAs: Public Enemy No. 1? Were B-schools responsible for the global economic crisis? It's a question that has consumed much of the B-school world for the better part of a year. In a story we ran in May, experts from inside and outside MBA programs weighed in on the debate. Philip Delves Broughton, a Harvard MBA and author of Ahead of the Curve: Two Years at Harvard Business School (Penguin Group, July 2008), directed blame at B-schools, calling the three-letter acronym, MBA, "scarlet letters of shame," and suggesting they stand for "Masters of the Business Apocalypse." Others, such as Richard Cosier, dean of Purdue's Krannert School of Business (Krannert Full-Time MBA Profile), defended MBA programs, saying, "It is my opinion that business schools will continue to produce students who will be part of the solution, rather than the problem."

Readers, meanwhile, started a rousing debate on the topic via the story's comments. Some completely blamed business schools for the crisis, criticizing everything from teaching techniques and the competitive environment MBA programs seem to foster to the overall value of the degree. Others defended today's B-schools, saying business schools are about as responsible for the economic crisis as engineering schools are for global warming. In the end, the common sentiment seemed to be that business schools deserved some blame, but not all of it.

MBAs: Public Enemy No.1?

4. GRE vs. GMAT: For years, the Graduate Management Admission Council (GMAC) had a virtual monopoly over the admission testing arena at business schools. Its well-known entrance exam, the Graduate Management Admission Test (GMAT), was the standard test used to get into business schools in the U.S. and many other schools around the world for decades. That all changed this year when the Educational Testing Service (ETS) started to encroach into GMAC territory, courting business schools and encouraging them to allow students to submit the Graduate Record Examination (GRE) for admissions. ETS' efforts are starting to pay off. There are now approximately 285 business schools that allow students to submit the GRE in lieu of the GMAT exam, including the University of Pennsylvania's Wharton School(Wharton Full-Time MBA Profile), Harvard Business School(Harvard Full-Time MBA Profile), and New York University's Stern School of Business(Stern Full-Time MBA Profile). ETS says that it expects more than 300 schools to sign on in 2010.

Continued in article

"The Marshmallow and the Cherry," by Edward Tenner, The Atlantic, December, 2009 ---
http://correspondents.theatlantic.com/edward_tenner/2009/12/the_marshmallow_and_the_cherry.php

Earlier in the year Jonah Lehrer explained in the New Yorker how cool deferred gratification is and how we need to teach it to our kids, the younger the better. Now, in the New York Times, John Tierney suggests that it's really an insidious habit for grownups, sacrificing real enjoyment for the mirage of an even better future. Can everything good be bad for you?

Of course the respective sets of behavioral research described might be consistent. Children who master delaying pleasure become superior achievers and thus have the frequent flier balances that they are so counterproductively hoarding. The same kindergartners who in a famous experiment triumphantly resisted the urge to eat a marshmallow probably will morph into affluent adults who save bottles of vintage Champagne for occasions so special they may never take place.

One person at least long ago found the secret of combining the two ethics. The charismatic but workaholic advertising man David Ogilvy, the subject of a recent biography, loved to tell a story of his own childhood when coaching his staff on client presentations:
 

When I was a boy, I always saved the cherry on my pudding for last. Then, one day, my sister stole it. From then on, I always ate the cherry first.

Jensen Common
This speaks in favor of increasing the dividend cash payout (yield) ratio --- http://en.wikipedia.org/wiki/Dividend_yield

"Ace Your Accounting Classes: 12 Hints to Maximize Your Potential," by David Albrecht, The Summa, December 30, 2009 ---
http://profalbrecht.wordpress.com/2008/12/30/ace-your-accounting-classes-12-hints-to-maximize-your-potential/

This article was published in the American Journal of Busienss Education.    I am entitled to place a copy on my personal web site, so am placing it here at this time.  Click here for a pdf copy.

The complete citation is:

Albrecht, W. David.  (2008).  Ace Your Accounting Classes:  12 Hints To Maximize Your Potentia, American Journal of Business Education, Volume 1, Number 1 (Quarter 3), pp. 1-8.   [hard copy]

 

December 23, 2009 message from Roger Debreceny [roger@DEBRECENY.COM]

The IASB is trialling podcast summaries of each meeting at http://tinyurl.com/yz7xjxt  http://www.iasb.org/Updates/Podcast+summaries/Podcast+summaries+of+Board+meetings.htm . Being a systems person, I only take a moderate issue in the intricacies of the latest financial accounting standards setting. But the first 30 minute podcast with IASB board member Steve Cooper and fellow Kiwi, Alan Teixeira, Director of Technical Activities at the Board provided a very useful summary of key issues.

Greetings to all on AECM for Christmas and the New Year.

Roger

Bob Jensen's threads on accounting and tax news ---
http://www.trinity.edu/rjensen/AccountingNews.htm

The motto of Judicial Watch is "Because no one is above the law". To this end, Judicial Watch uses the open records or freedom of information laws and other tools to investigate and uncover misconduct by government officials and litigation to hold to account politicians and public officials who engage in corrupt activities.
Judicial Watch --- http://www.judicialwatch.org/

Judicial Watch Announces List of Washington's "Ten Most Wanted Corrupt Politicians" for 2009 ---
http://www.judicialwatch.org/news/2009/dec/judicial-watch-announces-list-washington-s-ten-most-wanted-corrupt-politicians-2009

Judicial Watch, the public interest group that investigates and prosecutes government corruption, today released its 2009 list of Washington's "Ten Most Wanted Corrupt Politicians." The list, in alphabetical order, includes:

1. Senator Christopher Dodd (D-CT): This marks two years in a row for Senator Dodd, who made the 2008 "Ten Most Corrupt" list for his corrupt relationship with Fannie Mae and Freddie Mac and for accepting preferential treatment and loan terms from Countrywide Financial, a scandal which still dogs him. In 2009, the scandals kept coming for the Connecticut Democrat. In 2009, Judicial Watch filed a Senate ethics complaint against Dodd for undervaluing a property he owns in Ireland on his Senate Financial Disclosure forms. Judicial Watch's complaint forced Dodd to amend the forms. However, press reports suggest the property to this day remains undervalued. Judicial Watch also alleges in the complaint that Dodd obtained a sweetheart deal for the property in exchange for his assistance in obtaining a presidential pardon (during the Clinton administration) and other favors for a long-time friend and business associate. The false financial disclosure forms were part of the cover-up. Dodd remains the head the Senate Banking Committee.

    

2. Senator John Ensign (R-NV): A number of scandals popped up in 2009 involving public officials who conducted illicit affairs, and then attempted to cover them up with hush payments and favors, an obvious abuse of power. The year's worst offender might just be Nevada Republican Senator John Ensign. Ensign admitted in June to an extramarital affair with the wife of one of his staff members, who then allegedly obtained special favors from the Nevada Republican in exchange for his silence. According to The New York Times: "The Justice Department and the Senate Ethics Committee are expected to conduct preliminary inquiries into whether Senator John Ensign violated federal law or ethics rules as part of an effort to conceal an affair with the wife of an aide…" The former staffer, Douglas Hampton, began to lobby Mr. Ensign's office immediately upon leaving his congressional job, despite the fact that he was subject to a one-year lobbying ban. Ensign seems to have ignored the law and allowed Hampton lobbying access to his office as a payment for his silence about the affair. (These are potentially criminal offenses.) It looks as if Ensign misused his public office (and taxpayer resources) to cover up his sexual shenanigans.

    

3. Rep. Barney Frank (D-MA): Judicial Watch is investigating a $12 million TARP cash injection provided to the Boston-based OneUnited Bank at the urging of Massachusetts Rep. Barney Frank. As reported in the January 22, 2009, edition of the Wall Street Journal, the Treasury Department indicated it would only provide funds to healthy banks to jump-start lending. Not only was OneUnited Bank in massive financial turmoil, but it was also "under attack from its regulators for allegations of poor lending practices and executive-pay abuses, including owning a Porsche for its executives' use." Rep. Frank admitted he spoke to a "federal regulator," and Treasury granted the funds. (The bank continues to flounder despite Frank's intervention for federal dollars.) Moreover, Judicial Watch uncovered documents in 2009 that showed that members of Congress for years were aware that Fannie Mae and Freddie Mac were playing fast and loose with accounting issues, risk assessment issues and executive compensation issues, even as liberals led by Rep. Frank continued to block attempts to rein in the two Government Sponsored Enterprises (GSEs). For example, during a hearing on September 10, 2003, before the House Committee on Financial Services considering a Bush administration proposal to further regulate Fannie and Freddie, Rep. Frank stated: "I want to begin by saying that I am glad to consider the legislation, but I do not think we are facing any kind of a crisis. That is, in my view, the two Government Sponsored Enterprises we are talking about here, Fannie Mae and Freddie Mac, are not in a crisis. We have recently had an accounting problem with Freddie Mac that has led to people being dismissed, as appears to be appropriate. I do not think at this point there is a problem with a threat to the Treasury." Frank received $42,350 in campaign contributions from Fannie Mae and Freddie Mac between 1989 and 2008. Frank also engaged in a relationship with a Fannie Mae Executive while serving on the House Banking Committee, which has jurisdiction over Fannie Mae and Freddie Mac.

    

4. Secretary of Treasury Timothy Geithner: In 2009, Obama Treasury Secretary Timothy Geithner admitted that he failed to pay $34,000 in Social Security and Medicare taxes from 2001-2004 on his lucrative salary at the International Monetary Fund (IMF), an organization with 185 member countries that oversees the global financial system. (Did we mention Geithner now runs the IRS?) It wasn't until President Obama tapped Geithner to head the Treasury Department that he paid back most of the money, although the IRS kindly waived the hefty penalties. In March 2009, Geithner also came under fire for his handling of the AIG bonus scandal, where the company used $165 million of its bailout funds to pay out executive bonuses, resulting in a massive public backlash. Of course as head of the New York Federal Reserve, Geithner helped craft the AIG deal in September 2008. However, when the AIG scandal broke, Geithner claimed he knew nothing of the bonuses until March 10, 2009. The timing is important. According to CNN: "Although Treasury Secretary Timothy Geithner told congressional leaders on Tuesday that he learned of AIG's impending $160 million bonus payments to members of its troubled financial-products unit on March 10, sources tell TIME that the New York Federal Reserve informed Treasury staff that the payments were imminent on Feb. 28. That is ten days before Treasury staffers say they first learned 'full details' of the bonus plan, and three days before the [Obama] Administration launched a new $30 billion infusion of cash for AIG." Throw in another embarrassing disclosure in 2009 that Geithner employed "household help" ineligible to work in the United States, and it becomes clear why the Treasury Secretary has earned a spot on the "Ten Most Corrupt Politicians in Washington" list.

    

5. Attorney General Eric Holder: Tim Geithner can be sure he won't be hounded about his tax-dodging by his colleague Eric Holder, US Attorney General. Judicial Watch strongly opposed Holder because of his terrible ethics record, which includes: obstructing an FBI investigation of the theft of nuclear secrets from Los Alamos Nuclear Laboratory; rejecting multiple requests for an independent counsel to investigate alleged fundraising abuses by then-Vice President Al Gore in the Clinton White House; undermining the criminal investigation of President Clinton by Kenneth Starr in the midst of the Lewinsky investigation; and planning the violent raid to seize then-six-year-old Elian Gonzalez at gunpoint in order to return him to Castro's Cuba. Moreover, there is his soft record on terrorism. Holder bypassed Justice Department procedures to push through Bill Clinton's scandalous presidential pardons and commutations, including for 16 members of FALN, a violent Puerto Rican terrorist group that orchestrated approximately 120 bombings in the United States, killing at least six people and permanently maiming dozens of others, including law enforcement officers. His record in the current administration is no better. As he did during the Clinton administration, Holder continues to ignore serious incidents of corruption that could impact his political bosses at the White House. For example, Holder has refused to investigate charges that the Obama political machine traded VIP access to the White House in exchange for campaign contributions – a scheme eerily similar to one hatched by Holder's former boss, Bill Clinton in the 1990s. The Holder Justice Department also came under fire for dropping a voter intimidation case against the New Black Panther Party. On Election Day 2008, Black Panthers dressed in paramilitary garb threatened voters as they approached polling stations. Holder has also failed to initiate a comprehensive Justice investigation of the notorious organization ACORN (Association of Community Organizations for Reform Now), which is closely tied to President Obama. There were allegedly more than 400,000 fraudulent ACORN voter registrations in the 2008 campaign. And then there were the journalist videos catching ACORN Housing workers advising undercover reporters on how to evade tax, immigration, and child prostitution laws. Holder's controversial decisions on new rights for terrorists and his attacks on previous efforts to combat terrorism remind many of the fact that his former law firm has provided and continues to provide pro bono representation to terrorists at Guantanamo Bay. Holder's politicization of the Justice Department makes one long for the days of Alberto Gonzales.

    

6. Rep. Jesse Jackson, Jr. (D-IL)/ Senator Roland Burris (D-IL): One of the most serious scandals of 2009 involved a scheme by former Illinois Governor Rod Blagojevich to sell President Obama's then-vacant Senate seat to the highest bidder. Two men caught smack dab in the middle of the scandal: Senator Roland Burris, who ultimately got the job, and Rep. Jesse Jackson, Jr. According to the Chicago Sun-Times, emissaries for Jesse Jackson Jr., named "Senate Candidate A" in the Blagojevich indictment, reportedly offered $1.5 million to Blagojevich during a fundraiser if he named Jackson Jr. to Obama's seat. Three days later federal authorities arrested Blagojevich. Burris, for his part, apparently lied about his contacts with Blagojevich, who was arrested in December 2008 for trying to sell Obama's Senate seat. According to Reuters: "Roland Burris came under fresh scrutiny…after disclosing he tried to raise money for the disgraced former Illinois governor who named him to the U.S. Senate seat once held by President Barack Obama…In the latest of those admissions, Burris said he looked into mounting a fundraiser for Rod Blagojevich -- later charged with trying to sell Obama's Senate seat -- at the same time he was expressing interest to the then-governor's aides about his desire to be appointed." Burris changed his story five times regarding his contacts with Blagojevich prior to the Illinois governor appointing him to the U.S. Senate. Three of those changing explanations came under oath.

    

7. President Barack Obama: During his presidential campaign, President Obama promised to run an ethical and transparent administration. However, in his first year in office, the President has delivered corruption and secrecy, bringing Chicago-style political corruption to the White House. Consider just a few Obama administration "lowlights" from year one: Even before President Obama was sworn into office, he was interviewed by the FBI for a criminal investigation of former Illinois Governor Rod Blagojevich's scheme to sell the President's former Senate seat to the highest bidder. (Obama's Chief of Staff Rahm Emanuel and slumlord Valerie Jarrett, both from Chicago, are also tangled up in the Blagojevich scandal.) Moreover, the Obama administration made the startling claim that the Privacy Act does not apply to the White House. The Obama White House believes it can violate the privacy rights of American citizens without any legal consequences or accountability. President Obama boldly proclaimed that "transparency and the rule of law will be the touchstones of this presidency," but his administration is addicted to secrecy, stonewalling far too many of Judicial Watch's Freedom of Information Act requests and is refusing to make public White House visitor logs as federal law requires. The Obama administration turned the National Endowment of the Arts (as well as the agency that runs the AmeriCorps program) into propaganda machines, using tax dollars to persuade "artists" to promote the Obama agenda. According to documents uncovered by Judicial Watch, the idea emerged as a direct result of the Obama campaign and enjoyed White House approval and participation. President Obama has installed a record number of "czars" in positions of power. Too many of these individuals are leftist radicals who answer to no one but the president. And too many of the czars are not subject to Senate confirmation (which raises serious constitutional questions). Under the President's bailout schemes, the federal government continues to appropriate or control -- through fiat and threats -- large sectors of the private economy, prompting conservative columnist George Will to write: "The administration's central activity -- the political allocation of wealth and opportunity -- is not merely susceptible to corruption, it is corruption." Government-run healthcare and car companies, White House coercion, uninvestigated ACORN corruption, debasing his office to help Chicago cronies, attacks on conservative media and the private sector, unprecedented and dangerous new rights for terrorists, perks for campaign donors – this is Obama's "ethics" record -- and we haven't even gotten through the first year of his presidency.

    

8. Rep. Nancy Pelosi (D-CA): At the heart of the corruption problem in Washington is a sense of entitlement. Politicians believe laws and rules (even the U.S. Constitution) apply to the rest of us but not to them. Case in point: House Speaker Nancy Pelosi and her excessive and boorish demands for military travel. Judicial Watch obtained documents from the Pentagon in 2008 that suggest Pelosi has been treating the Air Force like her own personal airline. These documents, obtained through the Freedom of Information Act, include internal Pentagon email correspondence detailing attempts by Pentagon staff to accommodate Pelosi's numerous requests for military escorts and military aircraft as well as the speaker's 11th hour cancellations and changes. House Speaker Nancy Pelosi also came under fire in April 2009, when she claimed she was never briefed about the CIA's use of the waterboarding technique during terrorism investigations. The CIA produced a report documenting a briefing with Pelosi on September 4, 2002, that suggests otherwise. Judicial Watch also obtained documents, including a CIA Inspector General report, which further confirmed that Congress was fully briefed on the enhanced interrogation techniques. Aside from her own personal transgressions, Nancy Pelosi has ignored serious incidents of corruption within her own party, including many of the individuals on this list. (See Rangel, Murtha, Jesse Jackson, Jr., etc.)

    

9. Rep. John Murtha (D-PA) and the rest of the PMA Seven: Rep. John Murtha made headlines in 2009 for all the wrong reasons. The Pennsylvania congressman is under federal investigation for his corrupt relationship with the now-defunct defense lobbyist PMA Group. PMA, founded by a former Murtha associate, has been the congressman's largest campaign contributor. Since 2002, Murtha has raised $1.7 million from PMA and its clients. And what did PMA and its clients receive from Murtha in return for their generosity? Earmarks -- tens of millions of dollars in earmarks. In fact, even with all of the attention surrounding his alleged influence peddling, Murtha kept at it. Following an FBI raid of PMA's offices earlier in 2009, Murtha continued to seek congressional earmarks for PMA clients, while also hitting them up for campaign contributions. According to The Hill, in April, "Murtha reported receiving contributions from three former PMA clients for whom he requested earmarks in the pending appropriations bills." When it comes to the PMA scandal, Murtha is not alone. As many as six other Members of Congress are currently under scrutiny according to The Washington Post. They include: Peter J. Visclosky (D-IN.), James P. Moran Jr. (D-VA), Norm Dicks (D-WA.), Marcy Kaptur (D-OH), C.W. Bill Young (R-FL.) and Todd Tiahrt (R-KS.). Of course rather than investigate this serious scandal, according to Roll Call House Democrats circled the wagons, "cobbling together a defense to offer political cover to their rank and file." The Washington Post also reported in 2009 that Murtha's nephew received $4 million in Defense Department no-bid contracts: "Newly obtained documents…show Robert Murtha mentioning his influential family connection as leverage in his business dealings and holding unusual power with the military."

    

10. Rep. Charles Rangel (D-NY): Rangel, the man in charge of writing tax policy for the entire country, has yet to adequately explain how he could possibly "forget" to pay taxes on $75,000 in rental income he earned from his off-shore rental property. He also faces allegations that he improperly used his influence to maintain ownership of highly coveted rent-controlled apartments in Harlem, and misused his congressional office to fundraise for his private Rangel Center by preserving a tax loophole for an oil drilling company in exchange for funding. On top of all that, Rangel recently amended his financial disclosure reports, which doubled his reported wealth. (He somehow "forgot" about $1 million in assets.) And what did he do when the House Ethics Committee started looking into all of this? He apparently resorted to making "campaign contributions" to dig his way out of trouble. According to WCBS TV, a New York CBS affiliate: "The reigning member of Congress' top tax committee is apparently 'wrangling' other politicos to get him out of his own financial and tax troubles...Since ethics probes began last year the 79-year-old congressman has given campaign donations to 119 members of Congress, including three of the five Democrats on the House Ethics Committee who are charged with investigating him." Charlie Rangel should not be allowed to remain in Congress, let alone serve as Chairman of the powerful House Ways and Means Committee, and he knows it. That's why he felt the need to disburse campaign contributions to Ethics Committee members and other congressional colleagues.

"A Low, Dishonest Decade: The press and politicians were asleep at the switch.," The Wall Street Journal, December 22, 2009 ---
http://online.wsj.com/article/SB10001424052748703478704574612013922050326.html?mod=djemEditorialPage

Stock-market indices are not much good as yardsticks of social progress, but as another low, dishonest decade expires let us note that, on 2000s first day of trading, the Dow Jones Industrial Average closed at 11357 while the Nasdaq Composite Index stood at 4131, both substantially higher than where they are today. The Nasdaq went on to hit 5000 before collapsing with the dot-com bubble, the first great Wall Street disaster of this unhappy decade. The Dow got north of 14000 before the real-estate bubble imploded.

And it was supposed to have been such an awesome time, too! Back in the late '90s, in the crescendo of the Internet boom, pundit and publicist alike assured us that the future was to be a democratized, prosperous place. Hierarchies would collapse, they told us; the individual was to be empowered; freed-up markets were to be the common man's best buddy.

Such clever hopes they were. As a reasonable anticipation of what was to come they meant nothing. But they served to unify the decade's disasters, many of which came to us festooned with the flags of this bogus idealism.

Before "Enron" became synonymous with shattered 401(k)s and man-made electrical shortages, the public knew it as a champion of electricity deregulation—a freedom fighter! It was supposed to be that most exalted of corporate creatures, a "market maker"; its "capacity for revolution" was hymned by management theorists; and its TV commercials depicted its operations as an extension of humanity's quest for emancipation.

Similarly, both Bank of America and Citibank, before being recognized as "too big to fail," had populist histories of which their admirers made much. Citibank's long struggle against the Glass-Steagall Act was even supposed to be evidence of its hostility to banking's aristocratic culture, an amusing image to recollect when reading about the $100 million pay reportedly pocketed by one Citi trader in 2008.

The Jack Abramoff lobbying scandal showed us the same dynamics at work in Washington. Here was an apparent believer in markets, working to keep garment factories in Saipan humming without federal interference and saluted for it in an op-ed in the Saipan Tribune as "Our freedom fighter in D.C."

But the preposterous populism is only one part of the equation; just as important was our failure to see through the ruse, to understand how our country was being disfigured.

Ensuring that the public failed to get it was the common theme of at least three of the decade's signature foul-ups: the hyping of various Internet stock issues by Wall Street analysts, the accounting scandals of 2002, and the triple-A ratings given to mortgage-backed securities.

The grand, overarching theme of the Bush administration—the big idea that informed so many of its sordid episodes—was the same anti-supervisory impulse applied to the public sector: regulators sabotaged and their agencies turned over to the regulated.

The public was left to read the headlines and ponder the unthinkable: Could our leaders really have pushed us into an unnecessary war? Is the republic really dividing itself into an immensely wealthy class of Wall Street bonus-winners and everybody else? And surely nobody outside of the movies really has the political clout to write themselves a $700 billion bailout.

What made the oughts so awful, above all, was the failure of our critical faculties. The problem was not so much that newspapers were dying, to mention one of the lesser catastrophes of these awful times, but that newspapers failed to do their job in the first place, to scrutinize the myths of the day in a way that might have prevented catastrophes like the financial crisis or the Iraq war.

The folly went beyond the media, though. Recently I came across a 2005 pamphlet written by historian Rick Perlstein berating the big thinkers of the Democratic Party for their poll-driven failure to stick to their party's historic theme of economic populism. I was struck by the evidence Mr. Perlstein adduced in the course of his argument. As he tells the story, leading Democratic pollsters found plenty of evidence that the American public distrusts corporate power; and yet they regularly advised Democrats to steer in the opposite direction, to distance themselves from what one pollster called "outdated appeals to class grievances and attacks upon corporate perfidy."

This was not a party that was well-prepared for the job of iconoclasm that has befallen it. And as the new bunch muddle onward—bailing out the large banks but (still) not subjecting them to new regulatory oversight, passing a health-care reform that seems (among other, better things) to guarantee private insurers eternal profits—one fears they are merely presenting their own ample backsides to an embittered electorate for kicking.

Video: Fora.Tv on Institutional Corruption & The Economy Of Influence ---
http://www.simoleonsense.com/video-foratv-on-institutional-corruption-the-economy-of-influence/

Climategate on Finnish TV --- http://climateaudit.org/2009/12/29/climategate-on-finnish-tv/

Bob Jensen's threads on corrupt politicians can be found at http://www.trinity.edu/rjensen/FraudRotten.htm#Lawmakers

"Going to School on Revenue Recognition," by Tom Selling, The Accounting Onion, December 5, 2009 --- Click Here

Jensen Comment
Another question is consistency and whether inconsistencies suggest earnings management.

"Strategic Revenue Recognition to Achieve Earnings Benchmarks," Marcus L. Caylor, Marcus L. Caylor, SSRN, January 14, 2008 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=885368
This paper is a free download.

Abstract:
 I examine whether managers use discretion in the two accounts related to revenue recognition, accounts receivable and deferred revenue, to avoid three common earnings benchmarks. I find that managers use discretion in both accounts to avoid negative earnings surprises. I find that neither of these accounts is used to avoid losses or earnings decreases. For a common sample of firms with both deferred revenue and accounts receivable, I show that managers prefer to exercise discretion in deferred revenue vis-à-vis accounts receivable. I provide a reason for why managers might prefer to manage a deferral rather than an accrual: lower costs to manage (i.e., no future cash consequences). My results suggest that if given the choice, managers prefer to use accounts that incur the lowest costs to the firm.

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

Creative Earnings Management, Agency Theory, and Accounting Manipulations to Cook the Books
The Controversy Over Earnings Smoothing and Other Manipulations ---
http://www.trinity.edu/rjensen/theory01.htm#Manipulation

"Making Revenue Recognition Simple and Informative," by Tom Selling, The Accounting Onion, December 20, 2009 --- Click Here

December 21, 2009 reply from Bob Jensen

Hi Tom,

Although I like many of the points you make in the recent posting, I’m still troubled with upfront membership fees since these are really deferred profits if the monthly dues truly add zero to profits (by only contributing to variable costs).

Moral Hazard
This is an area teaming with moral hazard, especially given the sad history of health clubs bankruptcies. I think this is an area that should be regulated by requiring that these deferred profits be placed in a trust fund managed by an independent trustee. The club should only be allowed to realize the profits on some type of amortization schedule with a guarantee that unpaid profits be returned to members in the case of failed clubs.

Without Regulation
However, you are perhaps correct in the case of “lifetime” health clubs since most health clubs capture these profits with bankruptcy in a relatively short period of time. My use of the word “most” is anecdotal since I’ve not researched the proportion that actually declare bankruptcy in a relatively short period of time --- but I know it is a lot of such clubs that really commenced with honest intentions as well as the ones that planned on running off with membership fees at get go.

Bob Jensen

December 21, 2009 reply from Barbara Scofield

I find a theoretical framework for recognizing initial membership fees in that these fees represent a future cash savings for the customers in each subsequent year.  In the absence of having paid the initial "one-time"membership fee, an initial membership fee would be owed each year, which is actually the common practice for YMCA and many other gyms.  In the mind of the customer the initial "one-time" membership fee is the present value of the additional amount they would be willing to pay for a monthly-fee-only membership for the time period of their expected participation or annual membership fees.  Most initial fees disproportionately accrue to the gym because people move, not because the gyms go out of business.  If a company has historical information about the length of continuous participation of its members, then an allocation across that average time period would better match the transactions economic effects from the point of view of the customer.

Barbara W. Scofield, PhD, CPA
Chair of Graduate Business Studies
Professor of Accounting
The University of Texas of the Permian Basin
4901 E. University Dr.
Odessa, TX   79762
432-552-2183 (Office)
817-988-5998 (Cell)
BarbaraWScofield@gmail.com

December 21, 2009 reply from Bob Jensen

Although many who join health clubs and spas are pleased with their choices, others are not. They've complained to the Federal Trade Commission ("FTC") about high-pressure sales tactics, misrepresentations of facilities and services, broken cancellation and refund clauses, and lost membership fees as a result of clubs going out of business. To avoid these kinds of problems, it's best to look closely at the spa's fees, contractual requirements and facilities before you join. Here are some suggestions to help you make the right choice.
"Health Clubs," Lawyers.com --- http://consumer-law.lawyers.com/consumer-fraud/Health-Clubs.html
Also see http://www.ftc.gov/bcp/edu/pubs/consumer/health/hea08.shtm Review the Contracts

Some spas ask you to join - and pay - the first time you visit and offer incentives like special rates to entice you to sign on the spot. Resist. Wait a few days before deciding. Take the contract home and read it carefully. Before you sign, ask yourself:

·         Is everything that the salesperson promised written in the contract? If a problem arises after you join, the contract probably will govern the dispute. And if something is not written in the contract, it's going to be difficult to prove your case.

·         Is there a "cooling-off" period? Some spas give customers several days to reconsider after they've signed the contract.

·         Could you get a refund for the unused portion of your membership if you had to cancel, say, because of a move or an injury? What if you simply stopped using the spa? Will the spa refund your money? Knowing the spa's cancellation policies is especially important if you choose a long-term membership.

·         Can you join for a short time only? It may be to your advantage to join on a trial basis, say, for a few months, even if it costs a little more each month. If you're not enjoying the membership or using it as much as you had planned, you won't be committed to years of payments.

·         Can you afford the payments? Consider the finance charges and annual percentage rates when you calculate the total cost of your membership. Break down the cost to weekly and even daily figures to get a better idea of what it really will cost to use the facility. =

"One Cheer for Barney Frank:  The credit raters lose their oligopoly," The Wall Street Journal, December 23, 2009 ---
http://online.wsj.com/article/SB10001424052748703523504574603983503610564.html

The House-passed rewrite of financial regulation is a disappointment for investors and taxpayers. But one portion of the bill represents significant reform—and a vast improvement from an early draft we described in October.

Congressmen Barney Frank and Paul Kanjorski (D., Pa.) have produced legislation that would likely end the credit-ratings racket enjoyed by Standard & Poor's, Moody's and Fitch. During the housing bubble, these government-anointed judges of credit risk slapped their triple-A ratings on billions of dollars of mortgage-backed securities. The consequences for investors were catastrophic.

The Frank-Kanjorski provision that recently passed the House not only eliminates all laws that require the use of these "Nationally Recognized Statistical Ratings Organizations." The bill also instructs all the major financial regulators to remove such requirements from their rules. This is a subtle but enormously important change from the October draft, because most of the federal edicts that guaranteed profits for S&P and the gang were contained in agency rules, not laws.

The House-passed bill also repeals an exemption that credit-raters have enjoyed from the Securities and Exchange Commission's Regulation Fair Disclosure. No longer will they have access to corporate information that is denied to average investors.

Also removed from the bill was a bizarre "joint liability" scheme in which all the credit raters would be responsible for each other's work, so that a bad report by Fitch could be grounds for a lawsuit against Moody's. Unable to restrain themselves entirely from bestowing gifts upon trial lawyers, House Democrats have instead increased liability for the raters on their own work.

The Senate should avoid such public display of affection toward the plaintiffs bar but embrace the House language that strikes at the heart of the ratings cartel. Obliterating investor requirements to use credit-ratings agencies would amount to major reform all by itself. Perhaps the House and Senate should simply agree on that, pass a bill now, and then start over with a new mission for regulatory reform: break up the too big to fail racket.

"How Moody's sold its ratings - and sold out investors," by Kevin G. Hall, McClatchy Newspapers, October 18, 2009 --- http://www.mcclatchydc.com/homepage/story/77244.html

Bob Jensen's threads on the history of credit rater scandals ---
http://www.trinity.edu/rjensen/FraudRotten.htm#CreditRatingAgencies

December 14, 2009 message from Roger Debreceny [roger@DEBRECENY.COM]

See http://www.azpbs.org/horizon/play.php?vidId=1570 .. about a new privacy lab at ASU.

PS Julie is also on Twitter at www.twitter.com/juliesmithdavid 

Roger Debreceny
School of Accountancy
Shidler College of Business
University of Hawai'i at Manoa
2404 Maile Way
Honolulu, HI 96822, USA
Google Voice: +1 (513) 393-9393
roger(at)debreceny.com rogersd(at)hawaii.edu
www.debreceny.com  www.twitter.com/debreceny

"Court to rule on privacy of texting:  Case involves messages sent on a pager owned by an employer," by Robert Barnes, The Washington Post, December 15. 2009 --- Click Here

The Supreme Court will decide whether employees have a reasonable expectation of privacy for the text messages they send on devices owned by their employers.

The case the court accepted Monday involves public employees, but a broadly written decision could hold a blueprint for private-workplace rules in a world in which communication via computers, e-mail and text messages plays a very large role.

A federal appeals court in California decided that a police officer in the city of Ontario had a right to privacy regarding the texts he sent on his department-issued pager, even though his chief discovered that some of them were sexually explicit messages to his girlfriend. That court said the chief's decision to read the messages without a suspicion of wrongdoing on the part of the officer violated Fourth Amendment protections against unreasonable searches.

The ruling, by a panel of the U.S. Court of Appeals for the 9th Circuit, was the first of its kind, and the judges acknowledged that the "recently minted standard of electronic communication via e-mails, text messages, and other means opens a new frontier in Fourth Amendment jurisprudence that has been little explored."

Continued in article

William D. Eggers is the Global Director of Deloitte's Public Sector research program. John O'Leary is a Research Fellow at the Ash Institute of the Harvard Kennedy School. Their new book is If We Can Put a Man on the Moon: Getting Big Things Done in Government (Harvard Business Press, 2009).

"Why the Success of "Obama Care" Could Be Riskier Than Failure," by William D. Eggers and John O'Leary, Harvard Business School Blog, December 23, 2009 --- http://blogs.hbr.org/cs/2009/12/why_the_success_of_obama_care.html?cm_mmc=npv-_-DAILY_ALERT-_-AWEBER-_-DATE

When President Obama launched his health reform effort, more than anything he wanted to avoid the mistakes of the 1993-1994 attempt at health care reform. His advisors have said repeatedly over these past months that they want something passed.

Now it appears they will get their wish. It's certainly true that one way "Obama Care" could fail — the one everybody has been worrying about — is by never being passed into law. Another way it can fail, however, is if a poorly designed bill passes and then wreaks havoc during implementation. Indeed, this sort of design and execution failure could do greater lasting damage to the goals of health care reform than mere failure to pass a bill.

The Obama administration, and all reform-minded public agencies and organizations, would do well to avoid some of the mistakes of 2004, when an all-Republican Congress and White House rammed through a Medicare prescription drug benefit. The messy, ill-considered implementation of what in essence was a massive giveaway program generated huge initial ill-will among seniors, the very group the benefit was designed to serve.

Ultimately, the GOP's Medicare prescription drug reform stands as a model for achieving short-term legislative success that creates an implementation nightmare. In more general terms, those pushing for change saw official approval as the finish line rather than, more accurately, as the starting line.

Here are some of the key risks that the 2004 Congress should have had in mind in their push to get Medicare reform done — and which should be front-of-mind for change-leaders now:

The risk of ramming it through. The process by which Medicare Part D became legislative reality wasn't pretty. It involved low-balled cost estimates, an unprecedented all-night vote, and high-pressure tactics from Republicans to sway votes that cost Tom DeLay an ethics rebuke. With all the high-stakes political gamesmanship, any actual review of the proposed policy for "implementability" was minimal to non-existent. A related lesson as the Democrats now drive health care and other reforms through Congress: political memory rarely fades. Cut-throat tactics lead inexorably to future in-kind retribution. Public leaders must stop the vicious cycle in which avenging political battle scars trumps practical lessons learned from prior missteps of execution.

Forgetting who you're designing the reform for. Seniors were totally confused by their new "benefit." "This whole program is so complicated that I've stayed awake thinking, 'How can a brain come up with anything like this?'" lamented a seventy-nine-year old, retired business manager. Americans do not normally lie awake pondering the design of a federal program. But the Medicare prescription drug program was something special. "I have a PhD, and it's too complicated to suit me," said a seventy-three-year old retired, chemist.

Giving the nation's elderly voters apoplexy was not what Republicans had intended. But lawmakers had designed the legislation primarily to curry favor with other "stakeholders" — big pharmaceutical firms, health plans, employers, rural hospitals, and senior advocates such as the AARP — instead of designing it to work in the real world for the "end consumer" of the reform, i.e. everyday senior citizens.

The number of plans the typical senior had to sort through depended on where he or she lived. In Colorado, retirees faced a choice of 55 plans from 24 companies. Residents of Pennsylvania selected from 66 plans.

"The program is so poorly designed and is creating so much confusion that it's having a negative effect on most beneficiaries," said one pharmacist. "It's making people cynical about the whole process — the new program, the government's help."

Unrealistic timeline and scale. "No company would ever launch countrywide a new product to 40 million people all at once," explained Kathleen Harrington, the Bush political appointee at the Centers for Medicare and Medicaid Services who led the launch of Medicare Part D. "No one would ever say that you have to get all of the platforms, all of the systems developed for this and working within six months." Nobody except Congress, who in fact tried to do this, giving scant consideration to implementation challenges and the inherent difficulty in changing a well-established system.

The launch from hell. The computer system cobbled together to support the new benefit crashed the very first day coverage took effect. System errors slapped seniors with excessive charges or denied them their drugs altogether. Computer glitches generated calls to the telephone hotlines, which quickly became overloaded.

While eventually the program was turned around thanks to some heroic efforts by senior federal executives, the days and weeks following the January 2006 opening of benefit enrollment were a disaster — caused primarily by a dysfunctional design process and lack of an implementation mindset.

Lessons learned. Both Medicare Part D, as well as what we have seen of the current, huge effort toward health care reform, highlight why government has such a hard time dealing with complex problems. But the basic truth is simple: ultimately, to be successful, a health reform bill has to do two things — it has to pass through Congress, and it has to actually work in the real world.

These two considerations often work against each other. For political reasons, artificial deadlines are introduced. To appease interest groups, regulations are altered, or goodies buried in the bill. These measures are almost always taken to secure passage, but with little (or not enough) thought given to how they might hinder implementation.

Given the problems that arose in the comparatively simple launch of a new drug benefit to seniors, policymakers should be examining every risk inherent in implementing any serious overhaul of one-seventh of our economy. The legislative process needs to produce health care reform that can work in the real world or the backlash from a failed implementation will be furious.

William D. Eggers is the Global Director of Deloitte's Public Sector research program. John O'Leary is a Research Fellow at the Ash Institute of the Harvard Kennedy School. Their new book is If We Can Put a Man on the Moon: Getting Big Things Done in Government (Harvard Business Press, 2009).

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

"Public Policy as Public Corruption," by Michael Gerson, Townhall, December  23, 2009 ---
http://townhall.com/columnists/MichaelGerson/2009/12/23/public_policy_as_public_corruption

"Black Education," by Walter E. Williams (a black economics professor), Townhall, December 23, 2009 ---
http://townhall.com/columnists/WalterEWilliams/2009/12/23/black_education

Detroit's (predominantly black) public schools are the worst in the nation and it takes some doing to be worse than Washington, D.C. Only 3 percent of Detroit's fourth-graders scored proficient on the most recent National Assessment of Education Progress (NAEP) test, sometimes called "The Nation's Report Card." Twenty-eight percent scored basic and 69 percent below basic. "Below basic" is the NAEP category when students are unable to demonstrate even partial mastery of knowledge and skills fundamental for proficient work at their grade level. It's the same story for Detroit's eighth-graders. Four percent scored proficient, 18 percent basic and 77 percent below basic.

Michael Casserly, executive director of the D.C.-based Council on Great City Schools, in an article appearing in Crain's Detroit Business, (12/8/09) titled, "Detroit's Public Schools Post Worst Scores on Record in National Assessment," said, "There is no jurisdiction of any kind, at any level, at any time in the 30-year history of NAEP that has ever registered such low numbers." The academic performance of black students in other large cities such as Philadelphia, Chicago, New York and Los Angeles is not much better than Detroit and Washington.

What's to be done about this tragic state of black education? The education establishment and politicians tell us that we need to spend more for higher teacher pay and smaller class size. The fact of business is higher teacher salaries and smaller class sizes mean little or nothing in terms of academic achievement. Washington, D.C., for example spends over $15,000 per student, has class sizes smaller than the nation's average, and with an average annual salary of $61,195, its teachers are the most highly paid in the nation.

What about role models? Standard psychobabble asserts a positive relationship between the race of teachers and administrators and student performance. That's nonsense. Black academic performance is the worst in the very cities where large percentages of teachers and administrators are black, and often the school superintendent is black, the mayor is black, most of the city council is black and very often the chief of police is black.

Black people have accepted hare-brained ideas that have made large percentages of black youngsters virtually useless in an increasingly technological economy. This destruction will continue until the day comes when black people are willing to turn their backs on liberals and the education establishment's agenda and confront issues that are both embarrassing and uncomfortable. To a lesser extent, this also applies to whites because the educational performance of many white kids is nothing to write home about; it's just not the disaster that black education is.

Many black students are alien and hostile to the education process. They have parents with little interest in their education. These students not only sabotage the education process, but make schools unsafe as well. These students should not be permitted to destroy the education chances of others. They should be removed or those students who want to learn should be provided with a mechanism to go to another school.

Another issue deemed too delicate to discuss is the overall quality of people teaching our children. Students who have chosen education as their major have the lowest SAT scores of any other major. Students who have an education degree earn lower scores than any other major on graduate school admission tests such as the GRE, MCAT or LSAT. Schools of education, either graduate or undergraduate, represent the academic slums of most any university. They are home to the least able students and professors. Schools of education should be shut down.

Yet another issue is the academic fraud committed by teachers and administrators. After all, what is it when a student is granted a diploma certifying a 12th grade level of achievement when in fact he can't perform at the sixth- or seventh-grade level?

Prospects for improvement in black education are not likely given the cozy relationship between black politicians, civil rights organizations and teacher unions.

Dr. Williams serves on the faculty of George Mason University as John M. Olin Distinguished Professor of Economics and is the author of More Liberty Means Less Government: Our Founders Knew This Well.

Bob Jensen’s threads on higher education controversies are at
http://www.trinity.edu/rjensen/HigherEdControversies.htm

Another one from that Ketz guy.

"Hertz Converts While the SEC Inverts," by: J. Edward Ketz, SmartPros, December 2009 ---
http://accounting.smartpros.com/x68384.xml

Hertz Global Holdings did a 180 recently by righting a dumb mistake it made earlier. Before getting swallowed up by a legal vortex it created, Hertz just walked away before it wasted a lot of shareholder money.

I applaud its managers for coming to their collective senses.

As I discussed in an earlier column, Hertz announced on September 28 that it had sued Audit Integrity and its CEO Jack Zwingli for defamation.  This alleged defamation occurred because Audit Integrity asserted in one of its research reports that Hertz faced significant risk of corporate bankruptcy.

Audit Integrity had named 19 other firms that also faced a significant chance of corporate failure, and managers at Hertz attempted to convince them also to sue Audit Integrity.  Executives at the other business enterprises did not make the same error.

I described this case here in mid-October in my essay “Hertz Diverts and Subverts”.  My response indicated surprise that Hertz managers felt that they had a chance of surviving early motions to dismiss the case.  One look at the financial report would have revealed the unhealthy state of the business entity.  Negative earnings and negative retained earnings and a terrible debt-to-equity ratio are signals of distress to the investment community.

Further, anybody could have employed Altman’s well known model of predicting bankruptcy and discovered Z-scores for Hertz that displayed very poor results.  It wouldn’t take a rocket scientist’s nanny to figure out that Hertz faces financial troubles.

I assume that some Hertz managers or directors read my column.  After seeing the impeccable logic of my op-ed, they reconsidered the lawsuit against Audit Integrity.  Then, on or about November 15, Hertz dropped the lawsuit.  Publicly Hertz said that it had a good third quarter and wanted to move forward.  I accept their wanting to save face and not credit my logic for their decision.  It was a wise move even if I didn’t obtain proper attribution.

I was not successful on all counts, however.  In that essay I also encouraged the SEC and its chair Mary Schapiro to stop the intimidation of research analysts.  Audit Integrity also complained to the SEC about issuer intimidation, and in a letter to the firm, Mary Schapiro said she could not do anything.

Nothing?  I find it incredible that she cannot make a speech decrying corporate interference with legitimate work by research analysts.  I find it amazing that she cannot call up members of Congress and express her view that there ought to be a law against issuer intimidation.  I find it perplexing that she cannot or will not use the bully pulpit to stand up for investors, which I thought was the SEC’s raison d’être.

The Hertz decision is a win for everyone; unfortunately, it is marred by the inexplicable inaction of the SEC.  The battle for truth in accounting continues.

"Why Accounting Needs Your Accruals," by Karen Berman and Joe Knight, Harvard Business School Blog, December 18, 2009 ---
http://blogs.hbr.org/cs/2009/12/why_accounting_needs_your_accr.html?cm_mmc=npv-_-DAILY_ALERT-_-AWEBER-_-DATE

Managers across the country dread the call from accounting at this time of year — we need your accruals. Many managers feel that the process of putting together their accruals is tedious, and, dare we say, a waste of time. They wonder, "Why does accounting need this information? Is this another piece of information that goes into the black hole of a spreadsheet, never to be seen again?"

Accruals, especially at this time of year, are critical to good accounting. They help to ensure you have good information about the financial health of your company. And, they help to keep the books "clean," that is, keeping things that happened in 2009 in 2009 so that the picture your company presents with its financials tells the 2009 story in its entirety.

At its core, accrual accounting is fairly simple: the numbers in financial statements should reflect the work and activities that occurred in the time period of those statements. So, if the income statement is for December, then the revenue and expenses in that statement are for the revenue that was earned (for example, was the product delivered in December?) and the expenses that it took to make that revenue (for example, the cost of materials for the revenue that was earned in December). (A related and important accounting principle here is the matching principle: match expenses to the revenue the expenses helped to bring in.)

Here's the problem: invoices, bills and cash don't always line up in the same month the activities occurred. Say an invoice comes in for something that happened a month ago. It should have been "accrued for," so that, even though there wasn't any invoice, the amount is in the books for the month that the activity occurred. On the revenue side, say a product was delivered, but the client didn't pay until two months later. That revenue had to be "accrued" for in the month of delivery, even though neither the invoice, nor the payment for the product happened in that month.

Another example of accruals is when we pay for something in one month, but we get the benefit for more than just that one month. Say you pay your insurance bill for the whole year in January. That insurance covers 12 months, not just January. So, the company accrues for that, and the books reflect 1/12 of that payment in every month of the year.

Too much accounting? Just remember that you are part of the process of creating as close a picture as possible of what happened in 2009. And that is important for a whole host of reasons, because the financial statements are used to help make lots of decisions, including those about hiring (or layoffs), raises, capital purchases, new product plans, and so on.

Finally, here are four key things to remember about accruing:

1. Accruals can apply to revenue, operating expenses and capital expenses. Salaries can be a big part of accruals. 2. You don't need an invoice to accrue. You do need to know how much the invoice will be. 3. You may have to make assumptions and include estimates in your accrual numbers. That's OK, just document them. 4. Think about the activities that occurred in 2009, and make sure they are reflected in the books for 2009. There may be some projects that go into 2010. Work with your accounting department to decide how to handle those.

Karen Berman is founder and co-owner of the Business Literacy Institute, with Joe Knight. Joe is CFO at Setpoint Companies. They are the authors of Financial Intelligence.

Jensen Comment
This article probably does not show any business manager or accounting worker anything that they don't already know, and it probably makes little sense to anybody who never had the equivalent of Accounting 101.

More to the point is why mangers and investors need accrual accounting statements rather than just a cash flow statement ---
http://www.trinity.edu/rjensen/theory01.htm#CashVsAccrualAcctg

The 200th SmartPros Op/Ed Article from that timid (ha ha) Ketz guy
Don't look for him beating the drums for IFRS in the U.S.!
But there is a whole lot more in his columns that deal mostly with bad stuff in corporate accounting.

"200th Column: Retrospection Op/Ed," By: J. Edward Ketz, SmartPros, December 2009 ---
http://accounting.smartpros.com/x68360.xml 
And no end in sight (gratefully)

Thanks Ed.
I don't always agree with you, but mostly I do agree with you.
You do have a way with words.

That some bankers have ended up in prison is not a matter of scandal, but what is outrageous is the fact that all the others are free.
Honoré de Balzac

"Banks Bundled Bad Debt, Bet Against It and Won," by Gretchen Morgenson and Louise Story, The New York Times, December 23, 2009 ---
http://www.nytimes.com/2009/12/24/business/24trading.html?em
My friend Larry clued me in to this link.

In late October 2007, as the financial markets were starting to come unglued, a Goldman Sachs trader, Jonathan M. Egol, received very good news. At 37, he was named a managing director at the firm.

Mr. Egol, a Princeton graduate, had risen to prominence inside the bank by creating mortgage-related securities, named Abacus, that were at first intended to protect Goldman from investment losses if the housing market collapsed. As the market soured, Goldman created even more of these securities, enabling it to pocket huge profits.

Goldman’s own clients who bought them, however, were less fortunate.

Pension funds and insurance companies lost billions of dollars on securities that they believed were solid investments, according to former Goldman employees with direct knowledge of the deals who asked not to be identified because they have confidentiality agreements with the firm.

Goldman was not the only firm that peddled these complex securities — known as synthetic collateralized debt obligations, or C.D.O.’s — and then made financial bets against them, called selling short in Wall Street parlance. Others that created similar securities and then bet they would fail, according to Wall Street traders, include Deutsche Bank and Morgan Stanley, as well as smaller firms like Tricadia Inc., an investment company whose parent firm was overseen by Lewis A. Sachs, who this year became a special counselor to Treasury Secretary Timothy F. Geithner.

How these disastrously performing securities were devised is now the subject of scrutiny by investigators in Congress, at the Securities and Exchange Commission and at the Financial Industry Regulatory Authority, Wall Street’s self-regulatory organization, according to people briefed on the investigations. Those involved with the inquiries declined to comment.

While the investigations are in the early phases, authorities appear to be looking at whether securities laws or rules of fair dealing were violated by firms that created and sold these mortgage-linked debt instruments and then bet against the clients who purchased them, people briefed on the matter say.

One focus of the inquiry is whether the firms creating the securities purposely helped to select especially risky mortgage-linked assets that would be most likely to crater, setting their clients up to lose billions of dollars if the housing market imploded.

Some securities packaged by Goldman and Tricadia ended up being so vulnerable that they soured within months of being created.

Goldman and other Wall Street firms maintain there is nothing improper about synthetic C.D.O.’s, saying that they typically employ many trading techniques to hedge investments and protect against losses. They add that many prudent investors often do the same. Goldman used these securities initially to offset any potential losses stemming from its positive bets on mortgage securities.

But Goldman and other firms eventually used the C.D.O.’s to place unusually large negative bets that were not mainly for hedging purposes, and investors and industry experts say that put the firms at odds with their own clients’ interests.

“The simultaneous selling of securities to customers and shorting them because they believed they were going to default is the most cynical use of credit information that I have ever seen,” said Sylvain R. Raynes, an expert in structured finance at R & R Consulting in New York. “When you buy protection against an event that you have a hand in causing, you are buying fire insurance on someone else’s house and then committing arson.”

Investment banks were not alone in reaping rich rewards by placing trades against synthetic C.D.O.’s. Some hedge funds also benefited, including Paulson & Company, according to former Goldman workers and people at other banks familiar with that firm’s trading.

Michael DuVally, a Goldman Sachs spokesman, declined to make Mr. Egol available for comment. But Mr. DuVally said many of the C.D.O.’s created by Wall Street were made to satisfy client demand for such products, which the clients thought would produce profits because they had an optimistic view of the housing market. In addition, he said that clients knew Goldman might be betting against mortgages linked to the securities, and that the buyers of synthetic mortgage C.D.O.’s were large, sophisticated investors, he said.

The creation and sale of synthetic C.D.O.’s helped make the financial crisis worse than it might otherwise have been, effectively multiplying losses by providing more securities to bet against. Some $8 billion in these securities remain on the books at American International Group, the giant insurer rescued by the government in September 2008.

From 2005 through 2007, at least $108 billion in these securities was issued, according to Dealogic, a financial data firm. And the actual volume was much higher because synthetic C.D.O.’s and other customized trades are unregulated and often not reported to any financial exchange or market.

Goldman Saw It Coming

Before the financial crisis, many investors — large American and European banks, pension funds, insurance companies and even some hedge funds — failed to recognize that overextended borrowers would default on their mortgages, and they kept increasing their investments in mortgage-related securities. As the mortgage market collapsed, they suffered steep losses.

Continued in article

Bob Jensen's threads on banking and investment banking frauds are at
http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking

Accounting for Collateralized Debt Obligations (CDOs)

As to CDOs in VIEs, you might take a look at
http://www.mayerbrown.com/public_docs/cdo_heartland2004_FIN46R.pdf

Evergreen Investment Management case at
http://www.sec.gov/litigation/admin/2009/34-60059.pdf

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

Bob Jensen's threads on SPEs, SPVs, and VIEs ---
http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm

How to download journal articles and books

When I said yesterday in a reply to Pat that I use the Trinity University Library’s subscription to JSTOR to download free copies of AAA articles like The Accounting Review articles, I should’ve pointed out that, since I pay for the AAA Electronic Journals access, I use JSTOR only for articles published 1925-1998. In my case I access JSTOR using a password provided to me by the Trinity University Library that subscribes to JSTOR and many other electronic literature databases.

Beginning in 1999, the AAA created digital archives that subscribers can access directly, but there is a subscription fee added on to membership dues to access those archives. Students may download, without charge, JSTOR archived articles through their college library subscription. JSTOR is not usually as immediately up to date for the most recent articles as the AAA site --- http://aaahq.org/pubs/electpubs.htm
People without access to JSTOR can pay for copies of AAA journal articles published after 1998.

Of course there are also free hard copies of journals available in most college libraries, and these articles can be photocopied or scanned for educational purposes. As you grow older, you find yourself almost choked out of your office with stacks of old journals. I commenced giving most of my hard copy journals away even before I retired. Services like JSTOR allow me to download and store articles of interest in a hard drive.

MAAW has a convenient indexing of AAA journals back to when they were first published. This is a great free service generously and meticulously provided by Professor James Martin. However, after locating a historic AAA journal article, you will still have to use something like JSTOR to actually download the complete article ---
http://maaw.info/
Thank you for sharing James.

I personally, however, have hung onto a lot of books that now perhaps have some antique value. Eventually, Google Advanced Book Search and similar archiving services will have most old accounting books available for free digital downloading. Google Advanced Book Search is finally up to speed for many, many antique accounting books --- http://books.google.com/advanced_book_search
Give it a try with an antique accounting book of particular interest to you such as Truth in Accounting by Kenneth MacNeal.

 Another thing about Google Books is that it often provides other information about books and links to articles about selected books. Feed in the term Pacioli and see what you get at http://books.google.com/advanced_book_search

 One problem I still have with Google Advanced Book Search is that it will often link to later editions of old books rather than earliest editions. For example, on my desk I have a hard copy of the 1932 edition of Accountants’ Handbook edited by William A. Payton. When I use Google Advanced Book Search, however, I only find a link to the 1953 edition. If I search for the book title, Payton, and 1932 I do not find any hits.

Happy hunting.
I have hundreds of links to electronic literature at
http://www.trinity.edu/rjensen/ElectronicLiterature.htm

Bob Jensen's search helpers are at
http://www.trinity.edu/rjensen/searchh.htm

A New One from Francine
"Continuing The Conversation: If Auditors Weren’t There, Why Not?" by Francine McKenna, re: The Auditors, Decmeber 14, 2009 ---
http://retheauditors.com/2009/12/14/continuing-the-conversation-if-auditors-werent-there-why-not/

Jim Peterson and I talk often.  It was my lucky day when I found him writing for the International Herald Tribune about auditors and litigation and the future of the profession.  There’s quite an archive there to draw from.  Jim not only has the experience but the chops to write about the subjects that I feel strongly about.  Albeit I’m a little more fun, but…I told a mutual admirer recently not to judge me more beautiful than Jim.  He hasn’t seen Jim in stilettos nor me in a bow tie…

Jim opened a dialogue with me and the others who write frequently on this topic, like Dennis Howlett and Richard Murphy, via his post today at Re: Balance.  The subject is, “If not, why not…” We’re talking about the auditors’ failure to be a force either before, during, or after the financial crisis.

“Here – in response to the always tart-tongued Francine — is why the auditors weren’t there:

The simple if depressing reason is that their core product has long since been judged irrelevant. The standard auditor’s report is an anachronism — having lost any value it may once have had, except for legally-required compliance (here).

If that single page disappeared from corporate annual reports, no honest user of financial information would admit to missing it. Nor, offered the choice, would any rational CFO pay the fees to obtain it.”

If no one but me asks, since no one cares, then what are we doing here?  Only legally required compliance keeps us walking like dizzy children through this hall of mirrors, never reaching sunshine.

“…the fundamental issue of trustworthiness – on which the entire value of the auditors’ franchise perilously rests – is put under scrutiny when they are effectively sidelined for want of influence and capacity to persuade.”

Continued in article

Where Were the Auditors as Poison Was Being Added to Mortgage Loans on Main Street ---
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms

Will the Big Auditing Firms Survive the Shareholder/Pension Fund Lawsuits ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Auditors

Never ending fraud in Medicare billings: 
Unaudited overpayments, unqualified items, and criminal vendors
One spending sinkhole can be traced to large medical-equipment suppliers, device makers, and pharmaceutical companies, which government auditors and industry veterans describe as a recalcitrant bunch. Medical manufacturers know public agencies generally pay first and ask questions later—if ever. Medicare receives 4.4 million claims daily; fewer than 3% are reviewed before being paid within the legally required 30 days.

"A Hole in Health-Care Reform: Overbilling by medical-equipment suppliers, device makers, and drug companies has cost taxpayers billions. New legislation will do little to stem the tide," by Chad Terhune, Business Week, December 10, 2009 ---
http://www.businessweek.com/magazine/content/09_51/b4160046945722.htm?link_position=link3 

President Barack Obama and his Democratic allies on Capitol Hill say that a vast expansion of health coverage can be funded by squeezing out waste and fraud rather than cutting benefits. Whether that turns out to be true may help determine the success of the sweeping reform package being debated by Congress. Slashing costs is no easy task, and stopping fraud is even tougher. No less than $47 billion in Medicare spending went to dubious claims in the year ended Sept. 30, according to the U.S. Health & Human Services Dept. That's 10.7% of the $440 billion program that subsidizes care for the elderly. Medicaid, the government program for the poor, lets billions trickle away at roughly the same rate. The $10 million annual increase that Congress is allocating to fight fraud may not be enough to do the trick.

One spending sinkhole can be traced to large medical-equipment suppliers, device makers, and pharmaceutical companies, which government auditors and industry veterans describe as a recalcitrant bunch. Medical manufacturers know public agencies generally pay first and ask questions later—if ever. Medicare receives 4.4 million claims daily; fewer than 3% are reviewed before being paid within the legally required 30 days.

One way to get a sense of the scale of the seepage—and the challenge facing the Administration—is to look at whistleblower lawsuits filed under the federal False Claims Act. That law allows company employees to sue on behalf of the government to recover improperly claimed federal funds.

A suit filed by William A. Thomas, a former senior sales manager at Siemens Medical Solutions USA, one of the nation's largest medical suppliers and a unit of German engineering giant Siemens (SI), offers a case study in the difficulty of containing costs. Thomas, a 15-year Siemens Medical veteran, alleges in federal court in Philadelphia that for years the company overbilled the Veterans Affairs Dept. and other government agencies by hundreds of millions of dollars for MRI and CT scan machines and other expensive equipment. These high-tech systems—used to examine everything from damaged knees to suspected cancers—cost $500,000 to $3 million apiece, sometimes more. Thomas, who retired from Siemens in 2008, claims that with no justification other than larger profits, his former employer charged its government customers far more than private-sector buyers for the same equipment.

"Billions and billions could be saved with the right government regulation and oversight applied to health care," Thomas, 56, says in an interview. "But I think corporations will continue running circles around the federal government."

In court filings, Siemens has denied any wrongdoing and has sought to have the Thomas suit dismissed. A company spokesman, Lance Longwell, declined to elaborate for this article, citing the litigation.

The Thomas suit illustrates some of the vagaries of False Claims Act cases, hundreds of which are filed every year against government contractors in a range of industries. As the plaintiff, Thomas stands to pocket up to 30% of any court recovery, with the rest going to the Treasury. The Justice Dept., which can intervene in such suits to help steer them, announced last year that it will stay out of the case against Siemens for now. Yet Thomas' allegations have helped drive a parallel criminal investigation of Siemens' equipment marketing practices by the Defense Dept. and the U.S. Attorney's Office in Philadelphia.

In April federal investigators searched for records at the headquarters of Siemens Medical in Malvern, Pa., a suburb of Philadelphia. Ed Bradley, special agent-in-charge of the Defense Criminal Investigative Service, confirmed that the investigation is continuing but declined to comment further.

Longwell, the Siemens Medical spokesman, says the company is cooperating with criminal investigators. In March, just weeks before the search of its offices, Siemens won a new $267 million contract to provide radiology equipment to the U.S.

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Jensen Comment
The GAO has declared that many huge sink holes for fraud and waste are unauditable --- the Pentagon, the IRS, Medicare, and the list goes on and on. But the Congress that funds these programs is manipulated by special interest groups who do not want these audits. The new sink hole on the block is almost anything green.

What is happening to America?

Bob Jensen's threads on health care are at
http://www.businessweek.com/magazine/content/09_51/b4160046945722.htm?link_position=link3

"Taxpayers distrustful of government financial reporting," AccountingWeb, February 22, 2008 ---
http://www.accountingweb.com/cgi-bin/item.cgi?id=104680

The federal government is failing to meet the financial reporting needs of taxpayers, falling short of expectations, and creating a problem with trust, according to survey findings released by the Association of Government Accountants (AGA). The survey, Public Attitudes to Government Accountability and Transparency 2008, measured attitudes and opinions towards government financial management and accountability to taxpayers. The survey established an expectations gap between what taxpayers expect and what they get, finding that the public at large overwhelmingly believes that government has the obligation to report and explain how it generates and spends its money, but that that it is failing to meet expectations in any area included in the survey.

The survey further found that taxpayers consider governments at the federal, state, and local levels to be significantly under-delivering in terms of practicing open, honest spending. Across all levels of government, those surveyed held "being open and honest in spending practices" vitally important, but felt that government performance was poor in this area. Those surveyed also considered government performance to be poor in terms of being "responsible to the public for its spending." This is compounded by perceived poor performance in providing understandable and timely financial management information.

The survey shows:

The American public is most dissatisfied with government financial management information disseminated by the federal government. Seventy-two percent say that it is extremely or very important to receive this information from the federal government, but only 5 percent are extremely or very satisfied with what they receive.

 

Seventy-three percent of Americans believe that it is extremely or very important for the federal government to be open and honest in its spending practices, yet only 5 percent say they are meeting these expectations.

 

Seventy-one percent of those who receive financial management information from the government or believe it is important to receive it, say they would use the information to influence their vote.

Relmond Van Daniker, Executive Director at AGA, said, "We commissioned this survey to shed some light on the way the public perceives those issues relating to government financial accountability and transparency that are important to our members. Nobody is pretending that the figures are a shock, but we are glad to have established a benchmark against which we can track progress in years to come."

He continued, "AGA members working in government at all levels are in the very forefront of the fight to increase levels of government accountability and transparency. We believe that the traditional methods of communicating government financial information -- through reams of audited financial statements that have little relevance to the taxpayer -- must be supplemented by government financial reporting that expresses complex financial details in an understandable form. Our members are committed to taking these concepts forward."

Justin Greeves, who led the team at Harris Interactive that fielded the survey for the AGA, said, "The survey results include some extremely stark, unambiguous findings. Public levels of dissatisfaction and distrust of government spending practices came through loud and clear, across every geography, demographic group, and political ideology. Worthy of special note, perhaps, is a 67 percentage point gap between what taxpayers expect from government and what they receive. These are significant findings that I hope government and the public find useful."

This survey was conducted online within the United States by Harris Interactive on behalf of the Association of Government Accountants between January 4 and 8, 2008 among 1,652 adults aged 18 or over. Results were weighted as needed for age, sex, race/ethnicity, education, region, and household income. Propensity score weighting was also used to adjust for respondents' propensity to be online. No estimates of theoretical sampling error can be calculated.

You can read the Survey Report, including a full methodology and associated commentary.

"The Government Is Wasting Your Tax Dollars! How Uncle Sam spends nearly $1 trillion of your money each year," by Ryan Grim with Joseph K. Vetter, Readers Digest, January 2008, pp. 86-99 --- http://www.rd.com/content/the-government-is-wasting-your-tax-dollars/4/

1. Taxes:
Cheating Shows. The Internal Revenue Service estimates that the annual net tax gap—the difference between what's owed and what's collected—is $290 billion, more than double the average yearly sum spent on the wars in Iraq and Afghanistan.

About $59 billion of that figure results from the underreporting and underpayment of employment taxes. Our broken system of immigration is another concern, with nearly eight million undocumented workers having a less-than-stellar relationship with the IRS. Getting more of them on the books could certainly help narrow that tax gap.

Going after the deadbeats would seem like an obvious move. Unfortunately, the IRS doesn't have the resources to adequately pursue big offenders and their high-powered tax attorneys. "The IRS is outgunned," says Walker, "especially when dealing with multinational corporations with offshore headquarters."

Another group that costs taxpayers billions: hedge fund and private equity managers. Many of these moguls make vast "incomes" yet pay taxes on a portion of those earnings at the paltry 15 percent capital gains rate, instead of the higher income tax rate. By some estimates, this loophole costs taxpayers more than $2.5 billion a year.

Oil companies are getting a nice deal too. The country hands them more than $2 billion a year in tax breaks. Says Walker, "Some of the sweetheart deals that were negotiated for drilling rights on public lands don't pass the straight-face test, especially given current crude oil prices." And Big Oil isn't alone. Citizens for Tax Justice estimates that corporations reap more than $123 billion a year in special tax breaks. Cut this in half and we could save about $60 billion.

The Tab* Tax Shortfall: $290 billion (uncollected taxes) + $2.5 billion (undertaxed high rollers) + $60 billion (unwarranted tax breaks) Starting Tab: $352.5 billion

2. Healthy Fixes.
Medicare and Medicaid, which cover elderly and low-income patients respectively, eat up a growing portion of the federal budget. Investigations by Sen. Tom Coburn (R-OK) point to as much as $60 billion a year in fraud, waste and overpayments between the two programs. And Coburn is likely underestimating the problem.

The U.S. spends more than $400 per person on health care administration costs and insurance -- six times more than other industrialized nations.

That's because a 2003 Dartmouth Medical School study found that up to 30 percent of the $2 trillion spent in this country on medical care each year—including what's spent on Medicare and Medicaid—is wasted. And with the combined tab for those programs rising to some $665 billion this year, cutting costs by a conservative 15 percent could save taxpayers about $100 billion. Yet, rather than moving to trim fat, the government continues such questionable practices as paying private insurance companies that offer Medicare Advantage plans an average of 12 percent more per patient than traditional Medicare fee-for-service. Congress is trying to close this loophole, and doing so could save $15 billion per year, on average, according to the Congressional Budget Office.

Another money-wasting bright idea was to create a giant class of middlemen: Private bureaucrats who administer the Medicare drug program are monitored by federal bureaucrats—and the public pays for both. An October report by the House Committee on Oversight and Government Reform estimated that this setup costs the government $10 billion per year in unnecessary administrative expenses and higher drug prices.

The Tab* Wasteful Health Spending: $60 billion (fraud, waste, overpayments) + $100 billion (modest 15 percent cost reduction) + $15 billion (closing the 12 percent loophole) + $10 billion (unnecessary Medicare administrative and drug costs) Total $185 billion Running Tab: $352.5 billion +$185 billion = $537.5 billion

3. Military Mad Money.
You'd think it would be hard to simply lose massive amounts of money, but given the lack of transparency and accountability, it's no wonder that eight of the Department of Defense's functions, including weapons procurement, have been deemed high risk by the GAO. That means there's a high probability that money—"tens of billions," according to Walker—will go missing or be otherwise wasted.

The DOD routinely hands out no-bid and cost-plus contracts, under which contractors get reimbursed for their costs plus a certain percentage of the contract figure. Such deals don't help hold down spending in the annual military budget of about $500 billion. That sum is roughly equal to the combined defense spending of the rest of the world's countries. It's also comparable, adjusted for inflation, with our largest Cold War-era defense budget. Maybe that's why billions of dollars are still being spent on high-cost weapons designed to counter Cold War-era threats, even though today's enemy is armed with cell phones and IEDs. (And that $500 billion doesn't include the billions to be spent this year in Iraq and Afghanistan. Those funds demand scrutiny, too, according to Sen. Amy Klobuchar, D-MN, who says, "One in six federal tax dollars sent to rebuild Iraq has been wasted.")

Meanwhile, the Pentagon admits it simply can't account for more than $1 trillion. Little wonder, since the DOD hasn't been fully audited in years. Hoping to change that, Brian Riedl of the Heritage Foundation is pushing Congress to add audit provisions to the next defense budget.

If wasteful spending equaling 10 percent of all spending were rooted out, that would free up some $50 billion. And if Congress cut spending on unnecessary weapons and cracked down harder on fraud, we could save tens of billions more.

The Tab* Wasteful military spending: $100 billion (waste, fraud, unnecessary weapons) Running Tab: $537.5 billion + $100 billion = $637.5 billion

4. Bad Seeds.
The controversial U.S. farm subsidy program, part of which pays farmers not to grow crops, has become a giant welfare program for the rich, one that cost taxpayers nearly $20 billion last year.

Two of the best-known offenders: Kenneth Lay, the now-deceased Enron CEO, who got $23,326 for conservation land in Missouri from 1995 to 2005, and mogul Ted Turner, who got $590,823 for farms in four states during the same period. A Cato Institute study found that in 2005, two-thirds of the subsidies went to the richest 10 percent of recipients, many of whom live in New York City. Not only do these "farmers" get money straight from the government, they also often get local tax breaks, since their property is zoned as agricultural land. The subsidies raise prices for consumers, hurt third world farmers who can't compete, and are attacked in international courts as unfair trade.

The Tab* Wasteful farm subsidies: $20 billion Running Tab: $637.5 billion + $20 billion = $657.5 billion

5. Capital Waste.
While there's plenty of ongoing annual operating waste, there's also a special kind of profligacy—call it capital waste—that pops up year after year. This is shoddy spending on big-ticket items that don't pan out. While what's being bought changes from year to year, you can be sure there will always be some costly items that aren't worth what the government pays for them.

Take this recent example: Since September 11, 2001, Congress has spent more than $4 billion to upgrade the Coast Guard's fleet. Today the service has fewer ships than it did before that money was spent, what 60 Minutes called "a fiasco that has set new standards for incompetence." Then there's the Future Imagery Architecture spy satellite program. As The New York Times recently reported, the technology flopped and the program was killed—but not before costing $4 billion. Or consider the FBI's infamous Trilogy computer upgrade: Its final stage was scrapped after a $170 million investment. Or the almost $1 billion the Federal Emergency Management Agency has wasted on unusable housing. The list goes on.

The Tab* Wasteful Capital Spending: $30 billion Running Tab: $657.5 billion + $30 billion = $687.5 billion

6. Fraud and Stupidity.
Sen. Chuck Grassley (R-IA) wants the Social Security Administration to better monitor the veracity of people drawing disability payments from its $100 billion pot. By one estimate, roughly $1 billion is wasted each year in overpayments to people who work and earn more than the program's rules allow.

The federal Food Stamp Program gets ripped off too. Studies have shown that almost 5 percent, or more than $1 billion, of the payments made to people in the $30 billion program are in excess of what they should receive.

One person received $105,000 in excess disability payments over seven years.

There are plenty of other examples. Senator Coburn estimates that the feds own unused properties worth $18 billion and pay out billions more annually to maintain them. Guess it's simpler for bureaucrats to keep paying for the property than to go to the trouble of selling it.

The Tab* General Fraud and Stupidity: $2 billion (disability and food stamp overpayment) Running Tab: $687.5 billion + $2 billion = $689.5 billion

7. Pork Sausage.
Congress doled out $29 billion in so-called earmarks—aka funds for legislators' pet projects—in 2006, according to Citizens Against Government Waste. That's three times the amount spent in 1999. Congress loves to deride this kind of spending, but lawmakers won't hesitate to turn around and drop $500,000 on a ballpark in Billings, Montana.

The most infamous earmark is surely the "bridge to nowhere"—a span that would have connected Ketchikan, Alaska, to nearby Gravina Island—at a cost of more than $220 million. After Hurricane Katrina struck New Orleans, Senator Coburn tried to redirect that money to repair the city's Twin Span Bridge. He failed when lawmakers on both sides of the aisle got behind the Alaska pork. (That money is now going to other projects in Alaska.) Meanwhile, this kind of spending continues at a time when our country's crumbling infrastructure—the bursting dams, exploding water pipes and collapsing bridges—could really use some investment. Cutting two-thirds of the $29 billion would be a good start.

The Tab* Pork Barrel Spending: $20 billion Running Tab: $689.5 billion + $20 billion = $709.5 billion

8. Welfare Kings.
Corporate welfare is an easy thing for politicians to bark at, but it seems it's hard to bite the hand that feeds you. How else to explain why corporate welfare is on the rise? A Cato Institute report found that in 2006, corporations received $92 billion (including some in the form of those farm subsidies) to do what they do anyway—research, market and develop products. The recipients included plenty of names from the Fortune 500, among them IBM, GE, Xerox, Dow Chemical, Ford Motor Company, DuPont and Johnson & Johnson.

The Tab* Corporate Welfare: $50 billion Running Tab: $709.5 billion + $50 billion = $759.5 billion

9. Been There,
Done That. The Rural Electrification Administration, created during the New Deal, was an example of government at its finest—stepping in to do something the private sector couldn't. Today, renamed the Rural Utilities Service, it's an example of a government that doesn't know how to end a program. "We established an entity to electrify rural America. Mission accomplished. But the entity's still there," says Walker. "We ought to celebrate success and get out of the business."

In a 2007 analysis, the Heritage Foundation found that hundreds of programs overlap to accomplish just a few goals. Ending programs that have met their goals and eliminating redundant programs could comfortably save taxpayers $30 billion a year.

The Tab* Obsolete, Redundant Programs: $30 billion Running Tab: $759.5 billion + $30 billion = $789.5 billion

10. Living on Credit.
Here's the capper: Years of wasteful spending have put us in such a deep hole, we must squander even more to pay the interest on that debt. In 2007, the federal government carried a debt of $9 trillion and blew $252 billion in interest. Yes, we understand the federal government needs to carry a small debt for the Federal Reserve Bank to operate. But "small" isn't how we would describe three times the nation's annual budget. We need to stop paying so much in interest (and we think cutting $194 billion is a good target). Instead we're digging ourselves deeper: Congress had to raise the federal debt limit last September from $8.965 trillion to almost $10 trillion or the country would have been at legal risk of default. If that's not a wake-up call to get spending under control, we don't know what is.

The Tab* Interest on National Debt: $194 billion Final Tab: $789.5 billion + $194 billion = $983.5 billion

What YOU Can Do Many believe our system is inherently broken. We think it can be fixed. As citizens and voters, we have to set a new agenda before the Presidential election. There are three things we need in order to prevent wasteful spending, according to the GAO's David Walker:

• Incentives for people to do the right thing.

• Transparency so we can tell if they've done the right thing.

• Accountability if they do the wrong thing.

Two out of three won't solve our problems.

So how do we make it happen? Demand it of our elected officials. If they fail to listen, then we turn them out of office. With its approval rating hovering around 11 percent in some polls, Congress might just start paying attention.

Start by writing to your Representatives. Talk to your family, friends and neighbors, and share this article. It's in everybody's interest.

The Most Criminal Class is Writing the Laws --- http://www.trinity.edu/rjensen/FraudRotten.htm#Lawmakers

"Ernst & Young Expands Its Commitment to Help Universities Prepare Students for IFRS," SmartPros, November 30, 2009 ---
http://accounting.smartpros.com/x68280.xml

Ernst & Young LLP has announced that the Ernst & Young Foundation will direct an additional US$1 million toward further development of IFRS curriculum and other resources to help the next generation of accounting professionals meet the fast-changing needs of global financial markets.

This new commitment expands the work of the Ernst & Young Academic Resource Center (EYARC), which was launched in the summer of 2008. The support from the Ernst & Young Foundation now totals US$2.5 million.

The EYARC brings together Ernst & Young professionals and university faculty to develop time-critical learning materials focused on International Financial Reporting Standards (IFRS). In June 2009, the EYARC released 24 modules of comprehensive, user-friendly IFRS curriculum designed to be flexible with any teaching style. The modules include a user guide, lecture notes, slides, examples, homework problems, illustrative disclosures, case studies and international spotlights developed specifically for university education levels based on real-world experiences of Ernst & Young professionals. In addition, this past summer the EYARC offered a live, national training session to academics and also participated in a variety of faculty educational conferences.

With the additional funding, the EYARC's development goals for the upcoming year include updating the technical content of the existing modules, expanding the coverage to include more judgment-based resources, and providing a principles-based pedagogical approach to the material. Audit and tax modules will be added to the curriculum as well and will include the impact of IFRS on these functions.

"The Obama administration's summer 2009 white paper on financial reform includes an unequivocal call for transparency and international convergence of accounting and financial reporting standards," notes Ellen Glazerman, Ernst & Young LLP, Executive Director of the Ernst & Young Foundation. "After a successful first year and tremendous interest from the faculty community, we are proud to announce additional funding toward IFRS education."

"Making an effort to maximize pedagogical flexibility, Ernst & Young's Academic Resource Center offers faculty extensive training and materials useful for developing IFRS curriculum at both the undergraduate and graduate levels," says Jennifer Blouin, Assistant Professor at the Wharton School of the University of Pennsylvania. "The class notes, cases and high level spotlights on convergence issues created by Ernst & Young's team of academics and practice professionals are invaluable."

The E&Y press release on this news --- Click Here

Neither of the above news items provides links to a new E&Y resource site that students can go to at the moment. One will probably be announced soon.

Some other alternatives for faculty and students are summarized at http://www.trinity.edu/rjensen/theory01.htm#MethodsForSetting

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

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

September 28, 2009 message from Ellen Glazerman, Ernst & Young LLP [ellen.glazerman@EY.COM]

The Ernst & Young Foundation has teaching materials for IFRS (developed by faculty). They are free and cover Intermediate I, II and Advanced Accounting. We will be developing more this year. It is free to anyone with a .edu address. You just need to email catherine.banks@ey.com and she will give you a password to access the material. It is set up to be used either as material to integrate into what you are currently teaching or as a stand-alone course. There are lecture notes, home work assignments, cases, etc. I hope you find it useful.

Please feel free to contact me directly if you have any additional questions.

Ellen

Bob and Francine Debate the 2010 Employment Outlook in CPA Firms

December 9, 2009 message from Francine McKenna [retheauditors@GMAIL.COM]

Unfortunately Bob, the public accounting firms are hiring less and less right now. And they are also cutting professionals at all levels, including those who have less than 2 years of experience and don't even have a CPA yet.

We may be stuck with the 150 hour requirement but we are not stuck with the way the audit firms and the schools look at how that requirement is going to be met. Are we sure the firms and other employers are still expecting the same things form the universities given this requirement and the challenges it presents for students?

Thanks to Linda, Amy, and Bob for input.

http://goingconcern.com/2009/12/are-new-graduates-getting-sque.php

Francene

December 10, 2009 reply from Bob Jensen

Hi Francine,

Firstly I don’t think the CPA firm employment outlook is all that bad unless the Supreme Court strikes down Sarbanes-Oxley (SOX) and the PCAOB. Perhaps the big firms are cutting back only temporarily in fear of  losing SOX. Losing SOX at this point in time would be a disaster for auditing in general since the loss of audit fees might well push firms over the brink where auditing profits are no longer sufficient to off set the risk of billion dollar lawsuits.

Until Wall Street managed to get SOX in front of the Supreme Court, the outlook for accounting graduates was much better than all other business school disciplines. There were other bright spots.

Accounting Majors in Demand
Even when the economy is down, there is room for top students in the profession.   The National Association of Colleges and Employers’ 2009 Student Survey found that, even though students in the class of 2009 were graduating with fewer jobs available, accounting majors are still in high demand. Accounting and engineering graduates were among those majors most likely to have already found jobs.   Accounting majors expect to earn an average starting salary of about $45,000, while engineering grads expect to earn $58,000.
Journal of Accountancy, July 2009 --- http://www.journalofaccountancy.com/Issues/2009/Jul/AccountingMajors.htm
 

Robert Half Survey Update --- http://www.rhi.com/GFEM
"Employment outlook grim in 2009, but not for accountants," AccountingWeb, January 15, 2009 ---
http://www.accountingweb.com/item/106818

"Global Employment Financial Monitor for 2009-2010" (free download from Robert Half) ---
http://www.rhi.com/GFEM

Executive Summary
The accounting and finance professions have not been immune to the effects of the global financial crisis. Two-thirds of hiring managers we surveyed said their accounting and finance departments have been affected by current economic conditions.

Yet, for many employers, good accountants are still hard to find. More than half of all respondents said they were having difficulty locating skilled job candidates, and financial professionals remain in short supply in parts of the world. Even where job candidates compete for relatively few open positions, many managers are concerned about losing their most valuable team members to other job opportunities.

As positions are consolidated and fewer new employees added, financial professionals are taking on more work and experiencing increased stress. In response, managers are taking steps to help their employees remain motivated and productive, survey results show.

The hiring process is taking longer today, in part due to budget constraints but also because companies feel they can be more selective. When hiring at the executive level, businesses seek leaders with the industry experience and initiative necessary to seize any possible competitive edge.

Manpower Survey Guide Issue 75 ---
http://www.accountingweb.com/item/96782

 

The small business outlook is indeed grim and that reverberates to accounting firm business and employment needs, but there are signs that the Obama Administration may pull out the stops to boost the small business economy. But don't hold your breath for success of a small business surge --- http://www.accountingweb.com/item/95831

In my estimation, hiring of entry level graduates will surge ahead unless the Supreme Court destroys the entire auditing profession.

Bob Jensen

Bob Jensen's threads on careers and employment are at
http://www.trinity.edu/rjensen/BookBob1.htm#careers

 

Supreme Court Justices Express Skepticism Concerning Constitutionality of PCAOB (December 7, 2009, Note the Date) ---
http://www.jenner.com/files/tbl_s69NewsDocumentOrder/FileUpload500/6993/PCAOB v  Free Enterprise Fund.pdf

Jensen Comment
It will be very sad for the auditing profession and accountancy academe if the PCAOB is killed and buried. Industry and its friends at the WSJ have been trying for most of this decade to eliminate huge amounts of auditing fees by killing off Sarbanes-Oxley legislation (SOX).

What happens to the audit firms when it's no longer a profitable service without eliminating virtually all substantive testing?

We may start hearing from Bob Elliott all over again about how to supplement declining audit revenue --- http://www.journalofaccountancy.com/Issues/1999/Nov/flemingl

What happens to entry-level hiring when substantive testing is cut way back and replaced with analytical review computer models?

Before We Put On Our SOX
By the 1990s, auditing services of CPA firms were becoming less and less profitable and professional. Auditing was viewed by clients as a necessary evil for which they were willing to accept the lowest bidder irrespective of audit quality. In fact for many companies like Enron, incompetent or "cooperative" auditing firms were sought after as preferred auditors. In order to cut costs of service, CPA firms either dropped auditing services or they replaced more and more substantive testing with inferior analytical reviews in auditing --- http://www.trinity.edu/rjensen/fraud001.htm#Professionalism 

Auditing firms were increasingly being sued for poor quality audit services --- http://www.trinity.edu/rjensen/fraud001.htm

This made auditing services even more risky and less profitable.

The auditing firms created expanding consulting services that bolstered profitability far more than auditing services. The AICPA promoted newer types of  assurance services such as WebTrust, SysTrust, Elder Care, etc. --- http://en.wikipedia.org/wiki/Assurance_services 

Whatever happened to the SysTrust seal of approval?

The AICPA promotions of assurance services peaked out when strong advocate Bob Elliott was President and Vice Chair of the AICPA. Bob even appeared in a special edition of the PBS television program Nightly Business Report on May 31, 1999 just before Enron and Worldcom commenced to melt down --- http://www.aicpa.org/pubs/cpaltr/jacpa.htm 

He always stressed how auditing was becoming less and less profitable and that expanded consulting/assurance services were essential for the survival of CPA firms.

Bob Elliott's best analogy in the 1990s was his comparison of the auditing industry with the railroad industry. He stressed how the railroads failed to adapt to newer forms of technology and transportation services (e.g., the likes of mergers with airlines, FedEx, UPS, etc.). His message was that, to avoid being like a failed railroad industry, auditing firms had to change with technology and exploit the auditing firms' major asset --- a reputation for integrity.

Sadly, the reputation for integrity of auditing firms took a huge hit at the dawn of the 21st Century. It was revealed how the auditing firm of Andersen was earning as much from consulting in Enron as it was from auditing. Andersen was in fact auditing systems that it helped install, including Enron's felonious SPEs. You can view one of the thousands of these fraudulent SPEs at http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm

You can read about the Enron and Worldcom scandals at http://www.trinity.edu/rjensen/FraudEnron.htm  

The entire can of worms in auditing services became more and more public in courts across the United States --- http://www.trinity.edu/rjensen/fraud001.htm 

The poor services of auditing firms became a focal point in the U.S. Congress when equity markets appeared of the verge of collapse due to fear and distrust of the financial reporting of corporations dependent upon equity markets for capital. The Roaring 1990s burned and crashed. In a desperation move Congress passed the Sarbanes-Oxley Act (SOX) of 2002 --- http://en.wikipedia.org/wiki/Sarbanes-Oxley_Act 

SOX was a shot in the arm for the auditing industry. SOX forced the auditing industry to upgrade services with SOX legal backing that doubled or even tripled or quadrupled fees for such services. Clients continue to grumble about the soaring costs of audits, but in my opinion SOX was a small price to pay for saving our equity capital markets.

Now in 2009 the Supreme Court may force the auditing profession to take its SOX off and do cheap audits.

Welcome back Kotter;
Welcome back Chewco --- http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm
Welcome back Andy (I think he will be out in 2012)

NASBA will rev up the CCE, Certified Cognitor Examination --- Click Here
Also at http://www.cs.trinity.edu/~rjensen/temp/CognitorXYZElliott.htm 

December 10, 2009 reply from Francine McKenna [retheauditors@GMAIL.COM]

Hi Bob,

You are buying the hype.  I have thousands of comments on my blog because the firms are cutting. Students are panicked.  Less internships, less offers to interns, less interviews to those who didn't intern (or more often none) and delays on start dates.

The Sarbanes-Oxley gravy days have ben over for two years, since AS% kicked in.  Clients have taken upper hand and asked firms to cut or at least not grow audit fees. There has been no replacement for SOX revenue, especially given delays in IFRS and XBRL.

Sorry, but the stories about strength of accounting hiring and stability of the profession in the public accounting firms is all PR.

MOST COMMENTED POSTS

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Please don't misunderstand me... I am not pessimistic about the accounting profession. It's my profession. I would not keep writing about it if I was not optimistic that by bringing issues to light they can be addressed positively.

I am pessimistic about the large public accounting firm business model. I don't think it's viable anymore and does not protect shareholders.

With regard to data about hires and hiring outlook, both AICPA and Robert Half have a vested interest in saying everything is going to be fine. Robert Half is a publicly traded staffing company focusing on accounting and finance temporary placement. Their clients (and their recruits) are accounting and finance professionals. If they admit the market for accounting professionals is in the toilet or going there, they admit their own business outlook is dismal.

I hope that public accounting hiring is not same or greater in 2010 than this year. And that's sad all the way around. Unless the economy improves dramatically overnight, I think we have a ways to go before we start seeing anyone truly optimistic about business prospects. If the public accounting firms, the largest ones, hire as many or more graduates they will keep cutting experienced staff as they have been doing for the east eighteen months at least. For Deloitte it's been longer. And they are still cutting, even over the holidays.

The anomaly of the mid size regional firms seeing growth now is interesting and true. I have seen it. It's a subject for another note.

I would have said two years ago that my info was more anecdotal. But given the traffic to the blog and the number of comments and the same info coming in at the other publication I write for, Going COncern, I think significant "layoffs" are a stark reality. The info I have about cuts may be biased, but it's true. The firms are balancing their bad forecasting about how long Sarbanes would last, and how quickly they would replace it with IFRS and XBRL work, on the backs of their experienced staff. They are substituting experienced staff with lower priced college recruits.

The public accounting staffing supply chain from the universities to the firm is a two-three year process. The firms have a hard time turning off the spigot when business turns down because of the commitments they have already made to students one or two years prior beginning with the internship. They also care deeply about the university relationships. And they may start up the assembly line before the economy fully recovers because it take two to three years starting with an offer of an internship for a student to be a finished product ready for full time work and even longer to be certified. They would rather keep cheaper staff resources coming in at the new graduate level and work leaner than have an over abundance of more expensive experienced staff and people unassigned and eating into partner payouts. That's just the way the for-profit, multinational pseudo corporate style accounting firms work.

December 11, 2009 reply from Bob Jensen

Very nice reply Francine.

I agree with most points, although I’ve no reason to suspect Robert Half of making up phony survey answers from over 200,000 respondents around the world.

And I’ve no reason to suspect the Bureau of Labor Statistics for phony data that rates the prospects for growth in accounting jobs to be better than the average for all other job categories. The BLS, however, is looking at all sizes of accounting and auditing firms and is less skewed toward the large international accounting firms. Indeed the hope for the future may lie in the smaller and medium size firms as the courts bury the large firms in the sub-prime mortgage lawsuits. Also the BLS is not focusing only on entry-level opportunities for new graduates.

Anecdotal still remains anecdotal if it is not a more formalized study. Your correspondents might in fact be a biased subset if they seek you out when knowing your biases. Polls vary when they favor some sectors over other sectors even if the favoritism is not intentional.

I do hate to see the big firms suffer, because they are nearly all of our hope for those entry-level jobs for top accounting graduates. I am proud of the big firms for being rated the “best places to launch a career” --- even ultimately an academic career since most doctoral programs want applicants to have professional experience.

Big Four Firm Get Top Spots in Business Week's “2009 Best Places To Launch A Career, The Big Four Alumni Blog, September 10, 2009 --- http://www.bigfouralumni.blogspot.com/

BusinessWeek just released its 2009 rankings of its much-anticipated “2009 Best Places To Launch A Career” list and for a second year, Big Four firms completely dominate the list, capturing the top four spots in the rankings. This year, only 69 companies made the list compared to 119 in 2008 due to more stringent criteria, making the 2009 list “both more exclusive and more competitive.” Thus, this year, there was more relative competition to make the list and this year’s rankings are at least 40% tougher than the previous year.

Deloitte, Ernst & Young, PricewaterhouseCoopers and KPMG are respectively ranked 1st to 4th on the list, beating out such leading contenders as Google (not even ranked), Goldman Sachs (2009 rank 6, 2008 rank 4), General Electric (2009 rank 16), Booz Allen Hamilton (2009 rank 63) and Microsoft (2009 rank 18).

Other notables associated with the Big Four firms are Accenture (2009 rank 11, up an astonishing 36 ranks from 2008 rank 47), Protiviti (2009 rank 49, remarkably up 46 ranks from 2008 rank 95).

Two of the Big Six Accounting firms also make the list. Grant Thornton (2009 rank 51, 2008 rank 76) and RSM McGladrey Pullen (2009 rank 66, 2008 rank 104).

Continued in article

Last year's rankings were similar --- Click Here
http://bigfouralumni.blogspot.com/search/label/Best Places to Launch a Career

Your comments are well stated with respect to efforts of the large accounting firms to maintain relations with universities and to support the funding of programs and the placements of top graduates. Accounting would not be a popular major for top students on campus if graduates did not relatively have a better chance for launching careers than most other disciplines on campus.

On a relative basis accountancy schools are doing fairly well. Law schools are having a much more difficult time placing graduates, and surprisingly nursing graduates are having much more difficulty finding full-time jobs as hospitals are facing budget crises and nursing turnover rates declined (many nurses who want to retire to start families are now supporting unemployed or underemployed spouses, including one of our RN daughters in Wisconsin).

“Employment change. Employment of accountants and auditors is expected to grow by 18 percent between 2006 and 2016, which is faster than the average for all occupations. This occupation will have a very large number of new jobs arise, almost 226,000 over the projections decade. An increase in the number of businesses, changing financial laws, and corporate governance regulations, and increased accountability for protecting an organization’s stakeholders will drive growth.”
Bureau of Labor Statistics Job Outlook, 2008-2009 Edition ---
http://www.bls.gov/oco/ocos001.htm

I think most colleges are relying more on the long-term BLS outlook rather than the doom and gloom articles dated in the deep part of this recession.

Thanks Francine.
You’ve added a lot thus far to the AECM with some fresh ideas and observations.

Bob Jensen

December 11, 2009 reply from John Brozovsky [jbrozovs@VT.EDU]

As an academic and a father I would prefer the firms keep hiring the college grads and let go the 'more highly paid experienced staff'.  Getting that first job is clearly a harder hurdle than getting the next job.  Particularly the next job if you have big-4 on your resume.  We always used to bemoan the fact that everyone left the big-4 (5, 6, 8) on their own.  Evidently they are not leaving on their own now, probably because the economy appears to be in bad shape and job prospects weak, so the firms are pushing them out.

At the college level our graduates are having a bit harder time getting the job but most are still getting them. The main problem pool is international students.  We had to make some additional contacts to place an international student that had a 4.0 in an MBA program before moving over and getting a master's in accounting (no grades there yet-part of the problem with hiring in the fall of a one year program).  We placed him with a big 4 firm but in prior years this would not have required the extra effort.

John

December 11, 2009 reply from Francine McKenna [retheauditors@GMAIL.COM]

John,

I understand your preference and I would wish that things would be different for everyone.  But...

You're right that the attrition levels are very low right now in the largest firms.  People are staying because of the weak prospects outside.  I just Tweeted another article:

Securities Litigation Fears Escalate as Companies Cut Compliance and Internal Audit Staff from a group called Monadnock Research.  MR - Businesses have become more concerned about becoming a target of securities litigation, according to a recent study from Deloitte. Fueling this fear, 27.4 percent of respondents report losing headcount in the compliance and internal audit functions over the past 18 months. Individuals surveyed about which activities would reduce corruption and fraud risks, respondents cited more fraud awareness training (32.4 percent); expansion of internal audit monitoring procedures (23.1 percent); more robust fraud risk assessment (18.3 percent); and more oversight from the board and audit committee (7.5 percent). . . 

This is a subscription only publication but if you googled internal audit and compliance cuts you can find others with a similar trend described.

So the firms are pushing out "experienced" hires to continue to make room for lower cost new hires form the universities. Unfortunately, "experienced" is not what it used to be.  The industry accounting hire model is mostly based on getting fully trained Big 4 "experienced " professionals who leave of their own accord for better opportunities, with 4-10 years experience.  They were typically coming with their CPA, had been through several busy seasons and had led audits although maybe not yet promoted to Manager.  

Nowadays, staff are being cut with <1 year of experience all the way to pre-partner.  The staff with less than three years of experience are being asked in some cases to repay CPA signing bonuses and review course subsidies.  They may not yet have their CPA and they do not have enough experience to be considered "experienced" in the typical way industry had ben accustomed.  Industry and government are not prepared to take over where the large public accounting firms have left off. Where are the jobs now for someone with only 1-2 years experience in the Big 4?  They can not go to another firm since they are hiring only new grads and specific expertise at higher levels. Any ideas?  I get lots of mail and comments with that question?  Do any of the professors want to volunteer to answer my mailbag once a week? That would be a great blog feature:  Ask the Professor?  What Do I Do Now?

And the universities continue to allow the firms to come to campus and tout job opportunities, stability, and great working environments.  And the magazines still print that firms are best places to work or start your career even given the number of big firm employees suing for wrongful discharge and who swear they will never recommend the firm in their new company.  Yes, that always existed when someone left involuntarily, but now it exists in the thousands for each firm in a short amount of time. And the schools still pride themselves on their excellent placement.

Have the schools reopened placement centers to their accounting graduates who have been cut for the firms with less than three years experience? Have they adjusted their placement statistics?  If you say to me, "oh, they just could not cut it..." you will be wrong in most cases now.  The cuts at the firms have gone beyond performance.  Even the firms have admitted (at least Deloitte and KPMG) and made press releases about cuts being caused by the economy (and their own bad planning) not individual performance.

http://retheauditors.com/2008/08/29/update-deloitte-statement-on-layoffs/

Interesting you mention the international students.  Yes, the schools responded to the firms need for more and more graduates by bringing in more and more international students. As you can see, now the firms hardly ever sponsor visas. And when the cuts started at Deloitte, for example, two years ago, the international students were the first to be let go given the time and expense of maintaining their status. Many called me in mad scrambles to quickly find another sponsor and stay in the country. Most had to return to their "home" country.

http://retheauditors.com/2008/08/07/h1-bs-and-student-visas/

As Internal Audit Staffs Shrink, Will Fraud Rise?

A new study finds that compliance staffs haven't escaped layoffs, leaving companies more exposed to risk.
Kate O'Sullivan, CFO.com | US
December 10, 2009

Few corporate departments have been spared layoffs in recent months, and internal audit and compliance are no exceptions. According to a new poll by Deloitte Financial Advisory Services, 27% of executives reported reductions in these areas at their companies in the past 18 months, despite the fact that compliance experts and internal auditors were heavily recruited just a few years ago, in the wake of the Sarbanes-Oxley Act.

The implications for companies are worrisome. "We know that in a recessionary time, fraud risk and corruption risk rise, so there's a tension there," says Kerry Francis, chairman of Deloitte Financial Advisory Services. "You've got a decrease in compliance personnel, and in this economic environment there's pressure on employees and pressure on management — and that causes some people to do things that they shouldn't."

For those compliance staffers left behind, the role becomes more daunting. Particularly as companies cut travel budgets, the ability to do thorough site visits is limited, says Francis. "How does internal audit now execute their responsibilities?" she asks. "How can they be more strategic in their review and monitoring? There are lots of challenges facing the remaining personnel." More than ever, close coordination among internal audit, legal, and compliance personnel "is critical," she says.

Despite the reduction in compliance personnel, 50% of respondents to the Deloitte survey, who included CFOs, CEOs, board members, and middle managers in finance and risk management, said their compliance and ethics programs are strong. Another 36% said they are adequate. Many public companies and some private companies invested significantly in their compliance programs after the passage of Sarbox in 2002, notes Francis, and they may now feel confident that those programs are effective even with a reduced staff. But that confidence may not always be justified. "What seems to be slipping is the actual testing or review or active monitoring of transactions or behaviors," she points out. "That's the risk."

Companies may be able to offset some of the increased risk by setting a very strong ethical tone at the top. But CFOs will have to wait a few years to see whether highly visible ethical leadership can truly compensate for fewer compliance checks, as much of the fraud being committed today won't come to light for years. The average Securities and Exchange Commission fraud case today spans seven years from the beginning of an alleged scheme to settlement or litigation, says Francis.

Francine

An Upbeat Accounting Recruitment Message in a Down Economy
December 10, 2009 reply from David Fordham, James Madison University [fordhadr@JMU.EDU]

Francine, Ed, Bob, et al:

Also completely anecdotal but on the other side of the coin:

I have no knowledge or evidence about audit fees, firm profits, or even demand for audit services, since I've been way too busy to spend time with recruiters this semester. But based on what my colleagues are telling me, the cold air has not seeped down to us yet.

We had more firms at our "meet the firms" night last month than we've ever had before (56). The number of organizations who recruited accounting majors here set a new school record (66). Our percentage of May grads who have job offers already (74%)is exactly the same as it was this time last year, which was up about 5% before the year before and up 8% from the year before. The actual COUNT of grads who are graduating and who have jobs is up about 5% over last year. We haven't yet run our salary survey (to my knowledge) but from the scuttlebutt in talking with students, the starting salaries for our grads haven't dropped noticeably, if at all. I still have firms calling me begging to be guest speakers for my classes, which means they apparently still have time to spend a day driving over here to class, and still have money enough to spend the night and go to a basketball game or something.

We graduate around 120 accounting BBA's per year, and about 75-80 MSA grads each year (almost all of whom were accounting BBA's the year before). The bachelor number has been relatively steady the past few years, but the MSA enrollment has quadrupled over the last 3-4 years as the Virginia 150-hr kicked in a couple years ago.

Regarding curriculum, we too have moved several courses from the undergrad to the grad level, and our undergrad accounting degree no longer has sufficient accounting hours to meet the 30-hour minimum to sit for the exam in Virginia. Students not going for the MSA have to add the CIS minor to get their 150 hours -- and that minor includes an accounting technology course which puts them over the 30-hour accounting hurdle. But those who can get in (minimum GPA, GMAT hurdles, etc.) all go into the Masters program.

The masters program not only has some accounting courses that used to be undergrad, it also has the original pioneering Becker Boot-Camp (totally non-credit) starting the week after graduation. With the Becker boot camp, we are now in the top ten first-time pass-rates on the Exam. Since practically all our MSA's go into public accounting, the arrangement has been a boon to the students. Practically all of them have the course paid for by their employer after passing the exam.

Again, we are probably not typical. The only way we know the economy is down is that our salaries remain frozen after several years, our travel was frozen and while unfrozen now, remains under heavy restrictions, and my computer is now more than five years old. Fortunately, donations are up, so I still plan to be at the AAA-IS next month.

Of course, I have to admit, about 2/3rds of our market is Big Four in the Washington/Baltimore area which may be totally atypical to the rest of the world. But most (>90%) of our grads start in public accounting (Big 4, second tier, and a sprinkling of smaller firms), with almost all of the remainder going to government (the GAO, Secret Service, DoD, and Dept of Justice all have more offers out to our students this year than last, and are far more aggressive about trying to get their reps in front of the students than they have ever been in the past).

Purely anecdotal, and quite likely atypical, but from our unusual vantage point, accounting is still strong. We have no shortage of students wanting to major in accounting. Because we remain under a hiring freeze, we have had to manage enrollments by increasing our minnimum GPA to declare the major, and are implementing an entrance exam to enroll in intermediate.

David Fordham
James Madison University

Mary, Mary not so contrary about the new financial regulations passed by the House (in spite of the WSJ lament):
"SEC Chairman Schapiro Statement on House-Passed Financial Regulatory Reform Legislation," SEC News Release, December 11, 2009 ---
http://www.sec.gov/news/press/2009/2009-263.htm 

"They Weren’t There: Auditors And The Financial Crisis," by Francine McKenna, re: The Auditors, December 7, 2009 ---
http://retheauditors.com/2009/12/07/they-werent-there-auditors-and-the-financial-crisis/

 

“When the power brokers of the business world meet, the accountants are never far behind.

While other industries have downsized through the turmoil of the financial crisis, the “Big Four” accounting firms — PricewaterhouseCoopers, KPMG, Deloitte Touche Tohmatsu, and Ernst & Young — will end the year with more employees than before the crisis started.  Despite a rocky decade that included the Enron scandal — whose accounting shenanigans also took down Arthur Andersen, then one of the world’s largest accounting firms — and the financial crisis, the accounting industry has emerged stronger than ever before.

“When I called the CEO of one of our very large clients in the U.S. — it would be inappropriate to tell you who — there was a time when you would call them and his secretary would say, ‘he’s very busy, he’s tied up in a meeting,’ ” said James Quigley, CEO of Deloitte. “What they say now is, ‘he’s on the plane right now — would you like me to patch you through?”

CNN’s Kevin Voigt from the APEC Conference November 12, 2009

Oh really?

Fellow bloggers Adrienne Gonzalez and Caleb Newquist have already ripped up this CNN interview.  We are all embarrassed for this journalist.  He listened to a bunch of horse manure orchestrated by the audit firms’ public relations flacks and they published it with no verification, challenge, or context.

That’s the other “expectations gap” we face as journalists when trying to add an independent, objective, and inevitably critical voice to the story of the accounting industry.  If a journalist doesn’t cover the audit firms and the business of accounting on a regular basis, they “expect” accounting industry stories to be boring and maybe a little tedious or hard to understand.  They also “expect” it to be difficult to verify numbers, statistics, and trends about the revenues, profits, and headcounts of the largest audit firms. So… Maybe they take their word for it.  After all, they’re accountants. (It’s sadly true that there’s a dearth of publicly available financial information about the audit firms, especially in the US.)

But I was struck, actually flabbergasted, by the fat head remark above from Jim Quigley of Deloitte. He claims that big-time CEOs answer his phone calls these days. Exactly what is the CEO of Deloitte Touche Tohmatsu,  Deloitte’s global, non-auditing, “coordinating” umbrella firm doing calling CEOs about anything important nowadays?  Seems like meddling to me. Deloitte, in particular, has a lot fewer clients to call these days anyway. Maybe instead of the CEO of the global firm calling, the local partners should have shown some spine, such as with Bear Stearns and Washington Mutual?

I’ve been writing about the subprime crisis, the one that morphed into the financial crisis, since 2007.  My first post to mention subprime was March 14, 2007.  In that post, discussing KPMG and New Century, I talked about something that even the esteemed short David Einhorn missed: Repurchase risk was not being disclosed.  I’m still writing about repurchase risk and the banks are still obfuscating it with the acquiescence of their auditors.

Continued in article

"Ernst & Young Prevails in $140 Million Case Brought by Frontier Creditors Trust Andrew Longstreth," The American Lawyer, December 14, 2009 --- http://www.law.com/jsp/article.jsp?id=1202436290441&rss=newswire&utm_source=twitterfeed&utm_medium=twitter

When the creditors of bankrupt companies draw up lists of litigation targets, auditing firms are often right there at the top. So it was for the creditors trust of the bankrupt insurer, Frontier Insurance Group. The trust, represented by John McKetta III of Graves Dougherty Hearon & Moody, alleged that Ernst & Young underestimated the reserves Frontier needed to hold, making the company look healthy when it was actually insolvent. It claimed $140 million in damages, plus interest.

But E&Y decided to make a stand. It refused to chip up, and instead headed for a jury trial before White Plains, N.Y., federal district court Judge Cathy Seibel. On Wednesday, after 12 days of trial, jurors needed only two hours to exonerate the auditor.

"This case shows that E&Y is willing to go to trial in a case it believes has no merit, even where the threatened damages are substantial," said Ernst & Young's outside counsel, Dennis Orr of Morrison & Foerster. Orr told us that Ernst & Young hopes other potential litigants get the message.

Trust counsel McKetta said no decision had been made about the trust's next move in the case. But he was gracious in defeat, complimenting Seibel, the jury, and even the team at Morrison & Foerster. "They did a terrific job," McKetta said.

Ernst & Young stomps on a "vexatious litigant pursuing clearly frivolous claim."
"E&Y has AOL-Time Warner case thrown out," by Paul Grant, Accountancy Age, December 1, 2009 ---
http://www.financialdirector.co.uk/accountancyage/news/2254203/y-aol-warner-case-thrown

Ernst & Young is finally in the clear over its role in the controversial 2001 AOL-Time Warner merger after the last of hundreds of lawsuits was dismissed in New York yesterday (30 Nov).

District judge Colleen MacMahon granted the Big Four’s motion to dismiss the 2003 lawsuit brought by AOL shareholder Dominic Amorosa as the time limit for securities fraud cases had expired and the cases had failed to connect the statements made by the auditor to stock losses.

Amorosa had accused E&Y of approving false and misleading financial statements and concealing AOL’s improper methods of booking online advertising revenue. E&Y claimed Amorosa, who dropped out of a class action lawsuit to file his own case, was a “vexatious litigant pursuing clearly frivolous claims”.

Bob Jensen's threads on E&Y litigation are at http://www.trinity.edu/rjensen/fraud001.htm

"EY Settles SEC Charges Re: Bally’s Fraud-Lives To Audit Another Day," by Francine McKenna, re: The Auditors, Decenber 17, 2009 ---
http://retheauditors.com/2009/12/17/ey-settles-sec-charges-re-ballys-fraud-lives-to-audit-another-day/

Rueters News Item via Forbes --- http://retheauditors.com/2009/12/17/ey-settles-sec-charges-re-ballys-fraud-lives-to-audit-another-day/

 Ernst & Young has agreed to pay $8.5 million to settle civil charges that it violated accounting rules in connection with a fraud at Bally Total Fitness Holding Corp, the U.S. Securities and Exchange Commission said Thursday.

The SEC accused the accounting firm of issuing unqualified audit opinions that said that Bally's 2001 and 2003 financial statements conformed with U.S. accounting rules.

Continued in article

Francine's Commentary ---
http://retheauditors.com/2009/12/17/ey-settles-sec-charges-re-ballys-fraud-lives-to-audit-another-day/

“These opinions were false and misleading,” the SEC said in a statement.

“Ernst & Young has agreed to pay $8.5 million to settle civil charges that it violated accounting rules in connection with a fraud at Bally Total Fitness Holding Corp, theU.S. Securities and Exchange Commission said Thursday.

The SEC accused the accounting firm of issuing unqualified audit opinions that said that Bally’s 2001 and 2003 financial statements conformed with U.S. accounting rules.

Six of the accounting firm’s current and former partners also agreed to settle SEC accounting violation charges as part of this investigation, the SEC said.

In settling the allegations, Ernst & Young and the former and current partners did not admit to any wrongdoing, the SEC said.

“These settlements allow us and several of our partners to put this matter behind us and resolve issues that arose more than five years ago,” Ernst & Young said.”

What none of the stories that just hit tell you, though, is that at least two of the EY partners charged, Fletchall and Sever, held leadership positions with the AICPA in the past.

Three of the partners were members of EY’s leadership team/national office, giving advice, guidance, and making decisions about accounting standards on behalf of engagement teams nationwide.

Did Mr. Fletchall get off with a slap on the wrist given his AICPA leadership position, AICPA PAC contributions and significant campaign contributions to Senator Christopher Dodd? Mr. Fletchall is used to telling the SEC what it should do. Quite used to it.

EY can put an old case behind them… Yes, of course, since it’s December of 2009 and it’s taken the SEC six years to resolve a case from 2001-2003. No wonder the firms’ answer to any settlement or disciplinary proceeding is always, “that’s in the past.”

EY had independence issues recently and was supended from taking on new audit clients for six months. How many strikes does a firm get? Why no strong statement, sanction or other disciplinary action from the PCAOB for the partners or the firm in relation to this case? Maybe because Mr. Fletchall was also a member of the PCAOB’s Standang Advisory Group.

This case points out the long-tail impact of a bad audit, in causing distress to accounting firms, many years after the audit has been completed. And we don't think this is the end of the affair, there are a lot of other pending accounting investigations with the SEC, Huron Consulting for example, and the outcomes for firms convicted of wrong doing are going to be high. The SEC is just emerging itself from getting a bad rap in the Madoff affair, so may be getting a little more aggressive and assertive than in previous years. Also investors would hope for drastic changes in the audit process of accounting firms, if the firms’ integrity as ultimate protectors of investors’ interests has to be fully and firmly re-established.
"Big Ernst and Young Settlement on Bally Fitness, Large Implications," Big Four Blog, December 18, 2009 ---
http://bigfouralumni.blogspot.com/2009/12/big-ernst-and-young-settlement-on-bally.html

Bob Jensen's threads on E&Y litigation ---
http://www.trinity.edu/rjensen/fraud001.htm#Ernst

Will the big international auditing firms survive the subprime mortgage litigation ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Auditors

Where were the auditors?
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms 

The lead article in the November 2009 issue of The Accounting Review is like a blue plate special that differs greatly from the usual accountics offerings on the TAR menu over the past four decades. TAR does not usually publish case studies, field studies, or theory papers or commentaries or conjectures that do not qualify as research on testable hypotheses or analytical mathematics. But the November 2009 lead article by John Dickhout is an exception.

Before reading the TAR tidbit below you should perhaps read a bit about John Dichaut at the University of Minnesota, apart from the fact that he's an old guy of my vintage with new ideas that somehow leapt out of the accountics publishing shackles that typically restrain creative ideas and "search" apart from "research."

"Gambling on Trust:  John Dickhaut uses "neuroeconomics" to study how people make decisions," OVPR, University of Minnesota --- 

On the surface, it's obvious that trust makes the economic world go round. A worker trusts that he or she will get paid at the end of the week. Investors trust that earnings reports are based on fact, not fiction. Back in the mid-1700s, Adam Smith-the father of economics-built portions of his theories on this principle, which he termed "sympathy." In the years since then, economists and other thinkers have developed hundreds of further insights into the ways that people and economies function. But what if Adam Smith was wrong about sympathy?

Professor John Dickhaut of the Carlson School of Management's accounting department is one of a growing number of researchers who uses verifiable laboratory techniques to put principles like this one to the test. "I'm interested in how people make choices and how these choices affect the economy," says Dickhaut. A decade ago, he and his colleagues developed the trust game, an experiment that tracks trust levels in financial situations between strangers. "The trust game mimics real-world situations," he says.

Luckily for modern economics-and for anyone planning an investment-Dickhaut's modern-day scientific methods verify Adam Smith's insight. People tend to err on the side of trust than mistrust-are more likely to be a little generous than a little bit stingy. In fact, a basic tendency to be trusting and to reward trustworthy behavior may be a norm of human behavior, upon which the laws of society are built. And that's just the beginning of what the trust game and the field of experimental economics can teach us.

Trust around the world

Since Dickhaut and his co-authors first published the results of their research, the trust game has traveled from the Carlson School at the University of Minnesota all the way to Russia, China, and France. It's tested gender differences and other variations.

"It's an experiment that bred a cottage industry," says Dickhaut. Because the trust game has proved so reliable, researchers now use it to explore new areas. George Mason University's Vernon Smith, 2002 Nobel Laureate for his work in experimental economics, used the trust game in some of his path-breaking work. University of Minnesota researcher and Dickhaut co-author Aldo Rustichini is discovering that people's moods can be altered in the trust games so that participants become increasingly organized in their behavior, as if this can impact the outcome. This happens after the participants are repeatedly put in situations where their trust has been violated.

Although it's too soon to be certain, such research could reveal why people respond to troubled times by tightening up regulations or imposing new ones, such as Sarbanes-Oxley. This new research suggests that calls for tighter rules may reveal more about the brain than reduce chaos in the world of finance.

Researchers who study the brain during economic transactions, or neuroeconomists, scanned the brains of trust game players in labs across the country to discover the parts of the brain that "light up" during decision-making. Already, neuroeconomists have discovered that the section of the brain investors use when making a risky investment, like in the New York Stock Exchange, is different than the one used when they invest in a less risky alternative, like a U.S. Treasury bill.

"People don't lay out a complete decision tree every time they make a choice," Dickhaut says. Understanding the part of the brain accessed during various situations may help to uncover the regulatory structures that would be most effective-since people think of different types of investments so differently, they might react to rules in different ways as well. Such knowledge might also point to why behaviors differ when faced with long- or short-term gains.

Dickhaut's original paper, "Trust, Reciprocity, and Social History," is still a hit. Despite an original publication date of 1995, the paper recently ranked first in ScienceDirect's top 25 downloads from the journal Games and Economic Behavior.

Risky business

Dickhaut hasn't spent the past 10 years resting on his laurels. Instead, he's challenged long-held beliefs with startling new data. In his latest research, Dickhaut and his coauthors create lab tests that mimic E-Bay style auctions, bidding contests for major public works projects, and others types of auctions. The results may be surprising.

"People don't appear to take risks based on some general assessment of whether they're risk-seeking or risk-averse," says Dickhaut. In other words, it's easy to make faulty assumptions about how a person will respond to risk. Even people who test as risk-averse might be willing to make a risky gamble in a certain type of auction.

This research could turn the evaluation of risk aversion upside down. Insurance company questionnaires are meant to evaluate how risky a prospective client's behavior might be. In fact, the questionnaires could simply reveal how a person answers a certain kind of question, not how he or she would behave when faced with a risky proposition.

Bubble and bust, laboratory style

In related research, Dickhaut and his students seek that most elusive of explanations: what produces a stock-market collapse? His students have successfully created models that explain market crash situations in the lab. In these crashes, brokers try to hold off selling until the last possible moment, hoping that they'll get out at the peak. Buyers try to wait until the prices are the lowest they're going to get. It's a complicated setting that happens every day-and infrequently leads to a bubble and a crash.

"It must be more than price alone," says Dickhaut. "Traditional economics tells us that people are price takers who don't see that their actions influence prices. Stock buyers don't expect their purchases to impact a stock's prices. Instead, they think of themselves as taking advantages of outcomes."

He urges thinkers to take into account that people are always trying to manipulate the market. "This is almost always going to happen," he says. "One person will always think he knows more than the other."

Transparency-giving a buyer all of the information about a company-is often suggested as the answer to avoiding inflated prices that can lead to a crash. Common sense says that the more knowledge a buyer has, the less likely he or she is to pay more than a stock is worth. Surprisingly, Dickhaut's findings refute this seemingly logical answer. His lab tests prove that transparency can cause worse outcomes than in a market with poorer information. In other words, transparent doesn't equal clearly understood. "People fail to coordinate understanding," explains Dickhaut. "They don't communicate their expectations, and they might think that they understand more than they do about a company."

Do stock prices balloon and crash because of genuine misunderstandings? Can better communication about a stock's value really be the key to avoiding future market crashes? "I wish you could say for sure," says Dickhaut. "That's one of the things we want to find out."

Experimental economics is still a young discipline, and it seems to raise new questions even as it answers old ones. Even so, the contributions are real. In 2005 John Dickhaut was awarded the Carlson School's first career research award, a signal that his research has been of significant value in his field. "It's fun," he says with a grin. "There's a lot out there to learn."

Reprinted with permission from the July 2005 edition of Insights@Carlson School, a publication of the Carlson School of Management.

 

"The Brain as the Original Accounting Institution"
John Dickhaut
The Accounting Review 84(6), 1703 (2009) (10 pages)
TAR is not a free online journal, although articles can be purchased --- http://aaahq.org/pubs.cfm

ABSTRACT:
The evolved brain neuronally processed information on human interaction long before the development of formal accounting institutions. Could the neuronal processes represent the underpinnings of the accounting principles that exist today? This question is pursued several ways: first as an examination of parallel structures that exist between the brain and accounting principles, second as an explanation of why such parallels might exist, and third as an explicit description of a paradigm that shows how the benefits of an accounting procedure can emerge in an experiment.

The following are noteworthy in terms of this being a blue plate special apart from the usual accountics fare at the TAR Restaurant:

• There are no equations that amount to anything beyond a seventh grade algebra equation.
   
• There are no statistical inference tests, although much of the discussion is based upon prior experimental models and tests.
   
• The paper is largely descriptive conjecture by brain analogy.
   
• I view this paper as a commentary even though the current Editor of TAR declared he will not publish commentaries.
   
• The paper goes far back in history with the brain analogy.
   
• To date the TAR Editor has not been fired by the AAA Accountics Tribunal for accepting and publishing this commentary that is neither empirical nor advanced mathematical analysis. However, you must remember that it's a November 2009 edition of TAR, and I'm writing this tidbit in late November. Thunder and lightning from above could still wipe out Sarasota before the year end.
   
• The paper is far out in the conjectural ether. I think John is lifting the brain metaphor to where the air is thin and a bit too hot for me, but perhaps I'm an aging luddite with a failing brain. I reached my limit of the brain analogy in my metacognitive learning paper (which is also brain conjecture by analogy) ---
  http://www.trinity.edu/rjensen/265wp.htm
  Professor Dickhaut presents a much wider discussion of all parts of the brain. My research never went beyond the tiny hippocampus part of the brain.

John was saved from the wrath of the AAA Accountics Tribunal by also having an accountics paper (with complicated equations) published in the same November 2009 edition of TAR.
"Market Efficiencies and Drift: A Computational Model"
John Dickhaut and Baohua Xin
The Accounting Review 84(6), 1805 (2009) (27 pages)

Whew!
Good work John!

Question
What are the two manufacturing models (old versus new) attributed to Japanese creativity?

Hint
The older creative model is sometimes called the Kanban Model. Instead of having a linear manufacturing model invented by Henry Ford, the "line" is really a grouping of U-shaped work stations containing something where workers are trained to take over for each other on any work station inside the U. Hence a special feature is that there is less likely to be a major slow down at bottlenecks in Henry Ford's original line. The U-Shaped stations are often grouped in parallel lines to reduce the bottleneck risk even further.

The Japanese model also consisted of the concept of Just-In-Time inventory in which the raw material needed for production arrives at the plant, in theory, at the instant it is needed on the line. Hence huge cushions of raw material are no longer needed --- http://en.wikipedia.org/wiki/Just-in-time_(business)
However, JIT does not always work as well in the U.S. as it does in Japan. Firstly, the suppliers and buyers of raw materials are much more closely related in Japan's virtual men's club of business systems. Secondly, Japan is much smaller than the United States and has a much, much more efficient freight train service that overcomes trucking road jams. Manufacturers have much greater trust that raw materials really will arrive on schedule.

The JIT system, if successful, changes cost accounting as well as costs themselves. The costs of carrying inventory (especially financing costs) are almost eliminated.

But the Kanban is much, much more ---
http://en.wikipedia.org/wiki/Kanban

The Kanban is also important because it led to innovations in cost accounting and managerial accounting in general. Most importantly the Japanese were innovative in accounting for the costs of poor quality or quality control breakdowns.

The "new" Japanese manufacturing model is featured in the case below:

Teaching Case
From The Wall Street Journal Accounting Weekly Review December 3, 2009

Sharp's New Plan Reinvents Japan Manufacturing Model
by Daisuke Wakabayashi
Dec 01, 2009
Click here to view the full article on WSJ.com

TOPICS: Cost Accounting, Fixed Costs, Just-In-Time Inventory Management

SUMMARY: In Sakai city, Sharp has just opened, six months early, the most expensive manufacturing site ever built in Japan. "Even Sharp...acknowledged that the company only gave the green light to proceed during a boom period for LCD-panel demand, and that a similar choice might not be made in today's market." Two factors are expected to reduce costs of operations at the site: One is the size of the glass used to make the LCDs. Sharp is using the industry's biggest...which allow the company to produce 18 40-inch LCD panels from a single substrate-more than double the eight 40-inch panels per sheet it uses at its other LCD television panel-making factory. The other factor: Sharp has [moved] suppliers on site [in] a kind of hyper-"just-in-time" delivery system."

CLASSROOM APPLICATION: The article can be used to cover just in time and other manufacturing cost issues in management or cost accounting.

QUESTIONS: 
1. (Introductory) What is the Japanese manufacturing model referred to in the headline?

2. (Advanced) In general, how do just-in-time systems help to save costs in any manufacturing facility?

3. (Introductory) How has this model been changed by the factory built by Sharp? Why does the author call it a "hyper-'just-in-time' delivery system?

4. (Advanced) What savings from economies of scale, besides the just-in-time system, are Sharp executives hoping to obtain from the new manufacturing plant?

5. (Advanced) What risks are evident in Sharp's decision to invest in technology in Japan rather than spend funds on labor elsewhere? In your answer, comment on the risks of high fixed costs in economic downturns.

Reviewed By: Judy Beckman, University of Rhode Island

"Sharp's New Plan Reinvents Japan Manufacturing Model," by Daisuke Wakabayashi, The Wall Street Journal, December 1, 2009 --- http://online.wsj.com/article/SB10001424052748704498804574559820344775310.html?mod=djem_jiewr_AC

Sharp Corp.'s new production complex in western Japan is massive by any measure: It cost $11 billion to build and covers enough land to occupy 32 baseball stadiums. But it carries a meaning as large as its physical size. It's a litmus test for the future of Japanese high-tech manufacturing.

The facility, considered the most expensive manufacturing site ever built in Japan, started churning out liquid-crystal display panels last month, and Sharp's new flagship televisions featuring the energy-efficient LCD panels go on sale in the U.S. next month. Sharp moved forward the factory's planned opening by six months, saying the new plant would help it be more competitive.

"When you look to the next 10 or 20 years, the existing industrial model doesn't have a future," Toshihige Hamano, Sharp's executive vice president in charge of the Sakai facility, said in an interview. "We had to change the very concept of how to run a factory."

Located in Sakai city along Osaka prefecture's waterfront, the complex represents Japanese industry's biggest gamble in LCD panels to remain competitive with rivals from South Korea, Taiwan, and China.

The factory's size accommodates two main factors. One is the size of the glass used to make the LCDs. Sharp is using the industry's biggest, or "10th generation," sheets, which allow the company to produce 18 40-inch LCD panels from a single substrate—more than double the eight 40-inch panels per sheet it uses at its other LCD television panel-making factory.

The other factor: Sharp has decided to try and cut costs by moving suppliers on site, a kind of hyper-"just-in-time" delivery system.

The plant currently employs 2,000 people—roughly half from Sharp and half from its suppliers—although the work force will ultimately reach 5,000 as it adds production of solar panels as well.

It remains to be seen whether it makes sense for Sharp to keep seeking ever more-sophisticated production in Japan, or, as competitors have, to simply use less advanced production techniques at lower costs in places like China.

CLSA research analyst Atul Goyal warned in a report last month that the company is making a mistake by "chasing technology" with the new factory.

In the past, such efforts by Japanese electronics makers have resulted in costly capital investments, only to be confronted with limited appetite for cutting-edge technology and then eventually outflanked by a cheaper alternative.

Even Sharp's Mr. Hamano acknowledged that the company only gave the green light to proceed during a boom period for LCD-panel demand, and that a similar choice might not be made in today's market.

Rival Samsung Electronics Co. has said it is looking into building a new LCD-panel factory using even bigger glass sheets than Sharp, while LG Display Co. has said it plans to build a new factory in China using current glass size.

Sharp announced the Sakai project two years ago when LCD demand was surging and the company had produced five straight years of record profit. When consumer spending ground to a halt in late 2008, Sharp didn't cut costs and curb production quickly enough. Saddled with excess inventory, Sharp posted the first annual loss in nearly 60 years in the fiscal year ended March 31, 2009.

The experience taught Sharp a painful lesson that its supply chain needed to be leaner and its production more efficient, especially if the factory was going to be in Japan, where the strong yen and expensive labor force put the company at a disadvantage to its Asian competitors.

Sharp aims to streamline the costly LCD-panel production process by moving 17 outside suppliers and service providers inside its factory walls to work as "one virtual company."

In the past, Sharp kept suppliers within driving distance. Now they are all within the same facility. Supplies are sent not by truck from a nearby factory but by automated trolleys snaking from one building to another.

The suppliers, which include Asahi Glass Co. and Dai Nippon Printing Co., built and paid for their own facilities and are renting the land from Sharp.

Despite their location inside the plant, Sharp says its suppliers are permitted to sell their products to other companies.

At Sakai, Sharp has also linked its computer systems with suppliers so an order to the factory alerts suppliers right away. In the past, Sharp would email or call suppliers and place orders, creating a longer lag time.

Sharp wouldn't disclose how much, if any, cost savings will result from manufacturing LCD panels at Sakai, but analysts estimate a 5% to 10% savings.

Corning Inc. the world's largest maker of LCD glass substrates, built a factory next to Sharp's Sakai plant. Corning says the arrangement reduced total order cycle time from an average of one to two weeks to a matter of hours. Corning also says the proximity reduced the damage risk in transporting massive glass sheets on trucks.

While Sharp is a long-standing customer, Corning said it was concerned initially that building a factory on site would mean that it was "hitching its wagon" to Sharp since it's the only customer for such large glass substrates. Ultimately, Corning decided to proceed based on its faith in Sharp's Sakai plans.

"There's nothing like it anywhere," said James Clappin, president of Corning Display Technologies.

December 5, 2009 reply from James R. Martin/University of South Florida [jmartin@MAAW.INFO]

I have been working on MAAW's Japanese Management Section for about 15 years. For a considerable amount of material on JIT, Kanban, etc. see:http://maaw.info/JapaneseMain.htm

See also: http://maaw.info/Chapter8.htm

 Bibilography, articles summaries, chapter on JIT,etc.

James R. Martin

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

Sue Haka, former AAA President, commenced a thread on the AAA Commons entitled
"Saving Management Accounting in the Academy,"
--- http://commons.aaahq.org/posts/98949b972d
A succession of comments followed.

The latest comment (from James Gong) may be of special interest to some of you.
Ken Merchant is a former faculty member from Harvard University who form many years now has been on the faculty at the University of Southern California.

Here are my two cents. First, on the teaching side, the management accounting textbooks fail to cover new topics or issues. For instance, few textbooks cover real options based capital budgeting, product life cycle management, risk management, and revenue driver analysis. While other disciplines invade management accounting, we need to invade their domains too. About five or six years ago, Ken Merchant had written a few critical comments on Garrison/Noreen textbook for its lack of breadth. Ken's comments are still valid. Second, on the research and publication side, management accounting researchers have disadvantage in getting data and publishing papers compared with financial peers. Again, Ken Merchant has an excellent discussion on this topic at an AAA annual conference.

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

Bob Jensen's somewhat ignored threads on managerial and cost accounting are at
http://www.trinity.edu/rjensen/theory01.htm#ManagementAccounting

ICMA Announces Reorganization of Certified Management Accountant (CMA) Exam
December 15, 2009 message from James R. Martin/University of South Florida [jmartin@MAAW.INFO]

According to Brausch and Whitney (Strategic Finance, December 2009, p. 9) the changes to the CMA exam are intended to dramatically increase the value of the CMA in the market.

Beginning in the spring of 2010 the exam will include only two four-hour exams, each consisting of 100 multiple choice questions and two 30-minute essay questions. For more specifics see http://www.imanet.org/certification.asp

When I became a CMA in 1977, (Certificate 733) the exam was made up of five 3.5-hour exams spread out over three days. My initial reaction to the current change is that more people will take and pass the exam, but the value of the CMA will decline. I hope I am wrong about this, but I think the IMA is shooting themselves in the foot.

I would like to know what other people think about the change, particularly those who are CMA's. Will the effect of the change on the value of the CMA be positive or negative?

Another thought: Someone could do a survey of current accounting faculty, practicing accountants, and CMA's, and get a publication out of this.

"ICMA Announces Reorganization of Certified Management Accountant (CMA) Exam," SmartPros, December 2, 2009 ---
http://accounting.smartpros.com/x68295.xml

The Institute of Certified Management Accountants (ICMA), the certification division of the Institute of Management Accountants (IMA), today announced a significant reorganization of its renowned Certified Management Accountant (CMA) curriculum and examination format.

The CMA exam, which continues to be a career-enhancing credential valued and sought by employers, will be updated next spring to align even more closely with the critical knowledge and skills accountants and financial professionals use every day.

By focusing specifically on a body of advanced accounting and financial knowledge, the program will now consist of two exam parts rather than four. The updated exam’s subject matter places greater emphasis on the issues most critical to accountants and financial professionals in business, including financial planning, analysis, control and decision support.

“The new CMA program will maintain the rigor and relevance for which the CMA is highly regarded. At the same time, we have made changes to the program to adapt to the changing profession and the needs of today’s business professionals,” said ICMA Senior Vice President Dennis Whitney.

With more than 30,000 CMA certificates awarded to date, the CMA program continues to demonstrate its value to professionals. In fact, according to IMA’s 2008 Annual Salary Survey, members holding the CMA designation earned an average of 24 percent more in salary than their non-certified peers.

“We are confident the enhancements to the CMA program will ensure the credential’s continued relevance and value in organizations around the world as the most appropriate designation for accountants and financial professionals working in business,” said Joseph A. Vincent, CMA, ICMA Board of Regents Chair.

In tandem with the introduction of the new CMA program, the association also introduced new IMA and CMA brand logos.

Enrollment in the new CMA program will begin in spring 2010. Candidates may take the new CMA examinations starting May 1, 2010. For more information about the CMA certification program, please visit www.imanet.org/certification 

December 16, 2009 reply from Ron Huefner [rhuefner@ACSU.BUFFALO.EDU]

As the holder of CMA certificate number 2, let me weigh in on this discussion.

In my view, the CMA has never caught on among students and young professionals, because it does not convey an image of any particular skill set or employment role, relative to other non-CPA certifications. The Certified Internal Auditor (CIA), Certified Fraud Examiner (CFE) and Chartered Financial Analyst (CFA) all convey the image of a particular set of skills and a fairly well defined job function. But I'd find it hard to define the skill set suggested by the CMA. As to job function, "management accountant" is not a common job title. Thus it's hard for students to get any feel for this field.

The IMA has had the same problem of conveying an image. They have toyed with "finance" as their image. They gave a CMA-parallel exam -- the CFM, Certified in Financial Management -- for a while, but eventually dropped it. The flagship journal, "Management Accounting", was long ago renamed "Strategic Finance." But it's not clear this has solved their image problem. Nor does it seem they are viewed seriously as a finance organization.

Part of the problem is that there is an extremely wide range of job functions under the notion of "management accounting," so it is hard for a clear image to come through.

Until a sense of the implied skill set and the job function(s) of the CMA can be developed, I don't think it's going to get much traction among students.

Ron Huefner

Ronald J. Huefner
Distinguished Teaching Professor
University at Buffalo

Jensen Comment
James Martin maintains the massive management accounting knowledge base at http://maaw.info/

The CMA examination is administered by the Institute of Management Accountants (IMA) --- http://www.imanet.org/

"Beware Misguided Accountants," by Gary Cokins, Big Fat Finance Blog, December 1st, 2009 ---
http://bigfatfinanceblog.com/2009/12/01/beware-misguided-accountants/

. . .

Imagine that several centuries ago there was a navigator who served on a wooden sailing ship that regularly sailed through dangerous waters. It was the navigator’s job to make sure the captain safely and efficiently sailed the ship from one point to another. In the performance of his duties, the navigator relied on a set of sophisticated instruments. Without the effective functioning of these instruments, it would be impossible for him to chart the ship’s safest and most efficient course.

One day the navigator realized that one of his most important instruments was calibrated incorrectly. As a result, he provided the captain inaccurate navigational information. No one but the navigator knew of this calibration problem, and the navigator decided not to inform the captain. He was afraid that the captain would blame him for not detecting the problem sooner and then require him to find a way to report the measurements more accurately. That would require a lot of work.

As a result, the navigator always made sure he slept near a lifeboat so that if the erroneous navigational information led to a disaster, he wouldn’t go down with the ship. Eventually, the ship hit a reef that the captain believed to be miles away. The ship was lost, the cargo was lost, and many sailors lost their lives. The navigator, always in close proximity to the lifeboats, survived the sinking and later became the navigator on another ship.

Perils of poor managerial accounting

Can a similar story be told in today’s times? Centuries later, there was a management accountant who worked for a company in which a great deal of money was invested. It was this management accountant’s job to provide information on how the company had performed, its current financial position, and the likely consequences of decisions being considered by the company’s president and managers. In the performance of his duties, the management accountant relied on a managerial cost accounting system that was believed to represent the economics of the company. Without the effective functioning of the costing practices reported from this system, it would be impossible for the accountant to provide the president with the accurate and relevant cost and profit margin information he needed to make economically sound decisions.

One day the management accountant realized that the calculations and practices on which the cost system was based were incorrect. It did not reflect the economic realities of the company. The input data was correct, but the reported information was flawed. A broadly averaged cost allocation factor was used with no causal relationship to the outputs being costed. As a result, the current and forward-looking information he provided to support the president’s decision making was incorrect. No one but the management accountant knew this problem existed. He decided not to inform the president. He was afraid that the president would blame him for not detecting the problem sooner and then require him to go through the agonizing effort of developing and implementing a new, more accurate and relevant cost system using activity based costing (ABC) principles. That would require a lot of work. Wouldn’t it?

Meanwhile, the management accountant always made sure he kept his network with other professionals intact in case he had to find another position. Not surprisingly, the president’s poorly informed pricing, investment, and other decisions led the company into bankruptcy. The company went out of business, the owners lost their investment, creditors incurred financial losses, and many hard-working employees lost their jobs. However, the management accountant easily found a job at another company.

The accountant as a bad navigator

Why do so many accountants behave so irresponsibly? The list of answers is long. Some believe the costing error is not that big. Some think that extra administrative effort required to collect and calculate the new information will not offset the benefits of better decision making. Some think costs don’t matter because the focus should be on sales growth. Whatever reasons are cited, accountants’ resistance to change is based less on ignorance and more on misconceptions about what determines and influences accurate costing.

Today commercial ABC software and their associated analytics have dramatically reduced the effort to report good managerial accounting information, and the benefits are widely heralded. Furthermore, the preferred ABC implementation method is rapid prototyping with iteratively scaled modeling, which has destroyed myths about implementing ABC as being too complicated and lengthy. An ABC system can be implemented in a few weeks, not months.

Reasonably accurate cost and profit information is one of the pillars of performance management’s portfolio of integrated methodologies. Accountants unwilling to adopt logical costing methods, and managers who tolerate the perpetuation of flawed reporting, should change their ways. Stay on the ship or get off the ship before real damage is done.

Thank you for the heads up Francine!
"Fifteen Risk Factors for Poor Governance A self-diagnostic to identify risk factors for poor governance and reporting," by Walter Smiechewicz (who at one time worked for the scandalous Countrywide), Directorship, September 8, 2009 ---
http://www.directorship.com/fifteen-risk-factors-for-poor-governance/

Some of the best indicators of our overall physical health come from blood tests. Unfortunately, too often we don’t begin to watch and manage these numbers until later on in life. Of course, it’s never too late to improve your diet and exercise, but we’re always left thinking, “if only I’d paid attention to this earlier.”

With so many recent corporate crises, it is plain it’s suffice to say that a great many corporate board members and executives are experiencing similar regret right now. Perhaps this could have been avoided if they too had practiced routine diagnostic check ups. Like an individual blood test, board members need to know the risks their company is facing, and as with any health risk, they also need to be able to mitigate those exposures.

Sounds great, but the devils in the details, right? Perhaps not.

As chief consultant for governance and risk at Audit Integrity, I’ve examined the worst U.S. companies from an “integrity” standpoint in order to help board members and general auditors see how their company’s health stacks up. Audit Integrity’s metrics have shown which companies are 10 times more likely to face SEC Actions; five times more likely to face class action litigation; and four times more likely to face bankruptcy.

Using Audit Integrity’s proprietary AGR (Accounting, Governance, and Risk) score, 196 companies were identified as laggards or high-risk companies. These companies have been proven to have higher odds of SEC actions and class action litigation, loss of shareholder value, and increased odds of material financial restatement and bankruptcy. All are North American, non-financial, publicly traded companies with over $2 billion in market capitalization with an average-to-weak financial condition.

Next, I tested the 119 metrics that Audit Integrity flags and discovered that 15 of those metrics appeared consistently as identifiers of problematic companies; the first metric was prevalent in 65 percent of the 196 high-risk companies and the 11th evident in 40 percent. The other 8,000 companies tested had low incidences of these same metrics. A list – dubbed the Risky Business Catalogue – details the common metrics within high-risk companies. Board members, the C-suite, and general auditors should note if their company is a candidate for the RBC. The evidence is not saying that significant issues are imminent if a company has one of the RBCs, but a combination of RBC metrics indicate risk factors to the entity’s business model and strategy.

RBC’s metrics include:

1. The company has entered into a merger within the last 12 months. While there is certainly nothing wrong with corporate M&A activity, it’s common for policies to be revised and system integrations to be rushed. Company directors need to caution general auditors to be extra vigilant post merger and increase testing of balance sheet accounts.

2. The CEO and CFO’s compensation is more highly weighted toward incentive compensation than base compensation. This situation can cause negative motivations and earnings to be increased more creatively to ensure a larger portion of executive pay packages. Close attention should be paid to revenue recognition.

3. The Board Chairman is also the CEO. An age-old debate, but indispuditedly conflicts of interest invariably result when a company CEO is also its Chairman. Separate the roles to improve governance and reduce compromised oversight.Compromised reliability exists because the very architecture of governance has a built in conflict when the Chairman is also CEO.

4. The company has undergone a restructuring in the last 12 months. Restructuring may be completely valid, but also can be employed to conceal the lack of sustainable earnings growth. Directors, by role definition, should be intimately involved in restructuring procedures decisions and promised outcomes.

5. The company has encountered a public regulatory action in the last 12 months. Many corporate stakeholders hold true to the statement that where there’s smoke, there’s fire. Directors should no longer accept “no worries” explanations on regulatory matters. Compliance tests should be employed routinely and if regulatory action does occur, management needs to take action.

6. The amount of goodwill carried on the balance sheet, when compared to total assets, is high. When intangible assets such as goodwill grow, boards should ask more probing questions about how the business model generated these assets and about concomitant valuation protocols. General Auditors should confirm that models are comprehensively back tested and impairment procedures are adhered to assiduously.

7. The ratio of the CEO’s total compensation to that of the CFO is high. If a CEO is awarded a much larger paycheck than anyone else (particularly particularally the CFO), it increases governance risk and leads to a top-directed culture, thus limiting collaboration. Boards need to be involved in all executive compensation issues including that which drives pay packages for the CFO, Chief Risk Officer, as well as internal auditors,. etc.

8. Operating revenue is high when compared to operating expenses. Riskier companies have revenue recognition in excess of what is expected based on operating revenues. Directors should fully understand revenue recognition policies and instruct management to test them to be sure they are not aggressive.

9. A Divestiture(s) has occurred in the last 12 months. Data shows that riskier companies have more divestures, usually because it is an opportunity for more aggressive accounting activity. Board members should inquire as to how this action fits the strategy.

10. Debt to equity ratio is high. When a business relies too heavily on debt it reveals that markets are not independently funding the business model or strategy. Boards should know why the markets are not investing in their entity and therefore why debt is so heavily relied upon. Board members should also be knowledgeable on the quality of their equity and not just the amount. Lastly, they should understand management’s funding overall funding strategy and the strength of contingent funding plans.

11. A repurchase of company stock has taken place in the last 12 months. A repurchase of stock is usually presented to investors as an avenue to increase market demand for the stock, thereby elevating overall shareholder value. Management must provide reasoning for why there are no other ways to invest excess funds. Boards should also request the general auditor to review insider sales during the period of share repurchase programs.

12. Inventory valuations to total revenue is increasing. When inventory increases in relation to revenue it should raise control questions about inventory valuation. It could indicate changing consumer preferences, which should spur an analysis of a corporation’s business model.

13. Accounts receivables to sales is increasing. This situation can typically be indicative of relaxed credit standards. Directors should ask whether sales are decreasing due to market conditions and instruct the general auditor to probe receivables to determine their viability.

14. Asset turnover has slowed when compared to industry peers. If assets are increasing and sales are not flowing it could indicate less productive assets are being brought, or retained, on the balance sheet. Conversely, if sales are decreasing, executives and auditors will again want to analyze changing customer preferences.

15. Assets driven by financial models make up a larger portion of balance sheet. A collection of other accounting metrics indicates that boards, the C-suite, and general auditors should pay special attention to the controls, assumptions, and governance surrounding assets whose valuations are model driven. This is particularly true if assets that are valued by financial models make up a larger portion of the entities balance sheet.

To be sure, any one of these in isolation as an indicator of accounting and governance risk can be debated. Company divestitures and M&A can be a healthy indicator. But if a corporation fails more than a few of these metrics, board members need to take action.

It is easy to dismiss any one of these metrics when you find it is an issue in your company. Human nature is quick to retort – maybe for others but not for us. However, like time and tide, the numbers too, wait for no one. So, if you have any of these AGR metrics, you need to begin confronting these risk characteristics today to improve your corporate health and avoid the much more drastic financial equivalent of cardiovascular surgery tomorrow.

Walter Smiechewicz is chief consultant for governance and risk at Audit Integrity, a research firm that provides accounting and governance risk analysis

 December 5, 2009 reply from Bob Jensen

Here are some added thoughts:

The risk factors are excerpted from AICPA Statement on Auditing Standards 82, “Consideration of Fraud in a Financial Statement Audit” (1997). That statement was issued to provide guidance to auditors in fulfilling their responsibility “to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud.” Although there risk factor cover a broad range of situations, they are only examples. In the final analysis, audit committee members should use sound informed judgment when assessing the significance and relevance of fraud risk factors that may exist.
http://www2.gsu.edu/~wwwseh/Financial Reporting Red Flags.pdf
There may be an update on this material.

Reflections on the audit committee's role --- http://www.allbusiness.com/accounting-reporting/auditing/173956-1.html

You might browse some of the Financial Analysis Lab materials at Georgia Tech (directed by Chuck Mulford) ---
http://mgt.gatech.edu/fac_research/centers_initiatives/finlab/index.html
This is one of the best centers of academic study of financial reporting and fraud.

Mulford and Gene Comiskey some great books on red flags in financial reporting.  These include the following:

·         Creative Cash Flow Reporting: Uncovering Sustainable Financial Performance

·         The Financial Numbers Game: Detecting Creative Accounting Practices

·         Financial Warnings: Detecting Earning Surprises, Avoiding Business Troubles, Implementing Corrective Strategies
This is a bit dated (1996) but it is a classic that I keep within arms reach.

 

Fraudulent Revenue Accounting
"Detecting Circular Cash Flow:  Healthy doses of skepticism and due care can help uncover schemes to inflate sales," by John F. Monhemius and Kevin P. Durkin, Journal of Accountancy, December 2009 --- 
http://www.journalofaccountancy.com/Issues/2009/Dec/20091793.htm

Following an initial customer confirmation request with no response, a first-year auditor mails a second and third request, all under the supervision of the auditor-in-charge assigned to the account. Field work begins on the audit, but there is still no response from the customer. Another auditor scanning the cash journal from the beginning of the year through the current date notes that all outstanding invoices have subsequently been paid from this customer during this period. Customer check copies are provided, and remittances indicate that payment has been received in settlement of all outstanding invoices at fiscal year-end for this customer. But has the existence of accounts receivable from this customer at fiscal year-end really been established?

Fraudsters have been creating increasingly complex and sophisticated schemes designed to rely on potential weaknesses in the execution of audit procedures surrounding key assertions such as existence. A financial statement auditor can use his or her professional judgment while carrying out audit procedures to detect such a scheme.

Given the difficult economic times of the past year, special care should be given to consider fraud while performing audit engagements. One fraud scheme that has been encountered with increasing frequency involves the inflation of accounts receivable and sales through the creation of a circular flow of cash through a company to give the appearance of increasing revenue and existence of accounts receivable. This article addresses this fraud technique when used to materially overstate assets and inflate borrowing capacity under an asset-based revolving line of credit. This article also points out red flags that may help uncover such a scheme.

BACKGROUND

A typical asset-based revolving line of credit allows a company to borrow funds for working capital. The borrowing limit is based on a formula that takes into account various working capital assets and related advance rates. A typical availability formula allows for loan advances equal to a set percentage of asset balances.

This article focuses on an accounts receivable- backed line of credit, an asset that is prone to manipulation in this specific fraud scheme. Typical advances against accounts receivable range from 75% to 85% of eligible accounts receivable. Items excluded from eligible collateral would include invoices aged over 90 days, affiliate receivables or any other invoice that would create a nonprime receivable from the lender’s perspective. The loan agreement in an asset-based loan facility requires management to submit an availability calculation periodically. This allows the lender to monitor collateral levels and exposure. A generic accounts receivable availability calculation is illustrated in Exhibit 1.

Continued in article

Bob Jensen's threads on revenue accounting frauds
Revenue Reporting Frauds --- http://www.trinity.edu/rjensen/ecommerce/eitf01.htm

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

Third Disgraced Pennsylvania Revenue Secretary to Resign in the Rendell Administration.
"Whip DeWeese, revenue chief Stetler charged in corruption probe," by Brad Bumsted, Pittsburgh Tribune Review, December 15, 2009 ---
http://www.pittsburghlive.com/x/pittsburghtrib/news/breaking/s_657829.html

Former state House Speaker H. William DeWeese, former Revenue Secretary Steve Stetler and DeWeese aide Sharon Rodavich were charged today in an ongoing legislative corruption investigation led by Attorney General Tom Corbett.

DeWeese, D-Greene County, Stetler and Rodavich were charged with theft, conspiracy and conflict of interest. The charges against DeWeese and Rodavich stem from their allegedly raising money for DeWeese's campaigns with state-paid workers, resources and time.

"The grand jury showed that DeWeese's legislative dstaff and campaign staff were virtually one and the same," Corbett said. DeWeese aides testified to the grand jury that "campaign work for DeWeese was expected" from legislative staff.

They are the latest ensnared in a nearly 3-year-old probe, which has resulted in charges against 22 other current and former Democrat and Republican staffers and lawmakers. DeWeese is the second former speaker charged in the investigation. Republican John Perzel of Philadelphia was charged Nov. 12 with spending millions of taxpayer dollars on campaigns.

DeWeese saw his former chief of staff, Mike Manzo, and former right-hand man Mike Veon charged in the first round of indictments, handed down in July 2008. DeWeese, a 33-year veteran of the House, has been a force in state politics for nearly two decades, including a stint in 1993 as Speaker.

Stetler, a former House member from York who oversaw Democratic campaigns, resigned this morning as a member of Gov. Ed Rendell's Cabinet, a senior administration official said.

Corbett's announcement comes as the General Assembly is in the midst of approving table games at casinos. The charges could create chaos in a legislature stung by a series of disclosures since the investigation began in February 2007. Recent polls show public opinion of the body at its lowest level ever, after earlier charges and a 101-day budget impasse.

The Tribune-Review reported last week that DeWeese met three times with the attorney general's investigative team and his attorney Walter Cohen said he was cooperating fully. DeWeese was not seeking immunity, Cohen said.

Cohen said today he received no information about Corbett's charges.

Last week, the attorney general's office lost the first corruption case to go to trial. Former Rep. Sean Ramaley of Baden was acquitted on six felony counts of holding a sham job in Veon's Beaver Falls office.

Prosecutors alleged Ramaley used the job to campaign. A Dauphin County jury cleared him after his lawyer Philp Ignelzi of Pittsburgh told jurors there was reasonable doubt about each charge.

Five Democrats in that case have agreed to plead guilty. Veon, facing multiple charges of theft, conflict of interest and conspiracy, is slated for trial Jan. 19 along with aides. That case revolves around the use of millions of dollars in taxpayer-financed bonuses to reward staffers who worked campaigns. Veon, Annamarie Peretta-Rosepink and Brett Cott, strongly maintain their innocence.

Last month, former House Speaker John Perzel, R-Philadelphia, was accused with 9 other Republicans of directing a scheme to divert $10 million in tax money to pay for sophisticated computer equipment and programs that Perzel allegedly wanted to give Republicans an edge in elections. Perzel through his attorney says he is innocent of all charges.

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

Hard Copy of FASB Codification Available

FASB Codification Bound Vols. FASB Codification—Four Volumes (This bound edition is expected to be available the week of December 21. Your credit card will not be charged until the publication is shipped. For orders of 6 or more sets please call 800.748.0659.)
https://www.fasb.org/jsp/FASB/Page/Store/ProductPage&subjectId=25COD

This print edition also includes the codification of FASB Statements No. 166, Accounting for Transfers of Financial Assets, and No. 167, Amendments to FASB Interpretation No. 46(R), although the codification of these two Statements has not been released in the online version as of October 31, 2009. FASB Statement No. 164, Not-for-Profit Entities: Mergers and Acquisitions, has not been codified as of October 31, 2009 and is not included in this bound edition. Volume 1 includes the Notice to Constituents which provides information to aid in understanding the topical structure, content, style, and history of the FASB Codification and also contains the following Areas: General Principles (Topic 105) Presentation (Topics 205 through 280) Assets (Topics 305 through 360) Liabilities (Topics 405 through 480) Equity (Topic 505). Volume 2 includes: Revenue (Topic 605) Expenses (Topics 705 through 740) Part of the Broad Transactions Area (Topics 805 through 815). Volume 3 includes: The remainder of the Broad Transactions Area (Topics 820 through 860) Part of the Industry Area (Topics 905 through 944). Volume 4 includes: The remainder of the Industry Area (Topics 946 through 995) The Master Glossary.

PRODUCT CODE: CODB09

The FASB Codification database may be accessed (not free) at
http://asc.fasb.org/asccontent&trid=2273304&nav_type=left_nav

Bob Jensen's (negative) threads on the Codification Database are at
http://www.trinity.edu/rjensen/theory01.htm#MethodsForSetting

FASB Statement 167: Consolidation of Variable Interest Entities

How Will This Statement Change Current Practice?
This Statement amends Interpretation 46(R) to require an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity. This analysis identifies the primary beneficiary of a variable interest entity as the enterprise that has both of the following characteristics:

a. The power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance

b. The obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. Additionally, an enterprise is required to assess whether it has an implicit financial responsibility to ensure that a variable interest entity operates as designed when determining whether it has the power to direct the activities of the variable interest entity that most significantly impact the entity’s economic performance.

This Statement amends Interpretation 46(R) to require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. Before this Statement, Interpretation 46(R) required reconsideration of whether an enterprise is the primary beneficiary of a variable interest entity only when specific events occurred. This Statement amends Interpretation 46(R) to eliminate the quantitative approach previously required for determining the primary beneficiary of a variable interest entity, which was based on determining which enterprise absorbs the majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both.

This Statement amends certain guidance in Interpretation 46(R) for determining whether an entity is a variable interest entity. It is possible that application of this revised guidance will change an enterprise’s assessment of which entities with which it is involved are variable interest entities.

This Statement amends Interpretation 46(R) to add an additional reconsideration event for determining whether an entity is a variable interest entity when any changes in facts and circumstances occur such that the holders of the equity investment at risk, as a group, lose the power from voting rights or similar rights of those investments to direct the activities of the entity that most significantly impact the entity’s economic performance.

Under Interpretation 46(R), a troubled debt restructuring as defined in paragraph 2 of FASB Statement No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings, was not an event that required reconsideration of whether an entity is a variable interest entity and whether an enterprise is the primary beneficiary of a variable interest entity. This Statement eliminates that exception.

This Statement amends Interpretation 46(R) to require enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. The enhanced disclosures are required for any enterprise that holds a variable interest in a variable interest entity. This

Statement nullifies FASB Staff Position FAS 140-4 and FIN 46(R)-8, Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities. However, the content of the enhanced disclosures required by this Statement is generally consistent with that previously required by the FSP.

How Will This Statement Improve Financial Reporting?]
This Statement amends Interpretation 46(R) to replace the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. An approach that is expected to be primarily qualitative will be more effective for identifying which enterprise has a controlling financial interest in a variable interest entity.

This Statement requires an additional reconsideration event when determining whether an entity is a variable interest entity when any changes in facts and circumstances occur such that the holders of the equity investment at risk, as a group, lose the power from voting rights or similar rights of those investments to direct the activities of the entity that most significantly impact the entity’s economic performance. It also requires ongoing assessments of whether an enterprise is the primary beneficiary of a variable interest entity. These requirements will provide more relevant and timely information to users of financial statements.

This Statement amends Interpretation 46(R) to require additional disclosures about an enterprise’s involvement in variable interest entities, which will enhance the information provided to users of financial statements.

What Is the Effect of This Statement on Convergence with International Financial Reporting Standards?
The International Accounting Standards Board (IASB) has a project on its agenda to reconsider its consolidation guidance. The IASB issued two related Exposure Drafts, Consolidation and Derecognition, in December 2008 and March 2009, respectively. The IASB project on consolidation is a broader reconsideration of all consolidation guidance (not just the guidance for variable interest entities).

Although this Statement was not developed as part of a joint project with the IASB, the FASB and IASB continue to work together to issue guidance that yields similar consolidation and disclosure results for special-purpose entities. The ultimate goal of both Boards is to provide timely, transparent information about interests in specialp purpose entities. However, the timeline and anticipated effective date of the IASB project is different from the effective date of this Statement.

This Statement addresses the potential impacts on the provisions and application of Interpretation 46(R) as a result of the elimination of the qualifying special-purpose entity concept in Statement 166. Ultimately, the two Boards will seek to issue a converged standard that addresses consolidation of all entities.

What's Right and What's Wrong With SPEs, SPVs, and VIEs --- 
http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm

Calling All CPA Auditors for New Clients

"New SEC Madoff rule," New York Post, December 17, 2009 ---
http://m.nypost.com/ms/p/nyp/nyp/view.m?id=20570&storyid=4.0.3268925043

The Securities and Exchange Commission approved final rules yesterday requiring some investment advisers who manage customer funds to undergo annual surprise audits.

The rule is prompted by the Bernard Madoff scandal, requiring certain SEC-registered advisers who have custody of clients&apos; assets to retain an independent public accountant to conduct an annual exam.

If funds are found missing, the accountants must notify the SEC.

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

A close-up look at the IT infrastructure behind the Madoff affair

December 17, 2009 message from Scott Bonacker [lister@BONACKERS.COM]

There is an article in the new Bank Technology News that might be of interest to anyone teaching internal controls or fraud detection. Or if you're just curious.

http://www.americanbanker.com/btn_issues/22_12/the-it-secrets-1004419-1.html

"Special Feature The IT Secrets from the Liar's Lair Two years ago, IT executive Bob McMahon wondered why his highly-profitable employer, Bernard L. Madoff Investment Services, didn't replace antiquated systems with more modern and efficient off-the-shelf technology. On Dec. 11, 2008, when Madoff was arrested, he got his answer.A close-up look at the IT infrastructure behind the Madoff affair."

Scott Bonacker CPA
Springfield, MO

"The IT Secrets from the Liar's Lair," by John Dodge, Bank Technology News, December 2009 ---
http://www.americanbanker.com/btn_issues/22_12/the-it-secrets-1004419-1.html

Two years ago, IT executive Bob McMahon wondered why his highly-profitable employer, Bernard L. Madoff Investment Services, didn't replace antiquated systems with more modern and efficient off-the-shelf technology. The Madoff systems were expensive to maintain and made it difficult to grow the business by expanding into new classes of securities. McMahon's job: To organize and document projects that would create custom technology for the firm's trading operations.

On Dec. 11, 2008, he got his answer.

That day, Bernie Madoff was arrested and charged with stealing tens of billions of his clients' money over decades. McMahon realized if "technologists" had replaced the proprietary systems with more modern and open computers, they would have invariably found the absence of data on countless stock trades that supposedly took place. In a sense, the preservation of old computer technology helped Madoff successfully go undetected for years until his massive Ponzi scheme collapsed that day.

Over the past six weeks, Securities Industry News, a sister publication of Bank Technology News, has dug into and beyond the court records to construct an extensive picture of how Madoff actually operated: The systems and technology he and underlings used to create - or fake - the most detailed set of customer accounts underlying a fraud in the history of the securities industry.

Included are details of a declaration filed Oct. 16 on behalf of the court-appointed trustee, Irving Picard, investigating the case, and information filed in court when two IT employees were arrested in mid-November. The documents, and subsequent interviews, describe how the real and the fake trading floors worked, and why the securities investors believed they owned are never going to be declared "missing." The answer: Because they never existed in the first place.

LEGITIMATE AND ILLEGITIMATE

"I asked myself how Bernie could have hidden and maintained this for so long. A lot of it was because he had proprietary and legacy systems. And he relied on IT people he hired and paid," to not upset the status quo, says McMahon.

As a project manager, he always felt like an odd duck at Bernard L. Madoff Investment Services (BLMIS), an outfit which seemed to lack standards and procedures routine at former employers of his such as the International Securities Exchange and CheckFree Investment Services (now Fiserv, Inc.). Little was documented and the company seemed to be overwhelmed keeping the older systems from breaking down.

"I immediately recognized there was massive institutional chaos in the way the place was managed. No one found value in participating in project management meetings or in writing things down. There was no documentation," says McMahon, today an operational performance consultant for Standard & Poors.

McMahon lasted less than a year at Madoff's firm. He was hired in February 2007, by long-time BLMIS chief information officer Elizabeth Weintraub. She died in September of that year. Differences over updating the systems and formalizing procedures with Weintraub's two successors led to his dismissal the following January, by McMahon's account.

Nader Ibrahim, who was on the support desk from 2000 to 2003, confirmed that the atmosphere in the BLMIS IT department was often tense and unusual.

"We did not have titles, which was definitely suspicious to me. We all knew who each other worked for, but nobody knew what the other person was doing," he said. "Everything was on a need-to-know basis. There was a lot of secrecy."

But the real secret about Madoff's purported trading for thousands of investment advisory clients, investigators say, is that it never happened.

To be fair, it's not as if Madoff didn't have a real trading floor. Madoff's legitimate market-making business was located on the 19th floor of 885 Third Ave., in New York, using one IBM Application System/400 computer, known within the firm as "House 5.'' BLMIS' information technology operation was located on the 18th floor, where McMahon had his cube and was supposed to organize and document projects involving custom technology for the trading operation.

What was on the 17th floor? The fake trading floor where a second IBM AS/400 known internally as "House 17" processed historical price information on securities allegedly bought for clients. The end result was phony trade confirmations and wholly manufactured-but official-looking-statements for 4,903 investment advisory clients.

OPEN AND CLOSED

Madoff's legitimate traders used a mix of green-screen and "M2" Windows-based desktop computers. These ran in-house trading software referred to as MISS, which McMahon recalled standing for something like "Madoff Investment Systems and Services." The internally-named and developed M2s ran MISS as a Windows application and were used by younger traders who wanted familiar software instead of the rigid green screen system, developed around 1985, where only text appeared on screen and instructions were in almost cryptic codes entered into command lines.

Support for House 5 was almost like that of a large investment bank's support of its trading operations. Nothing was too good, in theory, for the Madoff trading operation on the 19th floor. Even if it was not necessary.

"Madoff did not buy anything off the shelf. The IT team was doing proprietary software development. Maybe J.P. Morgan Chase needs all this heavy technology, but a hedge fund with 120 people doesn't have to be in systems development," says McMahon, adding that a similarly-sized firm might have a half dozen IT people. Both McMahon and Ibrahim pegged the number of people actively supporting technology at BLMIS at between 40 and 50.

But large staff and support for House 5 has not thrown off investigators. Court-appointed trustee Irving Picard, who is charged with liquidating Madoff's remaining assets, has instead focused on "House 17,'' where the daily administration of the Ponzi scheme was executed.

Picard hired an investigator, Joseph Looby, an accounting forensics expert who probably knows the most about the technology that aided Madoff in stealing client funds other than former members of Madoff's staff. Looby is an expert in electronic fraud and senior managing partner with FTI Consulting Inc. in New York.

Looby's 20-page declaration on Picard's behalf with the U.S. Bankruptcy Court for Southern District of New York on Oct. 16 amounts to the deepest examination yet of the foundational technology behind Madoff's fraud. The declaration seeks to deny paying Madoff's victims based on their last statements, dated Nov. 30, 2008, because the values stated were based on investments that were allegedly never bought or sold (see graphic at right).

Reached in his Times Square office, Looby, like Picard, said he could not elaborate on his examination of "House 17. But in the declaration, he reported that "House 5" supported Madoff's market-making operation and was networked to third parties outside the firm that would logically support a trading operation. One, for example, was the depository and clearing firm Depository Trust & Clearing Corp. (DTCC).

"[House 5] was an AS/400, consistent with a legitimate securities trading business," Looby wrote. In the declaration, he often compares House 5's legitimacy to House 17's illegitimacy.

House 17, for reasons that are now obvious, was shut off to anyone but Madoff's former chief finance officer and right-hand-man Frank DiPascali Jr. as well as his alleged accomplices. That list now includes Jerome O'Hara, 46, and George Perez, 43, who have both been charged in civil and criminal complaints with helping DiPascali create the phoney statements that supported the Ponzi scheme. O'Hara and Perez face 30 years in prison and more than $5 million in fines if convicted. DiPascali sits in a New York jail awaiting sentencing after pleading guilty to 10 felony counts on Aug. 11. He faces 125 years and his sentencing is scheduled for May 2010. In the interim, investigators are hoping to get his cooperation to implicate others.

"They want to squeeze him for more than what he's giving now so he can avoid 125 years in prison," says Erin Arvedlund, author of "Too Good to be True: The Rise and Fall of Bernie Madoff." The former reporter for Barron's in a widely-cited 2001 story challenged Madoff's implausible if not impossible returns and asked why hundreds of millions in uncollected commissions were left on the table. It appears now there were no trades made, from which to derive commissions. "[House 17] was a closed system, separate and distinct from any computer system utilized by the other BLMIS business units; consistent with one designed to mass produce fictitious customer statements," according to Looby's declaration. House 17's expressed purpose was to maintain phony records and crank out millions of phony IRS 1099s on capital gains and dividends, trade confirmations, management reports and customer statements. "The AS/400 was like a giant Selectric typewriter. When you're making up numbers like that, you're using your computer as a typewriter," says computer consultant Judith Hurwitz, president of Hurwitz & Associates in Newton, Mass.

ON THE HOUSE

House 17 held 4,659 active accounts overseen by DiPascali where Madoff purportedly executed a "split strike conversion" strategy on large cap stocks. In basic terms, it's a "collar," putting a floor and a ceiling on returns. A floor on potential losses is created by purchasing a put on a stock. The sale of a call then puts a ceiling on the returns. The "split" in "strike" prices is considered a "vacation trade.'' The trader doesn't worry about what happens until the expiration dates on the put or call options arrive.

The strategy was allegedly applied for the thousands of customers on "baskets" of large cap stocks. According to the faked BLMIS statements, these accounts typically yielded 11 to 17 percent returns annually.

Another 244 "non-split strike" accounts produced phony returns in excess of 100 percent and were managed by BLMIS employees other than DiPascali.

The "non-split strike" accounts included many "long time" Madoff customers and feeder funds such as those operated by Stanley Chais or Jeffry Picower and against whom Picard has filed civil suits to reclaim billions in profits alleged to be illegal. Picower of Palm Beach was found dead in his pool Oct. 25. Chais maintains he's innocent.

In the declaration, Looby repeatedly asserts that no securities were ever bought for BLMIS investment advisory customers. Proceeds sent in by clients for that purpose were "instead primarily used to make distributions to or payments on behalf of, other investors as well as withdrawals and payments to Madoff family members and employees," the declaration states.

Here's how it worked: BLMIS employees fed the AS/400 constantly with stock data, enough to support trades that would satisfy the expectations promised to Madoff's thousands of eventual victims. To support the fantasy returns, so-called "baskets" of S&P100 stocks would be bought and sold, on behalf of clients. Looby did not specify the typical size of a basket, but they were proportional to the proceeds a client had remitted to BLMIS. "If a basket was $400,000 and a customer had $800,000 available, two baskets of securities and options would be purportedly "purchased" for the account," Looby wrote. The types of stocks can be seen in a Madoff statement. Proceeds from purported basket sales existed only on "House 17" and on the paper it put out, which indicated the funds were put into safe U.S. Treasury bonds. Meanwhile, funds remitted by clients were being diverted to a JPMorgan Chase & Co. bank account known as "703."

The complaints against O'Hara and Perez add further rich detail to how Madoff and his accomplices used aging but extensive computer technology to maintain the fraud. They also seem to confirm what common sense suggests about such a massive and enduring fraud: Madoff and DiPascali had to have technical help.

"O'Hara and Perez wrote programs that generated many thousands of pages of fake trade blotters, stock records, Depository Trust Corp. reports and other phantom books and records to substantiate nonexistent trading. They assigned names to many of these programs that began with "SPCL," which is short for "special," according to an SEC press announcement about the civil complaint.

The "special" programs were found on backup tapes, according to an official close to the investigation and who asked not to be identified. He added that the pair has not been cooperating with authorities. The evidence in the complaints is from BLMIS computers and documents, according to the source.

Among 10 fraudulent functions detailed in the criminal complaint, the special programs altered trade details by using "algorithms that produced false and random results;" created "false and fraudulent execution reports;" and "generated false and fraudulent commission reports." The criminal complaint also charges the pair with helping Madoff and DiPascali create misleading reports between 2004-08 to throw off SEC investigators and a European accounting firm hired by a Madoff client.

In 2006, O'Hara and Perez cashed out their BLMIS accounts worth "hundreds of thousands of dollars" and told Madoff they would no longer "generate any more fabricated books and records." O'Hara's handwritten notes from the encounter allegedly say "I won't lie any longer."

However, the "crisis of conscience" did not stop them from asking for a 25 per cent bump in salary and a $60,000 bonus to keep quiet, the complaints allege.

"DiPascali then managed to convince O'Hara and Perez to modify computer programs to he and other 17th floor employees could create the necessary reports," according to the SEC complaint. The reference to "other 17th floor employees" suggests that O'Hara and Perez will not be the last to be charged.

A sharp eye could have detected that funds weren't where they were supposed to be: 2008 customer statements showed funds in a "Fidelity Spartan U.S. Treasury Money Market Fund" that hadn't been offered since 2005. The fabulous returns had lulled BLMIS clients to sleep. While some trading data was input by hand, DiPascali cleverly used "essentially a mail merge program" to replicate the same stock trading information across multiple accounts, according to the declaration.

Stocks in a basket were "priced" after the market closed (i.e., with the knowledge of the prior published price history). Customer statements were then fabricated by BLMIS staff on House 17 which appeared to outsiders to keep track of customer investments and funds in a manner typical of any investment advisor. "BLMIS staff confirmed it, the system facilitated it and consistent returns could not have been achieved without it," Looby's declaration states.

Indeed, the customer statements had been perfected as an instrument in the deception. Madoff investor Ronnie Sue Ambrosino, a former computer analyst who ironically had worked on an AS/400, told Securities Industry News that she never suspected a thing. After all, the Securities and Exchange Commission had given Madoff a clean bill of health on several occasions since 1992 by not digging deeply into his operations or just plain neglect.

"The statements were always perfect, neat and immaculately presented. They came on time and everything was like clockwork," says Ambrosino, 56, a victim and now activist representing a group of about 400 Madoff investors. She bristles when the AS/400 is called old or outdated. "I know the 400 and it's a pretty powerful machine." It was powerful enough to convince investors that whatever proceeds they sent to Madoff were being invested in the stocks cited on their statements. "Key punch operators were provided with the relevant basket information that they manually entered into House 17. The basket trade was then routinely replicated in selected BLMIS split strike customer accounts automatically and proportionally according to each customer's purported net equity," Looby's declaration says.

The situation was largely the same for non-split strike clients except that the purported trades were in single equities, not baskets. "Thousands of documents including customer statements, IA (investment advisory) staff notes, account folders and programs in the AS/400 were reviewed, and these documents confirm the fact that such statements were prepared on an account-by-account basis (i.e. not basket trading)," Looby wrote.

Looby verified that trades between 2002 and 2008 were phantom by cross-checking with various clearing houses such as DTCC, Clearstream Banking S.A. in Luxembourg, the Chicago Board of Options Exchange (CBOE) and four other clearing firms. He also compared the cleared trades on the AS/400 "House 5" and "99.9 percent" of the fake trades on "House 17" did not match. The only connection he found is what looked like a small portion of a single client's trades, which were directed by the client and recorded on House 5.

Madoff employees monitored the "baskets" for split strike accounts in an Excel spreadsheet to make sure "the prices chosen after-the-fact obtained returns that were neither too high or low."

However, such monitoring was far from perfect. Looby cited several examples where daily trading volumes at BLMIS exceeded the entire daily volume for several stocks.

For instance, Madoff reported the purchase of 17.8 million shares of Exxon Mobil on Oct. 16, 2002. This amounted to 131 percent of the company's trading volume for that day. BLMIS's actual Exxon Mobil holdings that October were verified by the DTCC at 5,730 shares. Similar discrepancies for Amgen, Microsoft and Hewlett Packard were found on Nov. 30, 2008, the date for the final batch of BLMIS customer statements, as it turned out.

BLMIS data for options puts and calls was even more blatantly unreal. On Oct. 11, 2002, Looby found that BLMIS "applied an imaginary basket to 279 accounts with a volume of 82,959 OEX (S&P 100 options) calls and 82,959 puts." That amounted to 13 times the OEX volume at the CBOE that day.

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

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

"Peter R. Scanlon, Who Led Coopers When Big 8 Ruled Auditing, Is Dead at 78," by Dennis Hevesi, The New York Times, December 10, 2009 ---
http://www.nytimes.com/2009/12/11/business/11scanlon.html?_r=2&emc=tnt&tntemail1=y

Peter R. Scanlon, a former chairman and chief executive of one of the world’s largest public accounting firms, died on Dec. 3 at his home in Jupiter, Fla. He was 78.

The cause was cancer, his daughter Barbara Scanlon Jessup said.

Mr. Scanlon led Coopers & Lybrand from 1982 to 1991; the firm merged with Price Waterhouse in 1998 to form PricewaterhouseCoopers. During his tenure, the company was regularly referred to as one of the Big Eight. But with consolidation in the industry, and with Arthur Andersen out of business, PricewaterhouseCoopers is now one of the Big Four.

In the late 1980s, under Mr. Scanlon, Coopers & Lybrand often drew criticism for shunning the merger mania that engulfed the accounting profession. Ultimately, however, the firm was credited with having turned the situation to its advantage. By attracting disaffected affiliates of its competitors in other countries, it was able to expand its international franchise without incurring the costs of all-out mergers.

“We’re not opposed to mergers, but we’re just not going to do it because everyone thinks it’s the right thing to do,” Mr. Scanlon told The New York Times in 1989.

Mr. Scanlon brought in major new clients, including SmithKline Beckman and Unilever, and expanded his company’s existing operations rather than opening new offices. In the process he steered its profitability close to that of the other big firms. In 1991, his last year as its leader, Coopers & Lybrand earned $261 million on revenues of $1.5 billion.

Peter Redmond Scanlon was born in the Bronx on Feb. 18, 1931, one of eight children of Loretta Ryan and John Scanlon Jr. His father, who owned an insurance company, died when Peter was 9.

Peter was the first in his family to graduate from college, earning a bachelor’s degree in accounting from Iona College in 1952. He immediately joined what was then known as Lybrand, Ross Brothers & Montgomery. After serving in the United States Navy during the Korean War, he returned to the company and began rising through its ranks.

Besides his daughter Barbara, Mr. Scanlon is survived by his wife of 56 years, the former Mary Jane Condon; another daughter, Janet Scanlon; two sons, Peter and Brian; and eight grandchildren. His son Mark died in 1992.

Bob Jensen's threads on accounting history --- Click Here

Bob Jensen's threads on the large accounting firms --- Click Here
 

The Greatest Swindle in the History of the World

Paulson and Geithner Lied Big Time:  The Greatest Swindle in the History of the World
What was their real motive in the greatest fraud conspiracy in the history of the world?
Bombshell:  In 2008 and early 2009, Treasury Secretary leaders Paulson and Geithner told the media and Congress that AIG needed a global bailout due to not having cash reserves to meet credit default swap (systematic risk) obligations and insurance policy payoffs. On November 19, 2009 in Congressional testimony Geithner now admits that all this was a pack of lies. However, he refuses to resign as requested by some Senators.

Oh really?
"AIG and Systemic Risk Geithner says credit-default swaps weren't the problem, after all," Editors of The Wall Street Journal, November 20, 2009 ---
Click Here

TARP Inspector General Neil Barofsky keeps committing flagrant acts of political transparency, which if nothing else ought to inform the debate going forward over financial reform. In his latest bombshell, the IG discloses that the New York Federal Reserve did not believe that AIG's credit-default swap (CDS) counterparties posed a systemic financial risk.

Hello?

For the last year, the entire Beltway theory of the financial panic has been based on the claim that the "opaque," unregulated CDS market had forced the Fed to take over AIG and pay off its counterparties, lest the system collapse. Yet we now learn from Mr. Barofsky that saving the counterparties was not the reason for the bailout.

In the fall of 2008 the New York Fed drove a baby-soft bargain with AIG's credit-default-swap counterparties. The Fed's taxpayer-funded vehicle, Maiden Lane III, bought out the counterparties' mortgage-backed securities at 100 cents on the dollar, effectively canceling out the CDS contracts. This was miles above what those assets could have fetched in the market at that time, if they could have been sold at all.

The New York Fed president at the time was none other than Timothy Geithner, the current Treasury Secretary, and Mr. Geithner now tells Mr. Barofsky that in deciding to make the counterparties whole, "the financial condition of the counterparties was not a relevant factor."

This is startling. In April we noted in these columns that Goldman Sachs, a major AIG counterparty, would certainly have suffered from an AIG failure. And in his latest report, Mr. Barofsky comes to the same conclusion. But if Mr. Geithner now says the AIG bailout wasn't driven by a need to rescue CDS counterparties, then what was the point? Why pay Goldman and even foreign banks like Societe Generale billions of tax dollars to make them whole?

Both Treasury and the Fed say they think it would have been inappropriate for the government to muscle counterparties to accept haircuts, though the New York Fed tried to persuade them to accept less than par. Regulators say that having taxpayers buy out the counterparties improved AIG's liquidity position, but why was it important to keep AIG liquid if not to protect some class of creditors?

Yesterday, Mr. Geithner introduced a new explanation, which is that AIG might not have been able to pay claims to its insurance policy holders: "AIG was providing a range of insurance products to households across the country. And if AIG had defaulted, you would have seen a downgrade leading to the liquidation and failure of a set of insurance contracts that touched Americans across this country and, of course, savers around the world."

Yet, if there is one thing that all observers seemed to agree on last year, it was that AIG's money to pay policyholders was segregated and safe inside the regulated insurance subsidiaries. If the real systemic danger was the condition of these highly regulated subsidiaries—where there was no CDS trading—then the Beltway narrative implodes.

Interestingly, in Treasury's official response to the Barofsky report, Assistant Secretary Herbert Allison explains why the department acted to prevent an AIG bankruptcy. He mentions the "global scope of AIG, its importance to the American retirement system, and its presence in the commercial paper and other financial markets." He does not mention CDS.

All of this would seem to be relevant to the financial reform that Treasury wants to plow through Congress. For example, if AIG's CDS contracts were not the systemic risk, then what is the argument for restructuring the derivatives market? After Lehman's failure, CDS contracts were quickly settled according to the industry protocol. Despite fears of systemic risk, none of the large banks, either acting as a counterparty to Lehman or as a buyer of CDS on Lehman itself, turned out to have major exposure.

More broadly, lawmakers now have an opportunity to dig deeper into the nature of moral hazard and the restoration of a healthy financial system. Barney Frank and Chris Dodd are pushing to give regulators "resolution authority" for struggling firms. Under both of their bills, this would mean unlimited ability to spend unlimited taxpayer sums to prevent an unlimited universe of firms from failing.

Americans know that's not the answer, but what is the best solution to the too-big-to-fail problem? And how exactly does one measure systemic risk? To answer these questions, it's essential that we first learn the lessons of 2008. This is where reports like Mr. Barofsky's are valuable, telling us things that the government doesn't want us to know.

In remarks Tuesday that were interpreted as a veiled response to Mr. Barofsky's report, Mr. Geithner said, "It's a great strength of our country, that you're going to have the chance for a range of people to look back at every decision made in every stage in this crisis, and look at the quality of judgments made and evaluate them with the benefit of hindsight." He added, "Now, you're going to see a lot of conviction in this, a lot of strong views—a lot of it untainted by experience."

Mr. Geithner has a point about Monday-morning quarterbacking. He and others had to make difficult choices in the autumn of 2008 with incomplete information and often with little time to think, much less to reflect. But that was last year. The task now is to learn the lessons of that crisis and minimize the moral hazard so we can reduce the chances that the panic and bailout happen again.

This means a more complete explanation from Mr. Geithner of what really drove his decisions last year, how he now defines systemic risk, and why he wants unlimited power to bail out creditors—before Congress grants the executive branch unlimited resolution authority that could lead to bailouts ad infinitum.

Jensen Comment
One of the first teller of lies was the highly respected Gretchen Morgenson of The New York Times who was repeating the lies told to her and Congress by the Treasury and the Fed. This was when I first believed that the problem at AIG was failing to have capital reserves to meet CDS obligations. I really believed Morgenson's lies in 2008 ---
http://www.nytimes.com/2008/09/21/business/21gret.html
 

Here's what I wrote in 2008 --- http://www.trinity.edu/rjensen/2008Bailout.htm#Bailout
Credit Default Swap (CDS)
This is an insurance policy that essentially "guarantees" that if a CDO goes bad due to having turds mixed in with the chocolates, the "counterparty" who purchased the CDO will recover the value fraudulently invested in turds. On September 30, 2008 Gretchen Morgenson of The New York Times aptly explained that the huge CDO underwriter of CDOs was the insurance firm called AIG. She also explained that the first $85 billion given in bailout money by Hank Paulson to AIG was to pay the counterparties to CDS swaps. She also explained that, unlike its casualty insurance operations, AIG had no capital reserves for paying the counterparties for the the turds they purchased from Wall Street investment banks.

"Your Money at Work, Fixing Others’ Mistakes," by Gretchen Morgenson, The New York Times, September 20, 2008 --- http://www.nytimes.com/2008/09/21/business/21gret.html
Also see "A.I.G., Where Taxpayers’ Dollars Go to Die," The New York Times, March 7, 2009 --- http://www.nytimes.com/2009/03/08/business/08gret.html

What Ms. Morgenson failed to explain, when Paulson eventually gave over $100 billion for AIG's obligations to counterparties in CDS contracts, was who were the counterparties who received those bailout funds. It turns out that most of them were wealthy Arabs and some Asians who we were getting bailed out while Paulson was telling shareholders of WaMu, Lehman Brothers, and Merrill Lynch to eat their turds.

You tube had a lot of videos about a CDS. Go to YouTube and read in the phrase "credit default swap" --- http://www.youtube.com/results?search_query=Credit+Default+Swaps&search_type=&aq=f
In particular note this video by Paddy Hirsch --- http://www.youtube.com/watch?v=kaui9e_4vXU
Paddy has some other YouTube videos about the financial crisis.

Bob Jensen’s threads on accounting for credit default swaps are under the C-Terms at
http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm#C-Terms

The Greatest Swindle in the History of the World
"The Greatest Swindle Ever Sold," by Andy Kroll, The Nation, May 26, 2009 ---
http://www.thenation.com/doc/20090608/kroll/print

The legislation's guidelines for crafting the rescue plan were clear: the TARP should protect home values and consumer savings, help citizens keep their homes and create jobs. Above all, with the government poised to invest hundreds of billions of taxpayer dollars in various financial institutions, the legislation urged the bailout's architects to maximize returns to the American people.

That $700 billion bailout has since grown into a more than $12 trillion commitment by the US government and the Federal Reserve. About $1.1 trillion of that is taxpayer money--the TARP money and an additional $400 billion rescue of mortgage companies Fannie Mae and Freddie Mac. The TARP now includes twelve separate programs, and recipients range from megabanks like Citigroup and JPMorgan Chase to automakers Chrysler and General Motors.

Seven months in, the bailout's impact is unclear. The Treasury Department has used the recent "stress test" results it applied to nineteen of the nation's largest banks to suggest that the worst might be over; yet the International Monetary Fund, as well as economists like New York University professor and economist Nouriel Roubini and New York Times columnist Paul Krugman predict greater losses in US markets, rising unemployment and generally tougher economic times ahead.

What cannot be disputed, however, is the financial bailout's biggest loser: the American taxpayer. The US government, led by the Treasury Department, has done little, if anything, to maximize returns on its trillion-dollar, taxpayer-funded investment. So far, the bailout has favored rescued financial institutions by subsidizing their losses to the tune of $356 billion, shying away from much-needed management changes and--with the exception of the automakers--letting companies take taxpayer money without a coherent plan for how they might return to viability.

The bailout's perks have been no less favorable for private investors who are now picking over the economy's still-smoking rubble at the taxpayers' expense. The newer bailout programs rolled out by Treasury Secretary Timothy Geithner give private equity firms, hedge funds and other private investors significant leverage to buy "toxic" or distressed assets, while leaving taxpayers stuck with the lion's share of the risk and potential losses.

Given the lack of transparency and accountability, don't expect taxpayers to be able to object too much. After all, remarkably little is known about how TARP recipients have used the government aid received. Nonetheless, recent government reports, Congressional testimony and commentaries offer those patient enough to pore over hundreds of pages of material glimpses of just how Wall Street friendly the bailout actually is. Here, then, based on the most definitive data and analyses available, are six of the most blatant and alarming ways taxpayers have been scammed by the government's $1.1-trillion, publicly funded bailout.

1. By overpaying for its TARP investments, the Treasury Department provided bailout recipients with generous subsidies at the taxpayer's expense.

When the Treasury Department ditched its initial plan to buy up "toxic" assets and instead invest directly in financial institutions, then-Treasury Secretary Henry Paulson Jr. assured Americans that they'd get a fair deal. "This is an investment, not an expenditure, and there is no reason to expect this program will cost taxpayers anything," he said in October 2008.

Yet the Congressional Oversight Panel (COP), a five-person group tasked with ensuring that the Treasury Department acts in the public's best interest, concluded in its monthly report for February that the department had significantly overpaid by tens of billions of dollars for its investments. For the ten largest TARP investments made in 2008, totaling $184.2 billion, Treasury received on average only $66 worth of assets for every $100 invested. Based on that shortfall, the panel calculated that Treasury had received only $176 billion in assets for its $254 billion investment, leaving a $78 billion hole in taxpayer pockets.

Not all investors subsidized the struggling banks so heavily while investing in them. The COP report notes that private investors received much closer to fair market value in investments made at the time of the early TARP transactions. When, for instance, Berkshire Hathaway invested $5 billion in Goldman Sachs in September, the Omaha-based company received securities worth $110 for each $100 invested. And when Mitsubishi invested in Morgan Stanley that same month, it received securities worth $91 for every $100 invested.

As of May 15, according to the Ethisphere TARP Index, which tracks the government's bailout investments, its various investments had depreciated in value by almost $147.7 billion. In other words, TARP's losses come out to almost $1,300 per American taxpaying household.

2. As the government has no real oversight over bailout funds, taxpayers remain in the dark about how their money has been used and if it has made any difference.

While the Treasury Department can make TARP recipients report on just how they spend their government bailout funds, it has chosen not to do so. As a result, it's unclear whether institutions receiving such funds are using that money to increase lending--which would, in turn, boost the economy--or merely to fill in holes in their balance sheets.

Neil M. Barofsky, the special inspector general for TARP, summed the situation up this way in his office's April quarterly report to Congress: "The American people have a right to know how their tax dollars are being used, particularly as billions of dollars are going to institutions for which banking is certainly not part of the institution's core business and may be little more than a way to gain access to the low-cost capital provided under TARP."

This lack of transparency makes the bailout process highly susceptible to fraud and corruption. Barofsky's report stated that twenty separate criminal investigations were already underway involving corporate fraud, insider trading and public corruption. He also told the Financial Times that his office was investigating whether banks manipulated their books to secure bailout funds. "I hope we don't find a single bank that's cooked its books to try to get money, but I don't think that's going to be the case."

Economist Dean Baker, co-director of the Center for Economic and Policy Research in Washington, suggested to TomDispatch in an interview that the opaque and complicated nature of the bailout may not be entirely unintentional, given the difficulties it raises for anyone wanting to follow the trail of taxpayer dollars from the government to the banks. "[Government officials] see this all as a Three Card Monte, moving everything around really quickly so the public won't understand that this really is an elaborate way to subsidize the banks," Baker says, adding that the public "won't realize we gave money away to some of the richest people."

3. The bailout's newer programs heavily favor the private sector, giving investors an opportunity to earn lucrative profits and leaving taxpayers with most of the risk.

Under Treasury Secretary Geithner, the Treasury Department has greatly expanded the financial bailout to troubling new programs like the Public-Private Investment Program (PPIP) and the Term Asset-Backed-Securities Loan Facility (TALF). The PPIP, for example, encourages private investors to buy "toxic" or risky assets on the books of struggling banks. Doing so, we're told, will get banks lending again because the burdensome assets won't weigh them down. Unfortunately, the incentives the Treasury Department is offering to get private investors to participate are so generous that the government--and, by extension, American taxpayers--are left with all the downside.

Joseph Stiglitz, the Nobel-prize winning economist, described the PPIP program in a New York Times op-ed this way:

Consider an asset that has a 50-50 chance of being worth either zero or $200 in a year's time. The average "value" of the asset is $100. Ignoring interest, this is what the asset would sell for in a competitive market. It is what the asset is 'worth.' Under the plan by Treasury Secretary Timothy Geithner, the government would provide about 92 percent of the money to buy the asset but would stand to receive only 50 percent of any gains, and would absorb almost all of the losses. Some partnership!

Assume that one of the public-private partnerships the Treasury has promised to create is willing to pay $150 for the asset. That's 50 percent more than its true value, and the bank is more than happy to sell. So the private partner puts up $12, and the government supplies the rest--$12 in "equity" plus $126 in the form of a guaranteed loan.

If, in a year's time, it turns out that the true value of the asset is zero, the private partner loses the $12, and the government loses $138. If the true value is $200, the government and the private partner split the $74 that's left over after paying back the $126 loan. In that rosy scenario, the private partner more than triples his $12 investment. But the taxpayer, having risked $138, gains a mere $37."

Worse still, the PPIP can be easily manipulated for private gain. As economist Jeffrey Sachs has described it, a bank with worthless toxic assets on its books could actually set up its own public-private fund to bid on those assets. Since no true bidder would pay for a worthless asset, the bank's public-private fund would win the bid, essentially using government money for the purchase. All the public-private fund would then have to do is quietly declare bankruptcy and disappear, leaving the bank to make off with the government money it received. With the PPIP deals set to begin in the coming months, time will tell whether private investors actually take advantage of the program's flaws in this fashion.

The Treasury Department's TALF program offers equally enticing possibilities for potential bailout profiteers, providing investors with a chance to double, triple or even quadruple their investments. And like the PPIP, if the deal goes bad, taxpayers absorb most of the losses. "It beats any financing that the private sector could ever come up with," a Wall Street trader commented in a recent Fortune magazine story. "I almost want to say it is irresponsible."

4. The government has no coherent plan for returning failing financial institutions to profitability and maximizing returns on taxpayers' investments.

Compare the treatment of the auto industry and the financial sector, and a troubling double standard emerges. As a condition for taking bailout aid, the government required Chrysler and General Motors to present detailed plans on how the companies would return to profitability. Yet the Treasury Department attached minimal conditions to the billions injected into the largest bailed-out financial institutions. Moreover, neither Geithner nor Lawrence Summers, one of President Barack Obama's top economic advisors, nor the president himself has articulated any substantive plan or vision for how the bailout will help these institutions recover and, hopefully, maximize taxpayers' investment returns.

The Congressional Oversight Panel highlighted the absence of such a comprehensive plan in its January report. Three months into the bailout, the Treasury Department "has not yet explained its strategy," the report stated. "Treasury has identified its goals and announced its programs, but it has not yet explained how the programs chosen constitute a coherent plan to achieve those goals."

Today, the department's endgame for the bailout still remains vague. Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, wrote in the Financial Times in May that the government's response to the financial meltdown has been "ad hoc, resulting in inequitable outcomes among firms, creditors, and investors." Rather than perpetually prop up banks with endless taxpayer funds, Hoenig suggests, the government should allow banks to fail. Only then, he believes, can crippled financial institutions and systems be fixed. "Because we still have far to go in this crisis, there remains time to define a clear process for resolving large institutional failure. Without one, the consequences will involve a series of short-term events and far more uncertainty for the global economy in the long run."

The healthier and more profitable bailout recipients are once financial markets rebound, the more taxpayers will earn on their investments. Without a plan, however, banks may limp back to viability while taxpayers lose their investments or even absorb further losses.

5. The bailout's focus on Wall Street mega-banks ignores smaller banks serving millions of American taxpayers that face an equally uncertain future.

The government may not have a long-term strategy for its trillion-dollar bailout, but its guiding principle, however misguided, is clear: what's good for Wall Street will be best for the rest of the country.

On the day the mega-bank stress tests were officially released, another set of stress-test results came out to much less fanfare. In its quarterly report on the health of individual banks and the banking industry as a whole, Institutional Risk Analytics (IRA), a respected financial services organization, found that the stress levels among more than 7,500 FDIC-reporting banks nationwide had risen dramatically. For 1,575 of the banks, net incomes had turned negative due to decreased lending and less risk-taking.

The conclusion IRA drew was telling: "Our overall observation is that US policy makers may very well have been distracted by focusing on 19 large stress test banks designed to save Wall Street and the world's central bank bondholders, this while a trend is emerging of a going concern viability crash taking shape under the radar." The report concluded with a question: "Has the time come to shift the policy focus away from the things that we love, namely big zombie banks, to tackle things that are truly hurting us?"

6. The bailout encourages the very behaviors that created the economic crisis in the first place instead of overhauling our broken financial system and helping the individuals most affected by the crisis.

As Joseph Stiglitz explained in the New York Times, one major cause of the economic crisis was bank overleveraging. "Using relatively little capital of their own," he wrote, banks "borrowed heavily to buy extremely risky real estate assets. In the process, they used overly complex instruments like collateralized debt obligations." Financial institutions engaged in overleveraging in pursuit of the lucrative profits such deals promised--even if those profits came with staggering levels of risk.

Sound familiar? It should, because in the PPIP and TALF bailout programs the Treasury Department has essentially replicated the very over-leveraged, risky, complex system that got us into this mess in the first place: in other words, the government hopes to repair our financial system by using the flawed practices that caused this crisis.

Then there are the institutions deemed "too big to fail." These financial giants--among them AIG, Citigroup and Bank of America-- have been kept afloat by billions of dollars in bottomless bailout aid. Yet reinforcing the notion that any institution is "too big to fail" is dangerous to the economy. When a company like AIG grows so large that it becomes "too big to fail," the risk it carries is systemic, meaning failure could drag down the entire economy. The government should force "too big to fail" institutions to slim down to a safer, more modest size; instead, the Treasury Department continues to subsidize these financial giants, reinforcing their place in our economy.

Of even greater concern is the message the bailout sends to banks and lenders--namely, that the risky investments that crippled the economy are fair game in the future. After all, if banks fail and teeter at the edge of collapse, the government promises to be there with a taxpayer-funded, potentially profitable safety net.

The handling of the bailout makes at least one thing clear, however. It's not your health that the government is focused on, it's theirs-- the very banks and lenders whose convoluted financial systems provided the underpinnings for staggering salaries and bonuses, while bringing our economy to the brink of another Great Depression.

 Keynes: The Rise, Fall, and Return of the 20th Century's Most Influential Economist by Peter Clarke (Bloomsbury; 2009,  211 pages; $20). Examines the life and legacy of the British economist (1883-1946).
 

"Lack of Candor and the AIG Bailout:  If AIG wasn't too big to fail, why did the government rescue it? And why do we need to turn the financial system upside down?" by Peter J. Wallison, The Wall Street Journal, November 27, 2009 ---
http://online.wsj.com/article/SB10001424052748704779704574551861399508826.html?mod=djemEditorialPage 

Since last September, the government's case for bailing out AIG has rested on the notion that the company was too big to fail. If AIG hadn't been rescued, the argument goes, its credit default swap (CDS) obligations would have caused huge losses to its counterparties—and thus provoked a financial collapse.

Last week's news that this was not in fact the motive for AIG's rescue has implications that go well beyond the Obama administration's efforts to regulate CDSs and other derivatives. It's one more example that the administration may be using the financial crisis as a pretext to extend Washington's control of the financial sector.

The truth about the credit default swaps came out last week in a report by TARP Special Inspector General Neil Barofsky. It says that Treasury Secretary Tim Geithner, then president of the New York Federal Reserve Bank, did not believe that the financial condition of AIG's credit default swap counterparties was "a relevant factor" in the decision to bail out the company. This contradicts the conventional assumption, never denied by the Federal Reserve or the Treasury, that AIG's failure would have had a devastating effect.

So why did the government rescue AIG? This has never been clear.

The Obama administration has consistently argued that the "interconnections" among financial companies made it necessary to save AIG and Bear Stearns. Focusing on interconnections implies that the failure of one large financial firm will cause debilitating losses at others, and eventually a systemic breakdown. Apparently this was not true in the case of AIG and its credit default swaps—which leaves open the question of why the Fed, with the support of the Treasury, poured $180 billion into AIG.

The broader question is whether the entire regulatory regime proposed by the administration, and now being pushed through Congress by Rep. Barney Frank and Sen. Chris Dodd, is based on a faulty premise. The administration has consistently used the term "large, complex and interconnected" to describe the nonbank financial institutions it wants to regulate. The prospect that the failure of one of these firms might pose a systemic risk is the foundation of the administration's comprehensive regulatory regime for the financial industry.

Up to now, very few pundits or reporters have questioned this logic. They have apparently been satisfied with the explanation that the "interconnectedness" created by those mysterious credit default swaps was the culprit.

But the New York Fed is the regulatory body most familiar with the CDS market. If that agency did not believe AIG's failure would have actually brought down its counterparties—and ultimately the financial system itself—it raises serious questions about the administration's credibility, and about the need for its regulatory proposals. If "interconnections" among financial institutions are indeed the source of the financial crisis, the administration should be far more forthcoming than it has been about exactly what these interconnections are, and how exactly a broad new system of regulation and resolution would eliminate or reduce them.

The administration's unwillingness or inability to clearly define the problem of interconnectedness is not the only weakness in its rationale for imposing a whole new regulatory regime on the financial system. Another example is the claim—made by Mr. Geithner and President Obama himself—that predatory lending by mortgage brokers was one of the causes of the financial crisis.

No doubt some deceptive practices occurred in mortgage origination. But the facts suggest that the government's own housing policies—and not weak regulation—were the source of these bad loans.

At the end of 2008, there were about 26 million subprime and other nonprime mortgages in our financial system. Two-thirds of these mortgages were on the balance sheets of the Federal Housing Administration, Fannie Mae and Freddie Mac, and the four largest U.S. banks. The banks were required to make these loans in order to gain approval from the Fed and other regulators for mergers and expansions.

The fact that the government itself either bought these bad loans or required them to be made shows that the most plausible explanation for the large number of subprime loans in our economy is not a lack of regulation at the mortgage origination level, but government-created demand for these loans.

Finally, although there may be a good policy argument for a new consumer protection agency for financial services and products, the scope of what the administration has proposed goes far beyond lending, or even deposit-taking. In the administration's proposed legislation, the Consumer Financial Protection Agency would cover any business that provides consumer credit of any kind, including the common layaway plans and Christmas clubs that small retailers offer their customers.

Under the guise of addressing the causes of a global financial crisis, the Obama administration's bill would have regulated credit counseling, educational courses on finance, financial-data processing, money transmission and custodial services, and dozens more small businesses that could not possibly cause a financial crisis. Even Chairmen Frank and Dodd balked at this overreach. Their bills exempt retailers if their financial activity is incidental to their other business. Still, many vestiges of this excess remain in the legislation that is now being pushed toward a vote.

The lack of candor about credit default swaps, the effort to blame lack of regulation for the subprime crisis and the excessive reach of the proposed consumer protection agency are all of a piece. The administration seems to be using the specter of another financial crisis to bring more and more of the economy under Washington's control.

With the help of large Democratic majorities in Congress, this train has had considerable momentum. But perhaps—with the disclosure about credit default swaps and the AIG crisis—the wheels are finally coming off.

Bob Jensen's threads on the Greatest Swindle in the World are at
http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze

Bob Jensen's threads on why the infamous "Bailout" won't work --- http://www.trinity.edu/rjensen/2008Bailout.htm#BailoutStupidity

By now we've heard most all the reasons/excuses for the disappearance of all investment banking firms http://www.trinity.edu/rjensen/2008Bailout.htm#InvestmentBanking

The December 5, 2009 issue of The Economist magazine offers a new twist by blaming, in part, the silo databases of Wall Street firms. This is surprising since I would've assumed the big investment banks would've been early adopters of ERP system-wide communicating databases.

The term "silo computing" or "data silo" dates back to before the days of computer networking and refers to multiple databases in an organizations that are not compatible and often require duplicate computing. For example, an account sales database in the marketing department may be programmed differently than the account sales database in the accounting department. Silo computing was extremely common and extremely inefficient in COBOL days before the onset of Enterprise Resource Planning (ERP) integrative (ERP) total enterprise interactive databases of which the German SAP systems are the best known ERP systems --- http://www.trinity.edu/rjensen/245glosap.htm

"Silo but deadly," The Economist, December 5-11, 2009, pp. 83-84 ---
http://www.economist.com/businessfinance/displaystory.cfm?story_id=15016132

NO INDUSTRY spends more on information technology (IT) than financial services: about $500 billion globally, more than a fifth of the total (see chart). Many of the world’s computers, networking and storage systems live in the huge data centres run by banks. “Banks are essentially technology firms,” says Hugo Banziger, chief risk officer at Deutsche Bank. Yet the role of IT in the crisis is barely discussed.

It should be. Corporate IT systems—collections of computers, applications and databases—always tend to be messy, but those of banks are particularly bad. They were the first to adopt computers: decades-old mainframes are still in use. Lots of product innovation means new systems, as does merger activity, which has proliferated in the industry in recent years: Citigroup had a notoriously fragmented IT set-up going into the crisis. The need to comply with regulations, and the global presence of big banks, adds complexity.

The demands of financial markets make matters worse. Hedging positions, trading derivatives and modelling financial products all require highly sophisticated programs that are only really suited to specific asset classes. The code for new financial products has to be developed quickly. Innovation often takes place on Excel spreadsheets on traders’ desktops. “The big task of management is to manage down the number of spreadsheets,” says one risk chief, whose bank creates 1,000 product variations a year.

As a result, many banks have huge problems with data quality. The same types of asset are often defined differently in different programs. Numbers do not always add up. Managers from different departments do not trust each other’s figures. Finding one’s way through all these systems is detective work, says a former IT manager at a big British bank. “And sometimes the trail would go cold.”

This fragmented IT landscape made it exceedingly difficult to track a bank’s overall risk exposure before and during the crisis. Mainly as a result of the Basel 2 capital accords, many banks had put in new systems to calculate their aggregate exposure. Royal Bank of Scotland (RBS) spent more than $100m to comply with Basel 2. But in most cases the aggregate risk was only calculated once a day and some figures were not worth the pixels they were made of.

During the turmoil many banks had to carry out big fact-finding missions to see where they stood. “Answering such questions as ‘What is my exposure to this counterparty?’ should take minutes. But it often took hours, if not days,” says Peyman Mestchian, managing partner at Chartis Research, an advisory firm. Insiders at Lehman Brothers say its European arm lacked an integrated picture of its risk position in the days running up to its demise.

Whether the financial industry would have hit the brakes if it had had digital dashboards showing banks’ overall exposures in real time is a moot point. Some managers might not have even looked. And better IT would have done little to counteract the bigger forces behind the crisis, such as global economic imbalances.

Continued in article

Bob Jensen's threads on the recent Wall Street woes are at
http://www.trinity.edu/rjensen/2008Bailout.htm

Chinese mercantilism is a growing problem

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

"Chinese New Year," by Paul Krugman, The New York Times, December 31, 2009 ---
http://www.nytimes.com/2010/01/01/opinion/01krugman.html

It’s the season when pundits traditionally make predictions about the year ahead. Mine concerns international economics: I predict that 2010 will be the year of China. And not in a good way.

Actually, the biggest problems with China involve climate change. But today I want to focus on currency policy.

China has become a major financial and trade power. But it doesn’t act like other big economies. Instead, it follows a mercantilist policy, keeping its trade surplus artificially high. And in today’s depressed world, that policy is, to put it bluntly, predatory.

Here’s how it works: Unlike the dollar, the euro or the yen, whose values fluctuate freely, China’s currency is pegged by official policy at about 6.8 yuan to the dollar. At this exchange rate, Chinese manufacturing has a large cost advantage over its rivals, leading to huge trade surpluses.

Under normal circumstances, the inflow of dollars from those surpluses would push up the value of China’s currency, unless it was offset by private investors heading the other way. And private investors are trying to get into China, not out of it. But China’s government restricts capital inflows, even as it buys up dollars and parks them abroad, adding to a $2 trillion-plus hoard of foreign exchange reserves.

This policy is good for China’s export-oriented state-industrial complex, not so good for Chinese consumers. But what about the rest of us?

In the past, China’s accumulation of foreign reserves, many of which were invested in American bonds, was arguably doing us a favor by keeping interest rates low — although what we did with those low interest rates was mainly to inflate a housing bubble. But right now the world is awash in cheap money, looking for someplace to go. Short-term interest rates are close to zero; long-term interest rates are higher, but only because investors expect the zero-rate policy to end some day. China’s bond purchases make little or no difference.

Meanwhile, that trade surplus drains much-needed demand away from a depressed world economy. My back-of-the-envelope calculations suggest that for the next couple of years Chinese mercantilism may end up reducing U.S. employment by around 1.4 million jobs.

The Chinese refuse to acknowledge the problem. Recently Wen Jiabao, the prime minister, dismissed foreign complaints: “On one hand, you are asking for the yuan to appreciate, and on the other hand, you are taking all kinds of protectionist measures.” Indeed: other countries are taking (modest) protectionist measures precisely because China refuses to let its currency rise. And more such measures are entirely appropriate.

Or are they? I usually hear two reasons for not confronting China over its policies. Neither holds water.

First, there’s the claim that we can’t confront the Chinese because they would wreak havoc with the U.S. economy by dumping their hoard of dollars. This is all wrong, and not just because in so doing the Chinese would inflict large losses on themselves. The larger point is that the same forces that make Chinese mercantilism so damaging right now also mean that China has little or no financial leverage.

Again, right now the world is awash in cheap money. So if China were to start selling dollars, there’s no reason to think it would significantly raise U.S. interest rates. It would probably weaken the dollar against other currencies — but that would be good, not bad, for U.S. competitiveness and employment. So if the Chinese do dump dollars, we should send them a thank-you note.

Second, there’s the claim that protectionism is always a bad thing, in any circumstances. If that’s what you believe, however, you learned Econ 101 from the wrong people — because when unemployment is high and the government can’t restore full employment, the usual rules don’t apply.

Let me quote from a classic paper by the late Paul Samuelson, who more or less created modern economics: “With employment less than full ... all the debunked mercantilistic arguments” — that is, claims that nations who subsidize their exports effectively steal jobs from other countries — “turn out to be valid.” He then went on to argue that persistently misaligned exchange rates create “genuine problems for free-trade apologetics.” The best answer to these problems is getting exchange rates back to where they ought to be. But that’s exactly what China is refusing to let happen.

The bottom line is that Chinese mercantilism is a growing problem, and the victims of that mercantilism have little to lose from a trade confrontation. So I’d urge China’s government to reconsider its stubbornness. Otherwise, the very mild protectionism it’s currently complaining about will be the start of something much bigger.

"Chinese official raps US banks on derivatives," AsiaLynx, December 4, 2009 ---
http://www.asialynx.com/2009/12/04/chinese-official-raps-us-banks-on-derivatives/

BEIJING (Agencies): A senior Chinese official criticized foreign banks for selling derivatives with “fraudulent characteristics” that led to heavy losses for state-owned airlines and other companies.

“Some international investment banks are the biggest villains,” said Li Wei, deputy chairman of the agency that oversees China’s biggest state companies, in a commentary in this week’s edition of the Study Times, a newspaper published by the school of the Communist Party’s Central Committee.

The comments were the Chinese government’s most pointed public criticism yet of foreign institutions. Li’s agency said in September it would support companies that want to challenge the contracts in court.
Li said Chinese companies were to blame for most of their losses but complained that derivatives tied oil prices and other matters were too complex and made potential risks too hard to identify.

“Of course, first of all we need to find problems in the companies themselves,” Li wrote in the front-page commentary. “But it also is largely related to international investment banks maliciously peddling high-leverage, complex products with fraudulent characteristics.”

Some 68 of the 136 major banks, airlines and other companies directly controlled by the Cabinet invested in derivatives and recorded book losses totaling 11.4 billion yuan ($1.7 billion) by the end of October 2008, according to Li.

Li made no specific accusations against individual banks. But he noted that airlines and shipping companies bought fuel contracts from Goldman Sachs Group, Merrill Lynch — now a unit of Bank of America Corp. — and Morgan Stanley, while banks bought derivatives from Merrill Lynch, Morgan Stanley and Citigroup.

Spokespeople in China for Goldman and Citigroup declined to comment. Spokespeople for Morgan Stanley and Merrill Lynch did not immediately respond to phone messages and e-mails. – read more at ChinaDaily.com

Bob Jensen's timeline for derivative financial instruments frauds ---
http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds

The Greatest Swindle in the History of the World ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Bailout

What caused the great depressions in stock market listings, especially new listings?
Grant Thornton has a strong argument that the underlying reason for “The Great Depression in Listings” is not Sarbanes-Oxley, but what they call “The Great Delisting Machine,” an array of regulatory changes that were meant to advance low-cost trading, but have had the unintended consequence of stripping economic support for the value components (quality sell-side research, capital commitment and sales) that are needed to support markets, especially for smaller capitalization companies. GT cautions that today, capital formation in the U.S. is on life support. Within the venture capital universe, the average time from first venture investment to IPO has more than doubled.
David Weild and Edward Kim, "A Wake Up Call for America," Grant Thornton LLC, November 2009 ---
http://www.gt.com/staticfiles/GTCom/Public%20companies%20and%20capital%20markets/gt_wakeup_call_.pdf

A possible teaching case about equity share classes and stock splits
From The Wall Street Journal Accounting Weekly Review on December 10, 2009

Berkshire Hathaway Sets Meeting to Vote on Stock Split
by Kevin Kingsbury
Dec 04, 2009
Click here to view the full article on WSJ.com

TOPICS: Equity, Financial Accounting, Investments, Stock Acquisition, Stock Price Effects

SUMMARY: Berkshire Hathaway announced plans for a 50-1 stock split of its Class B shares as part of its place to acquire the 77% of railroad corporation Burlington Northern Sante Fe that it doesn't already own. The deal was struck in November Berkshire Hathaway to pay $26 billion in cash and stock for the acquisition.

CLASSROOM APPLICATION: Questions relate to the equity method and acquisition accounting for the investment in Burlington Northern by Berkshire Hathaway and to the accounting for the unusually large stock split.

QUESTIONS: 
1. (Advanced) How do you think Berkshire Hathaway is accounting for its current level of investment in Burlington Northern?

2. (Advanced) What is the name for the type of acquisition that Berkshire Hathaway is now undertaking?

3. (Advanced) Describe in general terms the steps that Berkshire Hathaway must take to account for its acquisition of the remaining 77% of the railroad company.

4. (Introductory) What is the difference between Class A and Class B shares of Berkshire Hathaway?

5. (Introductory) Why must Berkshire Hathaway undertake a stock split in its Class B shares in order to make this acquisition?

6. (Advanced) Why must Berkshire Hathaway hold a shareholder meeting on January 20 to approve the stock split? Specifically state your expectation for the impact of this split on the per share Berkshire Hathaway stock price.

7. (Advanced) How will Berkshire Hathaway account for the stock split?

Reviewed By: Judy Beckman, University of Rhode Island

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Buffett Bets Big on Railroad
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"2010: The Year of the Roth Conversion?" by Rich Arzaga, Journal of Accountancy, January 2010 ---
http://www.journalofaccountancy.com/Issues/2010/Jan/20091743.htm

This year will be the Year of the Tiger, according to Chinese custom, but it also could be remembered by investors as the Year of the Roth Conversion, a decision that can have a large impact on investors’ ability to build wealth during their lifetime and preserve wealth for beneficiaries.

 

Prior to 2010, anyone (except married taxpayers filing separately) with an annual adjusted gross income (AGI) of no greater than $100,000 could convert a traditional IRA to a Roth IRA. The AGI cap has prevented higher-income earners, a class of savers that might have benefited most from this strategy, from participating. However, under the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) these previously ineligible taxpayers will be eligible to participate starting this year (including married but separate filers). In fact, there is an incentive to take action in 2010: Everyone who converts this year may defer and spread income recognition from the conversion over tax years 2011 and 2012. A conversion in 2010 thus could reduce the marginal tax rate and total taxes due on what otherwise would be a larger single-year distribution. The 10% penalty tax otherwise imposed on early or excess distributions from an IRA does not apply. A conversion could be an attractive retirement income and estate planning strategy for wealthy individuals and high-income earners who seek to reduce taxes later in life and transfer more wealth to beneficiaries tax-free. But like any other approach to income and taxes, this decision is eventually based on a set of sustainable assumptions and specific objectives of the taxpayer.

 

ADVANTAGES OF A ROTH ACCOUNT

A chief advantage of a Roth IRA is that it has more flexible rules concerning distributions. Also, taxpayers who are otherwise unable to contribute to a traditional IRA can take advantage of a Roth IRA’s appreciation free from tax on gains. Other advantages of a Roth IRA include:

 

• In most instances, contributions can be withdrawn at any time without penalty. Earnings may be withdrawn without tax or penalty if the taxpayer is at least age 59½ and has held the Roth account for at least five years. Similar strategies that provide for tax-free growth and withdrawal are the IRC § 529 plans for college education and cash-value life insurance policies. Each has its strengths and limitations.
• With a Roth IRA, there are no required minimum distributions (RMDs) like those that apply to traditional IRAs when the taxpayer reaches age 70½. For affluent families with sufficient resources for retirement income, the RMD can seem an unnecessary expense with a confusing formula. From a client’s perspective, eliminating RMDs can provide a great sense of relief from the annual hassle of calculating and managing these distributions.
• Unlike with traditional IRA accounts, taxpayers can continue to contribute to a Roth IRA after reaching age 70½—also an attractive feature as Americans redefine retirement and continue to be industrious into later years. Starting in 2010, a retired couple can contribute $12,000 each year (including the “over- 50 make-up” amount) into Roth accounts. The AGI limits on regular contributions to a Roth IRA still apply, but it is possible to make nondeductible contributions to a traditional IRA and convert them to a Roth, regardless of AGI. These contributions grow free of income tax indefinitely, creating significant value for taxpayers as well as their beneficiaries.
• A tax-diversified retirement distribution strategy also helps with Social Security planning. Up to 85% of Social Security benefits are taxable. When calculating modified adjusted gross income (MAGI) for Social Security purposes, taxpayers must include all taxable and tax-exempt income and 50% of their Social Security benefits, but not Roth IRA distributions. Having a Roth IRA to supplement retirement income can be very important in managing the taxability of Social Security benefits.

 

IDEAL CONVERSION CANDIDATES

Some taxpayers may benefit more than others from converting to a Roth IRA. Assuming there are no cash flow issues, risk management gaps, other tax planning considerations that need to be weighed against the benefit of a conversion, advance tax issues at play, or adverse legislative changes, taxpayers who stand to benefit the most are those who:

 

• Are wealthy.
• Seek to reduce estate settlement costs.
• Won’t need to draw income from converted retirement accounts.
• Are young, high-income earners.
• Believe their tax bracket will be the same or higher in retirement, or more specifically, when they draw income from their qualified retirement accounts. The attractiveness of traditional IRAs and qualified retirement plans depends on the assumption that taxpayers will have a lower effective tax rate after retirement, when the deferred taxes on the savings will come due. Conversely, taxpayers whose tax rate seems more likely to be the same or higher in retirement might just as soon pay taxes on income now and accumulate tax-free gains. Consider the conversion comparison in Exhibit 1.

Continued in article

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

"Creating Lives in the Classroom," by Edith Sheffer, Chronicle of Higher Education, November 22, 2009 ---
http://chronicle.com/article/Teaching-Matters-Creating/49211/?sid=wc&utm_source=wc&utm_medium=en

At the beginning of my course on German history at Stanford University last fall, each student drew an identity at random that he or she would keep throughout the quarter—creating a unique historical character who was born in 1900 and lived through Germany's tumultuous 20th century. Through weekly posts to individual pages on the course Web site, students researched the texture of everyday life, untangled pivotal events, and weighed questions of humanity. Although fictional, the lives that the students developed offered a unique entree into the past, stimulating their curiosity and critical thinking about history.

Each student had one sentence to go on with his or her character's birthplace, gender, religion, and parents' occupations. Characters were born into all walks of life: the son of a prostitute in Berlin, the daughter of Jewish banker in Munich, the son of East Prussian nobility. The rest was up to students to decide. I gave weekly assignments to help structure their posts, requesting diary entries for key dates or eyewitness responses to certain events, and would note any historical inaccuracies in their writings. But I did not interfere with individual choices as to how the avatars would feel, live and act, placing just three restrictions on them: The characters could not die or be otherwise incapacitated, leave Germany permanently, or change the course of history.

That open-endedness engendered a sense of ownership, fostering seriousness and self-correction. Students showed humility in their approach to the material; in the words of one senior, "I kept asking myself, Is this realistic?" Perhaps more than anything, the high standards of the class Web site helped sustain the quality of the work and a productive exchange of ideas.

Over the quarter, the avatars lived through two world wars and the cold war, experiencing monarchy, democracy, fascism, and communism. They each saw Hitler at the Beer Hall Putsch and had to decide whether to vote for him a decade later. They were at the Berlin Wall when it went up in 1961 and came down in 1989. Building upon course readings, they had conversations with the writer Joseph Roth in Weimar Berlin, with the Holocaust perpetrators of Police Battalion 101, and with estranged family and friends on the opposite side of the Iron Curtain. They witnessed and, in some cases, participated in the violence of Germany's 20th century, even as they lived at the pinnacle of Germany's cultural and economic achievements. The characters also reflected upon the meaning of it all as they met together at the close of the century.

As the avatars became increasingly three-dimensional, the project resonated beyond the classroom. Students endowed them with personality quirks, discussed them with friends and family, and incorporated their own histories. One based his character's persecution and emigration from Nazi Germany on his own family's experience; another wrote his grandfather into his story. They also explored individual interests. A history major, prompted by election campaigning over Proposition 8 in California, had her character outed as gay in the Third Reich; she researched the treatment of homosexuals in Germany's successive regimes, integrating details like the number of gay bars in East and West Berlin into her weekly updates.

Students sent their characters on divergent paths. Some plunged head long into radical events and ideologies; others "took the path of least resistance" and "just let history pass [them] by." Some characters' values and personalities stayed consistent; others took "fluctuating, elastic political positions." Some characters spent their whole lives in one place; others ranged far and wide—a colonist to Southwest Africa, Jewish émigrés to Britain and America (they had to return to Germany), a priest to counsel killers in Poland, a resisting factory worker to Auschwitz, and a POW to Siberia.

The project inspired an unusual level of academic commitment. Students often went well beyond the required material in developing their avatars. Their research included Internet searches for images, period-appropriate children's names, and food specialties as well as reading scholarly works on particular topics of interest. They wrote an average of 1,120 words per post, equivalent to four and a half pages a week, in addition to their regular work. Most important, the students integrated all of the information into a coherent whole and uncovered their own historical lessons along the way.

Students said they gained a greater appreciation for everyday complexities—how ordinary people adjusted to extraordinary times, and how adaptations propelled new social and political realities. Their simple vignettes expressed complicated ideas. One farm woman from Dachau supported but had visceral misgivings about the local concentration camp: "I dislike the communists as much as anyone else, but smelling [their ashes] on the wind turned my stomach." Students felt that they came to understand how history makes individuals and individuals make history. A sophomore reflected: "The project forced us to see the situation as much from within as a student can, years later and thousands of miles away. Oskar, to whom I grew attached, had a past, a family, thoughts, ideas. There were justifications for his actions that were intricately tied in with all of these, ones that I would never have considered without a specific persona in mind."

The project also underscored how bound the characters' perceptions and opinions were to the circumstances of the moment—and how decisions made in one decade reverberate in the next. One character, an armaments-manufacturer-turned-democratic-leader, observed that "the only way to begin to make sense of the five very different Germanys I have lived in is to understand the malleable nature of the human mind and human society."

Creating lives can be an effective way to develop individual interests within the bounds of a survey course, as a complement to traditional lectures, exams, and papers. Students commented that it provided a sense of freedom rare in their course work, allowing space for imagination, authorship, and identification. The personal narratives were more work than traditional weekly papers, yet students agreed it was a rewarding way to expand upon the standard approach. As one said, "It was more than worth it. It allowed us to fuse the course material with our own creativity and take away so much more than a typical survey of history."

Although the experience involved a small group of motivated Stanford students, mostly history majors, the basic method can be adapted to different fields and classroom environments. The core concept—creating continuing lives within a Web-based community forum—could have broad appeal. In turn, the personal investment fosters enthusiasm and lasting learning.

Edith Sheffer is an Andrew W. Mellon fellow in the humanities at Stanford University. Her book, Burned Bridge: How East and West Germans Made the Iron Curtain will be published by Oxford University Press in 2011.

Jensen Comment
It struck me that this might be a good way to teach the Enron/Andersen Scandal by letting assigning students to play the parts of David DuckIt, Carl BassFishing, Ken LayLie, Jeff StirFry, Andy FasToad, Bob JaedickeSleepAlot, and the rest ---
http://www.trinity.edu/rjensen/FraudEnron.htm

The Enron Home Video (in praise of HFA, Hypothetical Future Accounting at Enron)
This is a home movie played by the real players, not actors
http://www.cs.trinity.edu/~rjensen/video/enron3.wmv

Bob Jensen's threads on virtual worlds and Second Life ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#SecondLife

"Going Concern “Sarbanes-Oxley Doublespeak”, by Francine McKenna, Re: The Auditors, December 2, 2009 ---
http://retheauditors.com/2009/12/02/going-concern-sarbanes-oxley-doublespeak/

1. "A law by itself does not bring benefits. Measure the benefits of the moral and ethical behaviors the law promotes and requires, instead. Certainly, all the above requirements — except perhaps “real-time” reporting that will implemented by XBRL mandates — are now second nature to most public companies. This didn’t happen without significant cost for some and a lot of bitching. But the significant additional cost (and bitching) was the result of two separate but equal conditions:

• Many companies, even the largest and most highly regarded, were poorly run – policies, procedures and controls over external financial reporting were either very weak or non-existent.

• The audit firms used the law to gouge clients and hold them hostage to a clean audit opinion. Auditor inefficiency and higher fees were the result of a vague, incomplete law that didn’t provide the rigid rules auditors are accustomed to. They also over-tested due to legitimate fears of legal liability…”

Continued @Going Concern

Bob Jensen's threads on recent "Going Concern" issues as over 1,200 banks failed with clean opinions ---
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms

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

So Much Auditor Litigation Makes For Strange Bedfellows
Francine McKenna's Great Blog, October 12, 2009 --- Click Here
Includes a clip from the old risqué movie Bob,Carol, Ted, and Alice

Every one of the Big 4 (and the next tier) has a handful of lawsuits on their desk related to their audits of the banks and other financial institutions that failed, were taken over in the dead of night, or bailed out by their respective central banks. That’s in addition to the various fraud and Madoff related suits. It may or may not have been better for them to have warned us with “going concern” opinions earlier.  We’ll let the judges and juries decide, if any of the cases are actually tried.  Most often they settle and the audit firm pays, but not as much as you would think.  

Deloitte has been party to settlements, left and right, lately, but they’re no more prone to settlements.   After all, per Adam Savett of Risk Metrics (by way of Kevin La Croix of D&O Diary), “jury trials in securities class action lawsuits are extremely rare” :

“As reported on the Securities Litigation Watch blog (here), only 21 cases (prior to Vivendi) have gone trial since the 1995 enactment of the PSLRA. Only seven of the 21 cases (including the Household International case) that have gone to a verdict involved conduct that occurred after the PSLRA was enacted.”
 

Jury trials in accounting malpractice cases are even rarer. It’s just that Deloitte has more than the average share of subprime-related litigation and as a result is suffering from the double whammy of both losing clients due to the crisis and having those former clients sue them.

What’s interesting about the current flood of lawsuits is the heightened probability Deloitte - and the rest of the Big 4 - will end up on both sides of lawsuits with their former and current audit clients.

Take the Merrill Lynch litigation.

Please. 

Deloitte is a co-defendant with Bank of America (in place of Merrill Lynch) on lawsuits stemming from Bank of America’s “Deal From Hell” to buy Merrill Lynch for $50 billion, arranged in 48 hours, and agreed to on September 15 of last year.   In January of this year, Merrill Lynch announced settlement of a suit filed in October 2007 related to the earlier period where Merrill Lynch experienced significant losses due to write downs of CDOs and other subprime related assets. Deloitte was a defendant and may also have to contribute to that $475 million settlement.  Kevin La Croix described it as,

 ”…unquestionably the largest subprime subprime securities lawsuit settlements so far, and [ ] certainly suggest[s] the enormous stakes that may be involved in the mass of subprime and credit crisis-related litigation cases that remain pending.”

Continued in article

Bob Jensen's threads on large firm litigation ---
http://retheauditors.com/2009/10/12/so-much-auditor-litigation-makes-for-strange-bedfellows/

“Going Concern Audit Opinions: Why So Few Warning Flares?" by Francine McKenna, re: The Auditors, September 18, 2009 --- http://retheauditors.com/2009/09/18/going-concern-audit-opinions-why-so-few-warning-flares/

Lehman Brothers. Bear Stearns. Washington Mutual. AIG. Countrywide. New Century. American Home Mortgage. Citigroup. Merrill Lynch. GE Capital. Fannie Mae. Freddie Mac. Fortis. Royal Bank of Scotland. Lloyds TSB. HBOS. Northern Rock.

When each of the notorious “financial crisis” institutions collapsed, were bailed out/nationalized by their governments or were acquired/rescued by “healthier” institutions, they were all carrying in their wallets non-qualified, clean opinions on their financial statements from their auditors. In none of the cases had the auditors warned shareholders and the markets that there was “ a substantial doubt about the company’s ability to continue as a going concern for a reasonable period of time, not to exceed one year beyond the date of the financial statements being audited.”

Continued in a very good article by Francine (she talks with some major players)
http://retheauditors.com/2009/09/18/going-concern-audit-opinions-why-so-few-warning-flares/

November 25, 2009 reply from Gerald Trites [gtrites@ZORBA.CA]

I just have to weigh in here, as we have spoken about this issue before. You have stated the theory very well, but the fact of the matter is that it just can't work that way. Auditors do not have enough information to be able to do an independent assessment of loan loss allowances. They need to rely on management and staff knowledge and expertise in order to assess the reasonableness of the allowances. If that knowledge and expertise is based on deception or is flawed, they cannot necessarily discover that.

Lets take the allowance for doubtful accounts as an example. The auditors do not know the accounts well enough to determine if they are collectible or not. They can review the agings, compare them to other years, review subsequent payments, confirm the accounts, etc. If the agings identify particular accounts, they will go to the accounts receivable managers and discuss those accounts with them. As part off thosse discussions they will likely review supporting evidence as to the condition of the debtors. These discussions form an important part of their audit of that allowance. The other procedures only provide corroborative evidence. Lets also remember that many companies are very large, so we are looking at accounts that could number in the hundreds of thousands and exist in numerous countries of the world. So the audit firm needs to send in people - on a test basis - to review accounts in those other countries. Since they are doing branch audits, those auditors know even less about the client than the home office auditors do. I understand that knowledge of the business is an important standard, but this can not substitute for the knowledge of the management and staff of the client. So there is always an imbalance.

In the case of the recent financial mess, we are looking at it with the benefit of hindsight - always a nice position to be in. Before the events, very people predicted the kind of mess that would evolve. Those who did were often laughed at.

If the audit firms did not follow the standards of the profession, then they could be in the wrong. However if they did, and simply failed to predict the serious downturn in the economy that generated the losses that occured, then they clearly are not in the wrong.

Francine is right - the auditors cannot be expected to second guess management; and they cannot be expected to predict the future.

Jerry

November 25, 2009 reply from Zane Swanson [ZSwanson@UCO.EDU]

Timeliness of information could be a major factor in the poor decision-making. Major financial institutions are heavily engaged in micro-economic day trading in contrast to prior (decade+) banking business. Accounting statements should be reflective of the economics of the firm. If auditors do not have the information to decide, why not require financial institutions to publish their statements on the next day on the internet?. Given that management is responsible for the their statements, they should welcome rational investor decisions based on timely data instead of run-on-the-bank problems based on old information or grave-vine stuff that the average investor does not possess.

Bye, Zane

November 27, 2009 reply from Glen Gray

A side note to this discussion:

The auditor cannot use as a defense that there was too much data, the supporting materials were inadequate, or the big one--the company was so complex no body could fully understand their process/procedures/business model etc. because by making any of those admissions would mean that the auditor was violating GAAS to do the audit. Because GAAS requires that the auditor be competent in GAAP, GAAS, and the client's business. Otherwise, the auditor must withdraw from the audit.

Dan Guy, who has a long history with the AICPA and now functions as an expert witness, made this point at the audit workshop at the 2009 AAA audit mid-year meeting. He said they know they have won the case (against the audit firm) as soon as the audit partner says--The client's business was so complex that no one could understand it.

Glen L. Gray, PhD, CPA
Dept. of Accounting & Information Systems
College of Business & Economics
California State University,
Northridge 18111 Nordhoff ST Northridge, CA 91330-8372
818.677.3948
http://www.csun.edu/~vcact00f

November 26, 2009 reply from Bob Jensen

Hi Jerry and Zane,

The current shareholder lawsuits pending against virtually all the big firms that audit bands will investigate whether auditors should have been more diligent in detail testing of tainted mortgage bank portfolios and poisoned tranches. I anticipate that some of the lawsuits will bring out some bad auditing of bank loan portfolios and poor investigations of internal controls as required under SOX.

Do you have any empirical references that show that the loan loss reserves of banks have not been systematically earnings managed across the past four decades. My searches show the opposite to be the case such that auditors must be aware of the problem on bank audits.

I hope you are correct, but a four-decade history of mismanaged or purposefully managedloan losses in banking suggests something is wrong in the auditing of banks. It would seem that there’s a long history of actual losses exceeding loan loss reserves. Do you have empirical evidence to the contrary of the following citations illustrative of hundreds of banking studies?

I will cite some older studies to show how bank loan loss reserves have been poorly estimated for many years. Auditors cannot possibly be ignorant of this problem.
 

"Loan Loss Reserves," by  John R. Walter, Economic Review, July/August 1991, Page 28

Nevertheless, the desire to smooth reported profits, to lower taxes, and to limit the expenses of estimating future loan losses continues to provide an incentive for banks to hold reserves at levels that differ from their best estimates of the losses inherent in their loan portfolios.

From The William and Mary Law Review, Summer of 1970

Bad debt reserves manipulation is one of the key ways bank managers manage earnings according to Mark W. Nelson , John A. Elliott , Robin L. Tarpley, Accounting Horizons Supplement, Vol. 17, 2003.

Mortgage lender blames KPMG for its failure:  Good thing!
FHA and Ginnie Mae are imposing these actions because TBW failed to submit a required annual financial report and misrepresented that there were no unresolved issues with its independent auditor even though the auditor ceased its financial examination after discovering certain irregular transactions that raised concerns of fraud. FHA's suspension is also based on TBW's failure to disclose, and its false certifications concealing, that it was the subject of two examinations into its business practices in the past year.
"FHA SUSPENDS TAYLOR, BEAN & WHITAKER MORTGAGE CORP. AND PROPOSES TO SANCTION TWO TOP OFFICIALS:  Ginnie Mae Issues Default Notice and Transfers Portfolio," by Brian Sullivan, HUD News, August 4, 2009 --- http://www.hud.gov/news/release.cfm?content=pr09-145.cfm
 

Jensen Comment
Most of these "fraud" issues concern misrepresentations in loan approvals, particularly fraudulent mortgage borrower income and credit worthiness documentation. If KPMG commenced doing better auditing of loan approval internal controls, perhaps KPMG learned it's lesson from the pending lawsuits of shareholders claiming that KPMG was incompetent in a number of former bank audits --- http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms