Additions to New Bookmarks between April 1 and June 30, 2010

New Bookmarks
Year 2010 Quarter 2: April 1 - June 30 Additions to Bob Jensen's Bookmarks
Bob Jensen at Trinity University

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

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

Choose a Date Below for Additions to the Bookmarks File

2010
April 30. 2010

May 31, 2010

June 30, 2010

June 30, 2010

Bob Jensen's New Bookmarks on June 30, 2010
Bob Jensen at Trinity University

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

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

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

Accountancy, Tax, IFRS, XBRL, and Accounting History News Sites --- http://www.trinity.edu/rjensen/AccountingNews.htm

Accounting Professors Who Blog --- http://www.trinity.edu/rjensen/ListservRoles.htm

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

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

How to author books and other materials for online delivery
http://www.trinity.edu/rjensen/000aaa/thetools.htm
How Web Pages Work --- http://computer.howstuffworks.com/web-page.htm

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

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

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

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

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

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

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

Pete Wilson provides some great videos on how to make accounting judgments ---
http://www.navigatingaccounting.com/

FEI Second Life Video (thank you Edith) ---
If I Were an Auditor --- http://www.youtube.com/user/feiblog#p/a/u/0/Q-FR_fkTFKY

Teaching History With Technology --- http://www.thwt.org/
Some these ideas apply to accounting history and accounting education in general

Bob Jensen's threads on accounting novels, plays, and movies ---
http://www.trinity.edu/rjensen/AccountingNovels.htm

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

Bob Jensen's threads on education technology --- http://www.trinity.edu/rjensen/000aaa/0000start.htm

"College Groups Share Health Care Worries With White House," Inside Higher Ed, June 3, 2010 ---
http://www.insidehighered.com/news/2010/06/03/qt#229052

Supporters of student health insurance plans who saw provisions of the Patient Protection and Affordable Care Act threatening the plans were reassured Wednesday in a meeting with President Obama’s chief health care deputy. Representatives of the American College Health Association, the National Association of College and University Business Officers, College and University Professional Association for Human Resources and the six presidential higher education associations met Wednesday with Nancy-Ann DeParle, director of the White House Office of Health Reform, to share their concerns. They worry that student plans -- currently defined as "limited duration," a category that exempts the plans from being part of the individual market -- would under the new law become too expensive for colleges and universities to offer.

One person in the room for the meeting, Steven Bloom, assistant director of government and public affairs at the American Council on Education, said that DeParle assured the group that the absence of language making clear that the plans could continue to operate just as they do today was "not intentional." The Obama administration has emphasized that "if you like the insurance you have, you get to keep it," Bloom said, "and they view student insurance as part of that.... It's just fallen through the cracks."

College health advocates first met with Congressional aides last fall to discuss this same concern, but language supporting student health insurance plans never made it into the final bill. Now that the bill has been passed and legislation is all but frozen on Capitol Hill, Bloom and his peers expect that a fix will come through regulations

Bob Jensen's threads on healthcare in the U.S. are at
http://www.trinity.edu/rjensen/Health.htm

Video on IOUSA Bipartisan Solutions to Saving the USA

If you missed CNN’s two-hour IOUSA Solutions broadcast, you can watch a 30-minute version at
http://www.pgpf.org/newsroom/press/IOUSA-Solutions-Premiers-on-CNN/ (Scroll Down a bit)
Note that great efforts were made to keep this a bipartisan panel along with the occasional video clips of President Obama discussing the debt crisis. The problem is a build up over spending for most of our nation’s history, It landed at the feet of President Obama, but he’s certainly not the cause nor is his the recent expansion of health care coverage the real cause.

One take home from the CNN show was that over 60% of the booked National Debt increases are funded off shore (largely in Asia and the Middle East).
This going to greatly constrain the global influence and economic choices of the United States.

By 2016 the interest payments on the National Debt will be the biggest single item in the Federal Budget, more than national defense or social security. And an enormous portion of this interest cash flow will be flowing to foreign nations that may begin to put all sorts of strings on their decisions to roll over funding our National Debt.

The unbooked entitlement obligations that are not part of the National Debt are over $60 trillion and exploding exponentially. The Medicare D entitlements to retirees like me added over $8 trillion of entitlements under the Bush Presidency.

Most of the problems are solvable except for the Number 1 entitlements problem --- Medicare.
Drastic measures must be taken to keep Medicare sustainable.

I thought the show was pretty balanced from a bipartisan standpoint and from the standpoint of possible solutions.

Many of the possible “solutions” are really too small to really make a dent in the problem. For example, medical costs can be reduced by one of my favorite solutions of limiting (like they do in Texas) punitive damage recoveries in malpractice lawsuits. However, the cost savings are a mere drop in the bucket. Another drop in the bucket will be the achievable increased savings from decreasing medical and disability-claim frauds. These are is important solutions, but they are not solutions that will save the USA.

The big possible solutions to save the USA are as follows (you and I won’t particularly like these solutions):

Extend retirement age significantly (75 years maybe?).
When Social Security was enacted, life expectancy was slightly over 65 years of age.
Now it is well over 75 years of age.
Hit Medicare retirees like me with higher fees for physicians, hospital services, and Medicare D drug payments.
Perhaps this should be on a scale based upon wealth/income levels such that people, like me, who can afford to pay more must pay more.
Greatly curb the biggest cost of Medicare --- keeping dying people alive in expensive hospitals for a few weeks or maybe even a few months. Sometimes dying people must be kept alive in ICU units costing over $10,000 per day when there is no hope of recovery. There was not any hint of suggesting euthanasia as an alternative. But dying people can be allowed to die more naturally and pain free.
http://www.cbsnews.com/video/watch/?id=5737437n&tag=mncol;lst;3
(wait for the commercials to play out)
Limit the National Debt is some way. It’s now more common in Europe to limit national debt to 60% of GDP. Various other means of constraining our National Debt were discussed in the CNN longer version of the IOUSA Solutions video.

Watch for the other possible solutions in the 30-minute summary video ---
http://www.pgpf.org/newsroom/press/IOUSA-Solutions-Premiers-on-CNN/
(Scroll Down a bit)

Here is the original (and somewhat dated video that does not delve into solutions very much)
IOUSA (the most frightening movie in American history) ---
(see a 30-minute version of the documentary at www.iousathemovie.com )

Now the IOUSA Bipartisan Solutions
I suggest that as many people as possible divert their attention from the Tiger Woods at the Masters Tournament today (April 11) to watch bipartisan proposals (‘Solutions”) on how to delay the Fall of the United States Empire. By the way, Bill Bradley was one of the most liberal Democratic senators in the History of the United States Senate.

Watch the World Premiere of I.O.U.S.A.: Solutions on CNN
Saturday, April 10, 1:00-3:00 p.m. EST or Sunday, April 11, 3:00-5:00 p.m. EST

Featured Panelists Include:

Peter G. Peterson, Founder and Chairman, Peter G. Peterson Foundation
David Walker, President & CEO, Peter G. Peterson Foundation
Sen. Bill Bradley
Maya MacGuineas, President of the Committee for a Responsible Federal Budget
Amy Holmes, political contributor for CNN
Joe Johns, CNN Congressional Correspondent
Diane Lim Rodgers, Chief Economist, Concord Coalition
Jeanne Sahadi, senior writer and columnist for CNNMoney.com

Watch for the other possible solutions in the 30-minute summary video ---
http://www.pgpf.org/newsroom/press/IOUSA-Solutions-Premiers-on-CNN/
(Scroll Down a bit)

CBS Sixty minutes has a great video on the enormous cost of keeping dying people artificially alive:
High Cost of Dying --- http://www.cbsnews.com/video/watch/?id=5737437n&tag=mncol;lst;3
(wait for the commercials to play out)

No sugar coating from this Wharton professor
"National Retirement Expert: 75 needs to be the new 62," by Carla Fried, CBS Moneywatch, June 2010 ---
http://moneywatch.bnet.com/retirement-planning/blog/retirement-beat/national-retirement-expert-75-needs-to-be-the-new-62/644/

Olivia Mitchell is one of the nation’s foremost retirement experts, having spent an impressive career studying the evolving nature of retirement planning issues for individuals, corporations and government. The short version of Mitchell’s resume is that she is a professor at the Wharton School at the University of Pennsylvania and executive director of the Pension Research Council. I’ll let you peruse Mitchell’s full 23-page CV at your own leisure.

So I was interested to read a recent PRC paper Mitchell penned that digs into some of the most pressing retirement security issues in the wake of the financial crisis.

Sugarcoating is not her way.

My message is straightforward and, I fear, not particularly upbeat: current and future generations of managers and employees will not be able to use the ‘old fashioned’ model of provisioning for retirement. Instead, the 21st century economy will require an entirely new perspective on retirement risk management.

From there Mitchell ticks off the big risks weighing on the current model: We’re not saving enough, we don’t have a clue how to deal with longevity risk — in fact, we don’t have a clue about basic financial concepts — traditional pensions are in major trouble, the PBGC is not exactly rock solid, and then there’s the little issue of Social Security, a topic near and dear to her heart, having served on the 2001 bipartisan presidential Commission to Strengthen Social Security

The Retirement Fix

Mitchell concludes the report with a perfectly serviceable call to action:

Part of the task is to enhance financial literacy and political responsibility. We will also need to save more, invest smarter, and insure better against longevity. Another task will be to develop new products which can be used to hedge longevity and better protect against very long term risks including inflation.

What struck me in her report was this final thought:

But when all is said and done, most of us will simply have to work longer to preserve some flexibility against shocks in the long run.

And there it is: one of the nation’s foremost retirement thinkers concludes that at the end of the day, it’s working longer that is going to be our ticket out of any shortfalls and “shocks.”

Retire Early….at 75

Mitchell points out that working two to four more years can go a long way to closing a retirement funding gap. But that’s directed at Baby Boomers. Given ever-expanding longevity forecasts for younger generations she has this bit of advice for Gen X and Gen Y:

For the younger generation, age 75 might be a good target for early retirement, and later if possible!

Confirmation, from one of the country’s leading retirement thinkers, that 75 may indeed be the new 55.

Jensen Comment
At the moment we're between a rock and a hard place apart from each person's private problem concerning retirement. The global problem is that extending retirement age to 75 contributes significantly to decline of employment opportunities for younger people versus the need to extend retirement age to 75 to save the U.S. Social Security and Medicare entitlement programs.

Video on IOUSA Bipartisan Solutions to Saving the USA

If you missed Sunday afternoon CNN’s two-hour IOUSA Solutions broadcast, you can watch a 30-minute version at
http://www.pgpf.org/newsroom/press/IOUSA-Solutions-Premiers-on-CNN/ (Scroll Down a bit)
Note that great efforts were made to keep this a bipartisan panel along with the occasional video clips of President Obama discussing the debt crisis. The problem is a build up over spending for most of our nation’s history, It landed at the feet of President Obama, but he’s certainly not the cause nor is his the recent expansion of health care coverage the real cause.

Most of the problems are solvable except for the Number 1 entitlements problem --- Medicare.
Drastic measures must be taken to keep Medicare sustainable.

I thought the show was pretty balanced from a bipartisan standpoint and from the standpoint of possible solutions.

Many of the possible “solutions” are really too small to really make a dent in the problem. For example, medical costs can be reduced by one of my favorite solutions of limiting (like they do in Texas) punitive damage recoveries in malpractice lawsuits. However, the cost savings are a mere drop in the bucket. Another drop in the bucket will be the achievable increased savings from decreasing medical and disability-claim frauds. These are important solutions, but they are not solutions that will save the USA.

The big possible solutions to save the USA are as follows (you and I won’t particularly like these solutions):

Extend retirement age significantly (75 years maybe?).
When Social Security was enacted, life expectancy was slightly over 65 years of age.
Now it is well over 75 years of age.
Hit Medicare retirees like me with higher fees for physicians, hospital services, and Medicare D drug payments.
Perhaps this should be on a scale based upon wealth/income levels such that people, like me, who can afford to pay more must pay more.
Greatly curb the biggest cost of Medicare --- keeping dying people alive in expensive hospitals for a few weeks or maybe even a few months. Sometimes dying people must be kept alive in ICU units costing over $10,000 per day when there is no hope of recovery. There was not any hint of suggesting euthanasia as an alternative. But dying people can be allowed to die more naturally and pain free.
http://www.cbsnews.com/video/watch/?id=5737437n&tag=mncol;lst;3
(wait for the commercials to play out)
Limit the National Debt is some way. It’s now more common in Europe to limit national debt to 60% of GDP. Various other means of constraining our National Debt were discussed in the CNN longer version of the IOUSA Solutions video.

Watch for the other possible solutions in the 30-minute summary video ---
http://www.pgpf.org/newsroom/press/IOUSA-Solutions-Premiers-on-CNN/
(Scroll Down a bit)

Humor Between June 1 and June 30, 2010 --- http://www.trinity.edu/rjensen/book10q2.htm#Humor063010

Humor Between May 1 and May 31, 2010 --- http://www.trinity.edu/rjensen/book10q2.htm#Humor053110

Humor Between April 1 and April 30, 2010 --- http://www.trinity.edu/rjensen/book10q2.htm#Humor043010

Humor Between March 1 and March 31, 2010 --- http://www.trinity.edu/rjensen/book10q1.htm#Humor033110

Humor Between February 1 and February 28, 2010 --- http://www.trinity.edu/rjensen/book10q1.htm#Humor022810

Humor Between January 1 and January 31, 2010 --- http://www.trinity.edu/rjensen/book09q1.htm#Humor013110

Bob Jensen's threads on accounting humor ---
http://www.trinity.edu/rjensen/FraudEnron.htm#Humor

Fraud Updates have been posted up to December 31, 2009 ---
http://www.trinity.edu/rjensen/FraudUpdates.htm

Also see http://www.trinity.edu/rjensen/Fraud.htm

574 Shields Against Validity Challenges in Plato's Cave ---
http://www.trinity.edu/rjensen/TheoryTAR.htm

With a Rejoinder from the 2010 Senior Editor of The Accounting Review (TAR), Steven J. Kachelmeier

With Replies in Appendix 4 to Professor Kachemeier by Professors Jagdish Gangolly and Paul Williams

With Added Conjectures in Appendix 1 as to Why the Profession of Accountancy Ignores TAR

With Suggestions in Appendix 2 for Incorporating Accounting Research into Undergraduate Accounting Courses

"Amazing Disgrace," by Scott McLemee, Inside Higher Ed, May 19, 2010 ---
http://www.insidehighered.com/views/mclemee/mclemee290

"The Absence of Dissent," by Joni J. Young, Accounting and the Public Interest 9 (1), 1 (2009); doi: 10.2308/api.2009.9.1.1 ---
Click Here

ABSTRACT:
The persistent malaise in accounting research continues to resist remedy. Hopwood (2007) argues that revitalizing academic accounting cannot be accomplished by simply working more diligently within current paradigms. Based on an analysis of articles published in Auditing: A Journal of Practice & Theory, I show that this paradigm block is not confined to financial accounting research but extends beyond the work appearing in the so-called premier U.S. journals. Based on this demonstration I argue that accounting academics must tolerate (and even encourage) dissent for accounting to enjoy a vital research academy. ©2009 American Accounting Association

June 15, 2010 reply from Paul Williams [Paul_Williams@NCSU.EDU]

Bob,
Thank you advertising the availability of this paper in API, the on line journal of the AAA Public Interest Section (which I just stepped down from editing after my 3+ years stint). Joni is one of the most (incisively) thoughtful people in our discipline (her paper in AOS, "Making Up Users" is a must read). The absence of dissent is evident from even casual perusal of the so-called premier journals. Every paper is erected on the same premises -- assumptions about human decision making (i.e., rational decision theory), "free markets," economic naturalism, etc. There is a metronomic repetition of the same meta-narrative about the "way the world is" buttressed by exercises in statistical causal analysis (the method of agricultural research, but without any of the controls). There is a growing body of evidence that these premises are myths -- the so-called rigorous research valorized in the "top" journals is built on an ideological foundation of sand.

Paul Williams paul_williams@ncsu.edu
(919)515-4436

Gaming for Tenure as an Accounting Professor ---
http://www.trinity.edu/rjensen/TheoryTenure.htm
(with a reply about tenure publication point systems from Linda Kidwell)

"So you want to get a Ph.D.?" by David Wood, BYU ---
http://www.byuaccounting.net/mediawiki/index.php?title=So_you_want_to_get_a_Ph.D.%3F

Do You Want to Teach? ---
http://financialexecutives.blogspot.com/2009/05/do-you-want-to-teach.html

Jensen Comment
Here are some added positives and negatives to consider, especially if you are currently a practicing accountant considering becoming a professor.

Accountancy Doctoral Program Information from Jim Hasselback ---
http://www.jrhasselback.com/AtgDoctInfo.html

Why must all accounting doctoral programs be social science (particularly econometrics) "accountics" doctoral programs?
http://www.trinity.edu/rjensen/theory01.htm#DoctoralPrograms

What went wrong in accounting/accountics research?
http://www.trinity.edu/rjensen/theory01.htm#WhatWentWrong

AN ANALYSIS OF THE EVOLUTION OF RESEARCH CONTRIBUTIONS BY THE ACCOUNTING REVIEW: 1926-2005 ---
http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm#_msocom_1

Systemic problems of accountancy (especially the vegetable nutrition paradox) that probably will never be solved ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#BadNews

"The Accounting Doctoral Shortage: Time for a New Model,"
by Neal Mero, Jan R. Williams and George W. Krull, Jr. .
Issues in Accounting Education 24 (4)
http://aaapubs.aip.org/getabs/servlet/GetabsServlet?prog=normal&id=IAEXXX000024000004000427000001&idtype=cvips&gifs=Yes&ref=no

ABSTRACT:
The crisis in supply versus demand for doctorally qualified faculty members in accounting is well documented (Association to Advance Collegiate Schools of Business [AACSB] 2003a, 2003b; Plumlee et al. 2005; Leslie 2008). Little progress has been made in addressing this serious challenge facing the accounting academic community and the accounting profession. Faculty time, institutional incentives, the doctoral model itself, and research diversity are noted as major challenges to making progress on this issue. The authors propose six recommendations, including a new, extramurally funded research program aimed at supporting doctoral students that functions similar to research programs supported by such organizations as the National Science Foundation and other science-based funding sources. The goal is to create capacity, improve structures for doctoral programs, and provide incentives to enhance doctoral enrollments. This should lead to an increased supply of graduates while also enhancing and supporting broad-based research outcomes across the accounting landscape, including auditing and tax. ©2009 American Accounting Association

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

Bad Role Models for Our Children
"How Many Times Did Sen. Levin Say 'Sh**ty Deal'? by Cindy Perman, CNBC, April 28. 2010 ---
How Many Times Did Sen. Levin Say 'Sh**ty Deal'?

No matter how you feel about Goldman's behavior, use of uncouth and filthy language by government leaders and our media sets a low bar for decency. Goldman's defender, Warren Buffet, thinks the Goldman deal does not even smell. Boo to Warren on this one! Personally I don't think that Goldman's swap construction on this one passes the smell test.

Bob Jensen's threads on the latest Goldman scandal are at
http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking

Malware Detection, Removal, and Protection

From: AECM, Accounting Education using Computers and Multimedia [mailto:AECM@LISTSERV.LOYOLA.EDU] On Behalf Of AMY HAAS
Sent: Saturday, June 26, 2010 4:08 PM
To: AECM@LISTSERV.LOYOLA.EDU
Subject: Help my computer has a security alert virus

How do I get rid of this one? A danger symbol appears in my task bar and I keep getting pop-ups warning me about virus. A program called defense center now appears in my program list and I can't seem to delete it using the remove software in the control panel. My symantec program has not eliminated it!

Amy Haas

From: AECM, Accounting Education using Computers and Multimedia [mailto:AECM@LISTSERV.LOYOLA.EDU] On Behalf Of Jensen, Robert
Sent: Sunday, June 27, 2010 6:48 AM
To: AECM@LISTSERV.LOYOLA.EDU
Subject: Re: Help my computer has a security alert virus

Hi Amy,

You might first get a free scan from Microsoft --- http://onecare.live.com/site/en-US/center/howsafe.htm?s_cid=mscom_msrt

We should thank John (below) for this testimony as a user of Stopzilla --- http://www.stopzilla.com/products/stopzilla/home.do

Stopzilla is outstanding spyware/adware software but probably should not be used in place of a hardware firewall or more general cyber attack software like Symantec. Good spyware/adware software alternatives might work better than Symantec for spyware and adware, but they are not as broad based as Symantec and Norton Anti-virus --- http://www.pcmag.com/category2/0,2806,4796,00.asp
There is no single best alternative, and you cannot always trust the media that is dependent upon advertising revenues.

There are of course arguments about what is the best spyware/adware protection --- http://www.pctools.com/

Microsoft is in the game with what I think is a very good malware protection alternative --- http://www.microsoft.com/security/malwareremove/default.aspx

Most of these alternatives offer free and fee alternatives. The typical free version is a bit of a come on in that it will scan your computer for infections and possibly quarantine the culprits, but for removal you must buy the removal software. And there is always the possibility that code for removing the newer infections has not yet been written by anybody other than the criminals that created the infections.

I still think the best general advice I can give is to communicate with the Help Desk of your college.

Bob Jensen

Bob Jensen’s threads on computer and networking security are at
http://www.trinity.edu/rjensen/ecommerce/000start.htm#SpecialSection

From: AECM, Accounting Education using Computers and Multimedia [mailto:AECM@LISTSERV.LOYOLA.EDU] On Behalf Of John Anderson
Sent: Sunday, June 27, 2010 1:55 AM
To: AECM@LISTSERV.LOYOLA.EDU
Subject: Re: Help my computer has a security alert virus

Amy,

Stopzilla is an anti-spyware and anti-adware defense program which has always been the top rated such product since people have started surfing the web. It essentially gives you real-time control of your computer and will fight anything that tries to take away this control and download without your permission!

McAfee used to have a product called “Stinger” or “Striker,” but hard to believe they just gave it away. For some reason most of the commercial products out there are all focused on virus profiles only. They will do an excellent job of telling you what has got you … and how bad it is … but I prefer preventative medicine … not an autopsy! iS3 created Stopzilla. They are out of Palm Beach County Florida and will provide a support window for you on the phone for probably 15 hours a day.

http://www.is3.com/home.do

I now have lifetime licensing on all machines we own.

If the machine is badly compromised it may take Stopzilla a week to stabilize the situation, but it will do this by preventing rogue processes and websites from downloading to your machine without your permission or writing to your computer’s registry without permission. (It is quite surprising to look at the logging of the stuff it stops! You would never know!)

I also still run anti-virus, but it picks up very little after-the-fact … and nothing serious!

I can’t recommend Stopzilla enough!

Best Regards!

John

John Anderson, CPA, CISA, CISM, CGEIT, CITP

Financial & IT Business Consultant

14 Tanglewood Road

Boxford, MA 01921

jcanderson27@comcast.net

978-887-0623   Office

978-837-0092   Cell

Bob Jensen’s threads on computer and networking security are at
http://www.trinity.edu/rjensen/ecommerce/000start.htm#SpecialSection

How will IFRS affect the 2011 CPA Examinations?
If I Pass CPA Exam Parts in 2010, Will I Have to Pass Them Again in 2011?
Click Here
http://goingconcern.com/2010/06/if-i-pass-cpa-exam-parts-in-2010-will-i-have-to-pass-them-again-in-2011/#more-12870

Bob Jensen's threads on the CPA examination are at
http://www.trinity.edu/rjensen/Bookbob1.htm#010303CPAExam

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

My Life Beyond the Numbers by James Don Edwards

On June 14, 2010 (today) I opened an unexpected package from James Don Edwards that totally surprised me.
The book inside the package was entitled My Life Beyond the Numbers (ISBN 978-0-615-36164-2, March 2010)

James Don is the best "boss" I ever had --- while I was a newly minted assistant professor at Michigan State University. In spite of my youth and inexperience he gave me two doctoral seminars to teach, possibly because I was an accountics researcher in those days when accountics research was being revived after over 60 years of dormancy. James Don was never an accountics professor, but he anticipated how accountics would become dominant in academic accountancy henceforth and perhaps forever more ---
http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm

You can read the Hall of Fame entry for James Don Edwards at Click Here
http://fisher.osu.edu/departments/accounting-and-mis/the-accounting-hall-of-fame/membership-in-hall/james-don-edwards/

His many honors and awards include an honorary doctorate from the University of Paris.

In 1998, he was invited to the Georgia House of Representatives to hear a resolution honoring him and recognizing his contributions to the field of accounting and the State of Georgia. The University of Georgia Foundation recently established a Chair of Corporate Accounting Policy in his honor ---
http://www.legis.state.ga.us/legis/1997_98/fulltext/hr738.htm

One of his areas of expertise is the history of the accounting profession in the United States.

I've not yet read his latest book I just received, but I'm looking forward to chapters like "Oxford and Sir Edward Heath."
Don was on a first name basis with some of the most powerful people in the world.
He also served tirelessly for the American Accounting Association, including serving as its President 1970-71.

During a period when the University of Michigan (in the shadows of Bill Paton) totally dominated Michigan State University in doctoral programs and faculty research in accountancy, James Don raised the money and recruited some the outstanding doctoral students in our history. To name a few who joined the Academy at MSU we have Roger Hermanson, Gene Comiskey, Paul Pacter, Bill Kinney, Bob May, Jim McKeown, Barry Cushing, and others too numerous to mention here. And there were of course other outstanding faculty and doctoral students he recruited for the University of Georgia.

I am proud to consider James Don Edwards one of my very best friends. I wish he and Clara an long and happy life, and I especially wish Clara a total successful recovery from her new total hip. Her lovely picture is on the cover of the book alongside her partner in life. Clara is an original Iron Magnolia.

June 15, Message from Bob Jensen

HI David,

The publisher is listed in the book as Terrill Publishing, but I cannot find this company’s Web page. Don owns the copyright. The name Terrill appears in his genealogy, which makes me suspicious.

I’ve contacted Don for more details. This is a very, very personal book (in most ways a scrap book) that he might’ve paid to have published with only a very limited number of copies for friends. I really do not know at this point and will wait for his reply.

The book has quite a bit about Don’s international travels from going to China as a Marine in WW II to visiting scholar lecturing sabbaticals in Italy and Oxford plus shorter stints all over the world. Don had a bold way of working his way into private and public sector executive suites, including a major stint on Andersen’s Board that oversaw the acrimonious split of Andersen into Andersen Consulting and Andersen’s mainline accounting division.

Don is a powerful man with an equally powerful ego. He’s a wealthy man who invested well and enjoyed dining in world palaces yet has always lived in humble houses well below what he could afford. He dominates conversations and yet remembers every word you squeeze into the conversation. He has a dominant presence whenever he’s interacting with people. If he’d been a literature professor he would’ve become a university president.

Don is neither a typical scholar nor researcher, but he’s worked very well in joint projects (books and papers and services) with people who respected the skills he brought to the table, especially leadership skills and fund raising skills.

One thing I always admired about Don and Clara is that their friends were and still are always welcome at their home and at their table. When I first started working at MSU, we often made random and unannounced visits to their home and felt genuinely welcome on each and every visit. They’re the type of people who will beg you to stay for dinner.

Don is one of those people who, when the time comes for his funeral, hundreds upon hundreds of former students, former colleagues, former working partners, and many, many friends will show up from all over the world.

Fortunately Don and Clara are still in very good health and will probably attend many more AAA annual meetings for years to come, I don’t think he and Clara have ever missed one AAA annual meeting in over five decades.

Don himself really reads like the personal scrapbook he’s written. He was a born leader who perhaps missed his calling to be a university president. But he succeeded greatly in promoting accountancy in the world’s Academy.

He’s also a religious man who prefers ice cream to the demon rum. Generally you can’t take the Baptist upbringing out of the boy or man. In his book Don relates about the exceptional wines offered in the home (palace) of Baron Edmund Rothschild in Switzerland. But you know that down deep James Don Edwards and Clara would’ve preferred being offered homemade ice cream from a Louisiana bayou.

Don is still active in a golf foursome that still includes Accounting Hall of Famers Herb Miller and Denny Beresford, both of whom became affiliated with the University of Georgia because of abiding friendships with their leader Don Edwards.

Bob Jensen

June 15, Reply from Bob Jensen

Hi David,

Don Edwards just telephoned me and told me a bit about the history of this book. It was a book that his grandchildren begged him to write. He privately published enough copies to send to some friends and family.

But in this telephone call I persuaded him to contact a Web specialist at the University of Georgia (where he still goes into the office three times a week). I suggested that the book be saved in as a PDF file and then served up by the University of Georgia.

Don is now thinking about having the book served up on a Web site. He’s taking time to think about it since it was not meant to be available to anybody other than friends and family. However, knowing Don like I do, I think he will follow up on my suggestion.

I, of course, will broadcast the link to the world once there is a link, because I respect Don both as a friend and as a leader of our craft.

Bob Jensen

Amazing Disgrace
I have written repeatedly about the virtual lack of validity checking of research published in the academy's leading accounting research journals --- http://www.trinity.edu/rjensen/TheoryTAR.htm

Validity checking is probably highest for articles published in physical science research journals and is improving for social science research journals. There also is aggressive validity checking in some areas of humanities, notably history.

"Amazing Disgrace," by Scott McLemee, Inside Higher Ed, May 19, 2010 ---
http://www.insidehighered.com/views/mclemee/mclemee290

Publish Poop or Perish
"We Must Stop the Avalanche of Low-Quality Research," by Mark Bauerlein, Mohamed Gad-el-Hak, Wayne Grody, Bill McKelvey, and Stanley W. Trimble, Chronicle of Higher Education, June 13, 2010 ---
http://chronicle.com/article/We-Must-Stop-the-Avalanche-of/65890/

Everybody agrees that scientific research is indispensable to the nation's health, prosperity, and security. In the many discussions of the value of research, however, one rarely hears any mention of how much publication of the results is best. Indeed, for all the regrets one hears in these hard times of research suffering from financing problems, we shouldn't forget the fact that the last few decades have seen astounding growth in the sheer output of research findings and conclusions. Just consider the raw increase in the number of journals. Using Ulrich's Periodicals Directory, Michael Mabe shows that the number of "refereed academic/scholarly" publications grows at a rate of 3.26 percent per year (i.e., doubles about every 20 years). The main cause: the growth in the number of researchers.

Many people regard this upsurge as a sign of health. They emphasize the remarkable discoveries and breakthroughs of scientific research over the years; they note that in the Times Higher Education's ranking of research universities around the world, campuses in the United States fill six of the top 10 spots. More published output means more discovery, more knowledge, ever-improving enterprise.

If only that were true.

While brilliant and progressive research continues apace here and there, the amount of redundant, inconsequential, and outright poor research has swelled in recent decades, filling countless pages in journals and monographs. Consider this tally from Science two decades ago: Only 45 percent of the articles published in the 4,500 top scientific journals were cited within the first five years after publication. In recent years, the figure seems to have dropped further. In a 2009 article in Online Information Review, Péter Jacsó found that 40.6 percent of the articles published in the top science and social-science journals (the figures do not include the humanities) were cited in the period 2002 to 2006.

As a result, instead of contributing to knowledge in various disciplines, the increasing number of low-cited publications only adds to the bulk of words and numbers to be reviewed. Even if read, many articles that are not cited by anyone would seem to contain little useful information. The avalanche of ignored research has a profoundly damaging effect on the enterprise as a whole. Not only does the uncited work itself require years of field and library or laboratory research. It also requires colleagues to read it and provide feedback, as well as reviewers to evaluate it formally for publication. Then, once it is published, it joins the multitudes of other, related publications that researchers must read and evaluate for relevance to their own work. Reviewer time and energy requirements multiply by the year. The impact strikes at the heart of academe.

Among the primary effects:

Too much publication raises the refereeing load on leading practitioners—often beyond their capacity to cope. Recognized figures are besieged by journal and press editors who need authoritative judgments to take to their editorial boards. Foundations and government agencies need more and more people to serve on panels to review grant applications whose cumulative page counts keep rising. Departments need distinguished figures in a field to evaluate candidates for promotion whose research files have likewise swelled.

The productivity climate raises the demand on younger researchers. Once one graduate student in the sciences publishes three first-author papers before filing a dissertation, the bar rises for all the other graduate students.

The pace of publication accelerates, encouraging projects that don't require extensive, time-consuming inquiry and evidence gathering. For example, instead of efficiently combining multiple results into one paper, professors often put all their students' names on multiple papers, each of which contains part of the findings of just one of the students. One famous physicist has some 450 articles using such a strategy.

In addition, as more and more journals are initiated, especially the many new "international" journals created to serve the rapidly increasing number of English-language articles produced by academics in China, India, and Eastern Europe, libraries struggle to pay the notoriously high subscription costs. The financial strain has reached a critical point. From 1978 to 2001, libraries at the University of California at Los Angeles, for example, saw their subscription costs alone climb by 1,300 percent.

The amount of material one must read to conduct a reasonable review of a topic keeps growing. Younger scholars can't ignore any of it—they never know when a reviewer or an interviewer might have written something disregarded—and so they waste precious months reviewing a pool of articles that may lead nowhere.

Finally, the output of hard copy, not only print journals but also articles in electronic format downloaded and printed, requires enormous amounts of paper, energy, and space to produce, transport, handle, and store—an environmentally irresponsible practice.

Let us go on.

Experts asked to evaluate manuscripts, results, and promotion files give them less-careful scrutiny or pass the burden along to other, less-competent peers. We all know busy professors who ask Ph.D. students to do their reviewing for them. Questionable work finds its way more easily through the review process and enters into the domain of knowledge. Because of the accelerated pace, the impression spreads that anything more than a few years old is obsolete. Older literature isn't properly appreciated, or is needlessly rehashed in a newer, publishable version. Aspiring researchers are turned into publish-or-perish entrepreneurs, often becoming more or less cynical about the higher ideals of the pursuit of knowledge. They fashion pathways to speedier publication, cutting corners on methodology and turning to politicking and fawning strategies for acceptance.

Such outcomes run squarely against the goals of scientific inquiry. The surest guarantee of integrity, peer review, falls under a debilitating crush of findings, for peer review can handle only so much material without breaking down. More isn't better. At some point, quality gives way to quantity.

Academic publication has passed that point in most, if not all, disciplines—in some fields by a long shot. For example, Physica A publishes some 3,000 pages each year. Why? Senior physics professors have well-financed labs with five to 10 Ph.D.-student researchers. Since the latter increasingly need more publications to compete for academic jobs, the number of published pages keeps climbing. While publication rates are going up throughout academe, with unfortunate consequences, the productivity mandate hits especially hard in the sciences.

Only if the system of rewards is changed will the avalanche stop. We need policy makers and grant makers to focus not on money for current levels of publication, but rather on finding ways to increase high-quality work and curtail publication of low-quality work. If only some forward-looking university administrators initiated changes in hiring and promotion criteria and ordered their libraries to stop paying for low-cited journals, they would perform a national service. We need to get rid of administrators who reward faculty members on printed pages and downloads alone, deans and provosts "who can't read but can count," as the saying goes. Most of all, we need to understand that there is such a thing as overpublication, and that pushing thousands of researchers to issue mediocre, forgettable arguments and findings is a terrible misuse of human, as well as fiscal, capital.

Several fixes come to mind:

First, limit the number of papers to the best three, four, or five that a job or promotion candidate can submit. That would encourage more comprehensive and focused publishing.

Second, make more use of citation and journal "impact factors," from Thomson ISI. The scores measure the citation visibility of established journals and of researchers who publish in them. By that index, Nature and Science score about 30. Most major disciplinary journals, though, score 1 to 2, the vast majority score below 1, and some are hardly visible at all. If we add those scores to a researcher's publication record, the publications on a CV might look considerably different than a mere list does.

Third, change the length of papers published in print: Limit manuscripts to five to six journal-length pages, as Nature and Science do, and put a longer version up on a journal's Web site. The two versions would work as a package. That approach could be enhanced if university and other research libraries formed buying consortia, which would pressure publishers of journals more quickly and aggressively to pursue this third route. Some are already beginning to do so, but a nationally coordinated effort is needed.

Continued in article

Gaming for Tenure as an Accounting Professor ---
http://www.trinity.edu/rjensen/TheoryTenure.htm

What went wrong in accounting/accountics research?
http://www.trinity.edu/rjensen/theory01.htm#WhatWentWrong

How to Learn Accounting On Your Own

June 19, 2010 message from Tom Hood [tom@MACPA.ORG]

Greetings Colleagues,

I have two sons home for the summer asking if I know of any great resources to help them get ahead of Intermediate Accounting as they approach the fall semester. I figured I would go to the best source I know of to help them out – these two listservs.

So can you direct me to any on-line and other resources that may get them studying for Intermediate Accounting I and Intermediate Accounting II?

Also, what advice would you give them on how to approach these courses (one is in I and the older in II)?

I will also be sharing this on our student site…

On another note – we are working in an International Pavilion on CPA Island in Second Life and our Accounting Eductaion Pavilion (see details at www.cpaisland.com and www.slacpa.org ). We continue to offer free kiosks with links to your colleges and universities and free areas to meet as classes. We have an interne working this summer who can give you a demo and show you around – just send an e-mail to my attention ad mention the CPA Island.

Thanks,

Warmest regards,

Tom

Tom Hood, CPA.CITP CEO & Executive Director Maryland Association of CPAs Business Learning Institute
www.macpa.org
www.bizlearning.net

June 20, 2010 reply from Bob Jensen

Hi Tom,

First of all consider video alternatives. More than 100 universities have set up channels on YouTube ---
http://www.youtube.com/education?b=400

Next take a topic list from a typical intermediate accounting textbook, some of which are free (not necessarily completely up to date for rapidly changing standards) at
http://www.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks

Then search for the term "accounting" at http://www.youtube.com/education?b=400
Scroll down to find videos that might be relevant to intermediate accounting topics. Some of these videos are more up to date than even the latest textbooks.
Some of these videos are from the top teachers or top CPA firm leaders (like Jim Turley's videos) in the world.
Also note that if you search out the instructor (usually found at her/his university) you will often find more course materials available for downloading. Also email messages to these instructors may result in more shared learning materials.

But more importantly, Tom, consider the goals of your two sons in studying for intermediate accounting. The overriding goal of an intermediate accounting student is to eventually pass the CPA examination. For studying intermediate accounting I would have your sons dig directly into a CPA examination review course and focus on the answers to CPA examination questions in the topical areas identified above in intermediate accounting textbooks. They have to pick and chose topics found in an intermediate accounting textbook, because many CPA examination questions come from other courses such as advanced accounting and governmental accounting and tax accounting and managerial accounting.

A free CPA examination review package, complete with practice questions, answers, and examinations, is available at
http://cpareviewforfree.com/
If you want more video review modules for the CPA examination, then a commercial package is probably better ---
http://www.trinity.edu/rjensen/Bookbob1.htm#010303CPAExam

There are some topics that are probably not totally up to date in even the latest available intermediate accounting textbooks. One is IFRS although, unless your sons will be taking intermediate accounting from an IFRS nut, I would probably not worry too much about technical IFRS problems on the CPA examination in the near future. However, great free materials for learning IFRS are available at
http://www.trinity.edu/rjensen/Theory01.htm#IFRSlearning

In a typical intermediate accounting two semester sequence, much of the first semester is spent reviewing basic accounting (especially in universities that receive a large number of community college transfer students). If your sons need video reviews of basic accounting, I highly recommend Susan Crosson's video lectures. The links are at the bottom of the page at http://www.youtube.com/SusanCrosson
Look for "Financial Videos Organized by Topic."

Members of the American Accounting Association, including student members, can find some instructional helper materials at the AAA Commons ---
http://commons.aaahq.org/pages/home
Click on the menu choice "Teaching" and then "Browse resources."

Implied in all the above recommendations is a learning pedagogy that pretty much entails memory aiding and abetting in a traditional manner (study the problems and then study the textbook answers). At the other extreme there is better and longer-lasting metacognitive learning such as the award-winning BAM pedagogy (for an intermediate accounting two-course sequence) invented by Catanach, Croll, and Grinacker --- http://www.trinity.edu/rjensen/265wp.htm
This pedagogy is more like the real world where your supervisor gives you a problem to solve and you go out and solve it any way you can. You can study BAM's problems, but there are no answers provided to study. Students have to teach themselves by seeking out the answers from anywhere in the world.

Although the BAM pedagogy would be much more time consuming for your sons, you can probably get the Hydromate Case and some of the instructional support materials from Tony Catanach --- anthony.catanach@villanova.edu
If Tony is not available, Noah Barsky can help --- noah.barsky@villanova.edu

By the way, at the University of Virginia, where the BAM pedagogy was born, the passage rate on the CPA examination rose dramatically after switching to the BAM pedagogy in intermediate accounting, This is not surprising since you remember best those things you had to learn on your own. Of course many students looking for an easy way out hate the BAM pedagogy.

Bob Jensen

June 20, 2010 reply from AECM@LISTSERV.LOYOLA.EDU

I don't teach Intermediate (have done, but my involvement now is in managerial). However, I am the advisor for our accounting concentrators, and have quite a lot of contact with faculty who DO teach Intermediate, and the students who are taking it. I think that the primary problem I see (and hear from students) is the fact that most take Intermediate after a "hiatus" from the first Financial Accounting (or Principles) course. Typically of students, they've forgotten a lot of what they learned. Although Intermediate does some "reviewing" it really expects preparation and "remembering" from the students. The pace is pretty fast, and the demands are heavy. It is not for the faint of heart. I tell the students that in my opinion the two Intermediate courses are the hardest AC courses they'll take. After those, I found Advanced, or Audit, to be far less demanding.

I suggest two resources to them to "brush up" on the basics. First is the ALEKS software. Our students buy it for the Financial course to review the accounting cycle and basic concepts. So they have it already. They can dig it out of the back of that drawer and use it to review for Intermediate (or buy it again - it isn't that expensive). Another resource I recommend (and I have been using this in various courses for probably more than 20 years) is the latest edition of Anthony & Breitner "Essentials of Accounting." In this electronic age, I still recommend the luddite's favorite "programmed textbook" version. It's a workbook - actually pretty thin, less than half an inch, not like one of these massive CPA review "workbooks" - where the students read a few lines, answer a question, check their answer, go back if they missed it, move forward if they got it. I believe it is designed so that they can go thru the entire thing in something like 25 hours. It reviews everything through the Statement of Cash Flows - basic cycle, sales and receivables, inventory, debt, etc. If they go thru the entire workbook they'll be up to speed to handle the Intermediate work. They can carry it with them on the train or bus when they're going to work during the summer and study in half-hour bits.

It's the catch-up that really staggers a lot of students at the beginning. They'll talk about feeling overwhelmed at the mountain of material they're covering - like the two-year-old trotting along at top speed trying to keep up with a hurrying adult at the shopping mall. "Hey, wait for me!"

p The essence of wisdom ... is to avoid acting rashly, in the belief that you are running out of time. You are not. David Ignatius, "The Increment"

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

Bob Jensen's threads on online training and education alternatives are at
http://www.trinity.edu/rjensen/Crossborder.htm

Requiring four "A-Level" accountics journal publications for tenure puts a small college well ahead of the the leading research universities, virtually none of whom require four such hits at the A-Level (see Table 1 below).

Accountics is the mathematical science of values.
Charles Sprague [1887] as quoted by McMillan [1998, p. 1]
You can read about how "accountics" was dormant between 1887 and 1958. A perfect storm revived accountics to where it quickly came to dominate the leading academic accounting research journals, doctoral programs, and publication requirements for promotion, performance evaluation, and tenure after 1958 ---
http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm (Accounting Historians Journal)

Question that I posed on the AECM Listserv of international accounting educators and researchers:
Do you really, really want to become a non-tenured accounting professor?

Others on the AECM might be interested in your answers to the two questions stated below.

But if you prefer, please send your answers to me privately. I will respect the confidential nature of your reply unless you give me permission to share the name of your college or university in terms of these tenure criteria for accounting programs --- rjensen@trinity.edu

A College President Changes the Tenure Rules of the Road
Tenure Decisions: Does your college have a minimum quota for publication in the Top Ten Academic research journals?

There are various published rankings of academic accounting research journals, most of which are "accountics" journals that require accepted articles to be rooted in mathematics and statistics. Some rankings and references to rankings are provided at
http://www.trinity.edu/rjensen/theory01.htm#JournalRankings

David Wood and his BYU colleagues also rank accounting research programs based upon publication records of those programs in leading accounting research journals --- http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1337755
This study makes novel contributions to ranking accounting research programs constructed from publication counts in top journals ("AOS, Auditing, BRIA, CAR, JAE, JAR, JATA, JIS, JMAR, RAST, and TAR").
Other research publications in such journals as the Accounting Historians Journal, case research journals, Critical Perspectives in Accounting, Journal of Accountancy, Management Accounting, Issues in Accounting Education, are excluded in the BYU study and hence did not impact of the BYU rankings of top accounting research programs in the academy.

A College President Changes the Tenure Rules of the Road
In the above context I received the following (slightly edited) disturbing message from a good friend at a college that has a very small accounting education program (less than 25 masters program graduates in accounting annually). The college is not in the Top 50 business schools as ranked by US News or Business Week or the WSJ. Nor does the program have a doctoral program and is not even mentioned as having a an accounting research program ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1337755

The message reads as follows (slightly edited):

Bob,

Our College's President just contacted our non-tenured accounting faculty. He gave them a short list of “Accountics” journals that they have to publish in order to get tenure. The list consists of the usual (A-Level) suspects – JAR, TAR, JAE, AOS, JATA, CAR, Auditing – A Journal of Practice and Theory, and a handful more. He categorically told them that they need to have at least 4 articles in those journals to be successful in getting tenure.

Just thought you should know!

I hope you and Erika are doing well. I always look forward to you Tidbits and photos that accompany them. Of course, I also follow you on the AECM listserve.

Best Regards
XXXXX

Jensen Comment
I would not classify AOS as an accountics journal, although its future is a bit uncertain following the recent death of its founder and long-time editor Anthony Hopwood. I would classify it more as a societal/philosophical journal for accountancy research as very broadly defined. However, the other "usual suspects" are A"A-Level" accountics journals that virtually require sophisticated mathematics and statistics applications in accounting research for publication acceptance. On average these journals reject 80%-90% of the submissions.

Be that as it may, a follow up conversation with Professor XXXXX reveals that this "four top accountics journal requirement" is an abrupt change in tenure criteria at the college in question. Publication has been required up to now, but there was no minimum number like four and publications that counted could all be in journals like accounting history journals, case research journals, applied research journals like Management Accounting/Journal of Accountancy, and education research journals like Issues in Accounting Education.

Question 1
I'm interested in first of all finding out if your college has a minimum number, for tenure, of "accounting research" publications even though it might not require that these be the "Top 10" accountics research journals plus AOS?

It seems to be that a fixed minimum number is absurd. It encourages an accounting researcher to split a really good research paper artificially into parts for no purpose other than to increase the publication count. It also discourages major research studies in favor of quickies. It also seems to me that even the "Top 10" accounting research universities would be better served with quality rather than quantity research work. For example, suppose Eric Lie was a non-tenured research professor at the University of Iowa. Eric wrote an award-winning research paper published in Management Science (2005) that resulted in the 2007 American Accounting Association Contribution to the Accounting Literature Award. It also landed him among the 100 Most Influential People of the World Award by Time Magazine. It would seem that this one research paper on options backdating is far more significant than any four accountics research papers published in the same year (2005). I doubt that any other accounting, finance, or business administration professor in history has received this award from Time Magazine.

The policy also ignores how non-tenured faculty can game the system by finding 12 or more co-authors who separately take charge of one of the 12 studies. Then if four of the 12 studies make it into "Top 10" accountics research journals, all 12 partners have better chances of obtaining tenure in their respective universities. This is gaming the system if the purpose of the partnering is only to increase the chances of getting at least four of the "co-authored" papers into top accountics journals. This has been popular among co-workers pooling lottery tickets, but it has dubious ethics for research publication.

It would be funny if one of the 12 "co-authors" was a family Chihuahua, Labrador or Golden Retriever.

Question 2
I am interested in secondly in finding out if your college allows, for tenure, an unspecified number of "accounting research" publications other than the "Top 10" accountics research journal publications plus AOS? Or could a non-tenured accounting professor get tenure with only a "significant number" of research publications in such journals as the Accounting Historians Journal, case research journals, Critical Perspectives in Accounting, Journal of Accountancy, Management Accounting, Issues in Accounting Education, etc.?

Others on the AECM might be interested in your answers to the above two questions.

Thanks in advance

PS
In general I oppose using the AECM for formal survey studies, because this type of thing can get out of hand. However, this is a highly informal inquiry that should be of interest to virtually all subscribers to the AECM. I encourage subscribers to reply directly to the AECM.

June 2, 2010 reply from James R. Martin/University of South Florida [jmartin@MAAW.INFO]

Bob, For another paper with lots of advice for Ph.D. students and new faculty see Beyer, B., D. Herrmann, G. K. Meek and E. T. Rapley. 2010. What it means to be an accounting professor: A concise career guide for doctoral students in accounting. Issues In Accounting Education (May): 227-244.

Jensen Comment
Here are some key quotations from the article

"What It Means to be an Accounting Professor:: A Concise Career Guide for Doctoral Students in Accounting," by Brooke Beyer, Don Herrmann, Gary K. Meek, and Eric T. Rapley, Issues in Accounting Education, May 2010 ---
http://aaapubs.aip.org/getpdf/servlet/GetPDFServlet?filetype=pdf&id=IAEXXX000025000002000227000001&idtype=cvips&prog=normal

ABSTRACT:
The purpose of this paper is to provide a concise career guide for current and potential doctoral students in accounting and, in the process, help them gain a greater awareness of what it means to be an accounting professor. The guide can also be used by accounting faculty in doctoral programs as a starting point in mentoring their doctoral students. We begin with foundational guidance to help doctoral students better understand the “big picture” surrounding the academic accounting environment. We then provide specific research guidance and publishing guidance to help improve the probability of publication success. Actions are suggested that doctoral students and new faculty can take to help jump-start their academic careers. We finish with guidance regarding some important acronyms of special interest to doctoral students in accounting.

TABLE 1

Teaching and Research Expectations of Faculty

Adopted from Butler and Crack (2005)
Butler, A. W., and T. F. Crack. 2005. The academic job market in finance: A rookie’s guide. Financial Decisions 17 2: 1–17.

RESEARCH GUIDANCE

Research is the currency of academics. It is research, not teaching, that drives the rewards for faculty at most universities Hermanson 2008. This is the case not only for universities with doctoral accounting programs, but also for many universities focusing solely on undergraduate or master’s degrees in accounting. Hermanson 2008 provides several reasons why this is the case including the scarcity of research talent in comparison to teaching and that research is peer reviewed, providing a better measure of quality. Regardless of the reasons, doctoral students need to be aware of the importance of research and place special emphasis in this area throughout their careers. In the following section, we provide a summary of research advice commonly provided to doctoral students through the mentoring process.

. . .

GMAT
GMAT scores are likely the single most important admission criteria used by doctoral programs in selecting doctoral candidates for admission. While selection committees carefully consider other evidence including the applicant’s statement, work experience, schools where the undergraduate and master’s degrees were received, grade point average, and reference letters, the GMAT score provides a consistent benchmark that many programs use as a starting point in their decision process. Over half of the U.S. doctoral programs in accounting have a stated minimum GMAT score of 650 or more. A score in the range of 700 or more (top 10 percent) is desirable to receive strong consideration at many programs. The average GMAT score of the ADS Scholars selected to begin their doctoral program in 2009 was 718 and all of the candidates selected had a minimum GMAT score of 650. Furthermore, some programs require a minimum quantitative score of 45 or more (top 25 percent). Without strong quantitative skills, students can struggle in graduate-level statistics and econometrics courses. While the GMAT score is an important minimum benchmark in making initial admissions decisions, it is less important as an indicator of overall student success in a doctoral program. Doctoral program directors can provide numerous examples of students with very high GMAT scores who failed to complete the program. Likewise, some students with average GMAT scores have gone on to be highly successful accounting researchers. Similar to SAT/ACT scores for admission to college, the GMAT score is important for admission into a doctoral accounting program, but becomes progressively less important over one’s academic career.

Jensen Comment

Opposition to Validity Questioning of Accountics Research ---
http://www.trinity.edu/rjensen/TheoryTAR.htm

Bob Jensen's threads on the sad state of accountancy doctoral programs in North America ---
http://www.trinity.edu/rjensen/Theory01.htm#DoctoralPrograms

June 2, 2010 reply from Linda A Kidwell, University of Wyoming [lkidwell@UWYO.EDU]

Back to your original questions, Bob, our department has no set minimum number of hits in particular journals, but rather a system of weighting journals. For example, the top tier journals (the usual suspects) are worth more than sectional and other high quality journals, which in turn are worth more than other journals and presentations. The list and weightings were developed in a collaborative process using various sources for rankings as well as our department mission as guides. To be eligible for tenure, a candidate must have accrued a certain number of points, so higher quality requires less quantity, though we have to remind untenured faculty that hanging all their hopes on top tier articles that may take 2 years to get accepted, if at all, is not likely to do it alone if they have no lower tier articles to fill out their vitae. They also can't earn it on low-quality alone: there must be at least some high quality content. It's an imperfect system, but I think it strikes a good balance between quality and quantity, doesn't set unrealistic expectations, and allows those who don't do accountics research ample opportunity for their work to be respected. Finally, it also helps at the college T&P level, where we are the only non-doctoral department, and other departments need some help seeing the role of practitioner articles in an accounting vita.

June 21, 2010 message from accounting doctoral student Bergner, Jason M [jason.bergner@uky.edu]

Bob,

I’ve just been turned on to your web site about accounting, accountics, and teaching. I will continue to read but am very interested so far. I recently had a piece published in Journal of Accountancy on entering Ph.D. programs. I didn’t know if you knew of it and/or would consider adding it to your site.

http://www.journalofaccountancy.com/Web/PursuingaPhDinAccounting

I just returned from the Tahoe conference where I was besieged with “accountics” work and the pressure to get published in the top journals. I’ve always been curious about the “other side” of this story. I think your site is beginning to shed some light on this.

Thanks.

Jason

Jason Bergner
Doctoral Candidate
Office 355 MM
Douglas J. Von Allmen School of Accountancy
Gatton School of Business & Economics
University of Kentucky

June 21, 2010 reply from Bob Jensen

Hi Jason,

Since the Journal of Accountancy article is free to the world, I don’t see a need to copy parts of it into my Website. However, I will publish a link to your fine work (somewhat of a tribute to Dan Stone as well) and recommend that they carefully read the article at http://www.journalofaccountancy.com/Web/PursuingaPhDinAccounting

The fact that you were a mathematics teacher probably gave you a leg up in an accountics doctoral program.

Bob Jensen

Bob Jensen's threads on accountancy doctoral programs are at
http://www.trinity.edu/rjensen/Theory01.htm#DoctoralPrograms

Accounting Program Rankings in Academe

The top ranked accounting programs do not set a four-hit minimum number of A-Level publications for tenure. In fact the rankings below indicate that some things are more important to program quality, especially in the eyes of firms that hire graduates, than research and publication records of the faculty.

"While the World Implodes, Let’s Bicker About Accounting Program Rankings," by Caleb Newquist, Going Concern, May 6, 2010 ---
http://goingconcern.com/2010/05/while-the-world-implodes-lets-bicker-about-accounting-program-rankings/

Despite your 401k taking a deuce and the entire continent of Europe about to sink into the Atlantic, the Bloomberg Businessweek Business School undergraduate speciality rankings are out and the accounting rankings are, shall we say, interesting. Maybe no one is that worried about it but if sports play any part in your like/dislike of a particular school, then there should be a few words:

1 University of Notre Dame (Mendoza)
2 Brigham Young University (Marriott)
3 Emory University (Goizueta)
4 University of North Carolina – Chapel Hill (Kenan-Flagler)
5 Wake Forest University
6 Lehigh University
7 Boston College (Carroll)
8 University of California – Berkeley (Haas)
9 University of San Diego
10 Southern Methodist University (Cox)

11 Babson College
12 University of Washington (Foster)
13 University of Richmond (Robins)
14 Villanova University
15 Case Western Reserve University (Weatherhead)
16 University of Texas – Austin (McCombs)
17 University of Virginia (McIntire)
18 Cornell University
19 College of William & Mary (Mason)
20 New York University (Stern)
21 University of Southern California (Marshall)
22 Tulane University (Freeman)
23 Fordham University
24 Georgia Institute of Technology
25 Loyola University – Chicago
26 University of Illinois – Urbana Champaign
27 Ohio University
27 University of Denver (Daniels)
29 University of Texas – Dallas
30 University of South Carolina (Moore)
31 University of Connecticut
32 Boston University
33 Santa Clara University
34 University of Maryland (Smith)
35 Indiana University (Kelley)
36 Syracuse University (Whitman)
37 Washington University – St. Louis (Olin)
38 Binghamton University
39 University of Pennsylvania (Wharton)
40 Texas Christian University (Neeley)
41 University of Miami
42 University of Missouri – Columbia (Trulaske)
43 University of Michigan (Ross)
44 North Carolina State University
45 University of Wisconsin – Madison
46 Texas A&M University (Mays)
47 The College of New Jersey
48 University of Minnesota (Carlson)
49 Miami University (Farmer)
50 University of Georgia (Terry)
51 Massachusetts Institute of Technology (Sloan)
52 University of Delaware (Lerner)
53 Ohio Northern University (Dicke)
54 Seattle University (Albers)
55 Northern Illinois University
56 Michigan State University (Broad)
57 Georgetown University (McDonough)
58 California Polytechnic State University (Orfalea)
59 Loyola College in Maryland (Sellinger)
60 University at Buffalo
61 Bentley University
62 DePaul University
63 University of Iowa (Tippie)
64 Drexel University (LeBow)
65 Northeastern University
66 Marquette University
67 St. Joseph’s University (Haub)
68 University of Pittsburgh
69 University of Utah (Eccles)
70 University of Oregon (Lundquist)
71 Seton Hall University (Stillman)
72 Bowling Green State University
73 Kansas State University
74 Colorado State University
75 Louisiana State University (Ourso)
76 Baylor University (Hankamer)
77 University of Oklahoma (Price)
78 University of Colorado – Boulder (Leeds)
79 University of Massachusetts – Amherst (Isenberg)
80 James Madison University
81 George Washington University
82 University of Tennessee – Chattanooga
83 University of Houston (Bauer)
84 Xavier University (Williams)
85 Florida State University
86 John Carroll University (Boler)
87 University of Hawaii (Shidler)
88 Arizona State University (Carey)
89 Florida International University
90 University of Louisville
91 Bryant University
92 Rensselaer Polytechnic Institute (Lally)
93 Purdue University (Krannert)
94 Illinois State University
95 University of Arizona (Eller)
96 Texas Tech University (Rawls)
97 Hofstra University (Zarb)
98 Ohio State University (Fisher)
99 Clemson University
100 University of Florida (Warrington)
101 University of Akron
102 University of Arkansas – Fayetteville (Walton)
103 Butler University
104 University of Nebraska – Lincoln
105 University of Illinois – Chicago
106 University of Central Florida
107 Virginia Polytechnic Institute and State University (Pamplin)
108 Carnegie Mellon University (Tepper)
109 Temple University (Fox)
110 Pennsylvania State University (Smeal)
111 Clarkson University

Jensen Comment
Although virtually all of the above universities have AACSB-accredited business programs, many do not have the specialty AACSB-accredited accounting programs --- https://www.aacsb.net/eweb/DynamicPage.aspx?Site=AACSB&WebKey=4BA8CA9A-7CE1-4E7A-9863-2F3D02F27D23
I've always had doubts whether AACSB accounting program accreditation benefits exceed the costs.

"'U.S. News' May Shift Rankings Methodology," Inside Higher Ed, June 7, 2010 --- http://www.insidehighered.com/news/2010/06/07/qt#229379

U.S. News & World Report is considering several changes in the methodology for its college rankings. Robert Morse, who directs the rankings, discussed the possible changes and invited comment on them a blog post. . He said that the magazine may combine a ranking by high school counselors with the peer ranking currently done by college presidents -- one of the most controversial parts of the rankings. He also wrote that the magazine may add yield -- the percentage of accepted applicants who enroll -- to its formula, and may give more weight to "predicted graduation rate," which gives credit to colleges that exceed their expected rates.

Jensen Comment
Find a College
College Atlas --- http://www.collegeatlas.org/
Among other things the above site provides acceptance rate percentages
Online Distance Education Training and Education --- http://www.trinity.edu/rjensen/Crossborder.htm
For-Profit Universities Operating in the Gray Zone of Fraud (College, Inc.) --- http://www.trinity.edu/rjensen/HigherEdControversies.htm#ForProfitFraud

Bob Jensen's threads on ranking controversies are at
http://www.trinity.edu/rjensen/HigherEdControversies.htm#BusinessSchoolRankings

Video: Why Accountants Don't Run Startups ---
http://www.justin.tv/startuplessonslearned/b/262670582#r=zWvHyWU~&s=li

Seven-Course Certificate in Leadership Studies from the University of Iowa
"Teaching a Leader," by Jennifer Epstein, Inside Higher Ed, June 15, 2010

Career-minded college students (or their concerned and hovering parents) are always in search of surefire ways to make their résumés and transcripts stand out as they try to elbow out classmates for full-time jobs after graduation.

Beyond the grades, internships, student organizations, majors and minors that give employers a sense of what students have learned and what they might be able to do, the University of Iowa will this fall add a seven-course certificate in leadership studies, aimed at making students more attractive to hiring managers in a down

“Leadership is one of the top skills employers say they are looking for looking for,” said Kelley C. Ashby, director of the Career Leadership Academy in the university’s Pomerantz Career Center, which already offers four classes on leadership. “We want students to have the academic component -- various theories of leadership -- and we also want students to have practical experience to apply what we’re teaching them.”

Though the university and its College of Business had for years offered courses on leadership to undergraduates, students and parents seemed to want more, “to know that classes and experiences could translate into something tangible on their transcript,” said David Baumgartner, assistant dean and director of the career center.

Other institutions, including Northwestern University and the University of Wisconsin at Madison, have in the last decade or so introduced leadership certificates open to undergraduates in more than just their business schools.

At Iowa, the certificate will consist of 21 credits -- the equivalent of seven standard Iowa courses. All students will be required to take a core course, “Perspectives on Leadership: Principles and Practices,” developed by faculty in the university’s business, communication studies, education, political science and philosophy departments, as well as by Ashby and a representative of the university’s Office of Student Life. They will also have to choose one pre-approved course from each of the following areas: self leadership, group leadership, communication, cultural competency, and ethics and integrity.

After a student has taken at least three courses, he or she can take on three credits of “experiential course work” -- an internship, on-campus leadership position, or service-learning course. The hope is that the theories of leadership that students learn in the courses will be put into immediate use in leadership positions.

While students generally dive into internships, resident assistant positions or student group presidencies without any specific knowledge on leadership, Ashby said, “we want there to be more intention about why they do what they do when they’re in those positions.”

Ashby said she anticipates that about 50 students will sign up for the core course this fall, but expects that, within a few years, as many as 300 undergraduates might be pursuing the certificate at any one time. So far, she added, there’s no clear pattern of who’s expressing the most interest -- no glut of liberal arts majors hoping to make themselves more employable, and no onslaught of hypercompetitive business majors.

“It’s for students where it’s difficult to see, ‘Where’s my first job?’ and not just for the management majors,” she said. “It’s for the nursing major trying to connect the dots, the student interested in nonprofit management.” The program is being housed in University College, which she described as Iowa’s “kind of miscellaneous college,” rather than being pigeonholed into the College of Business, where the career center is based.

Debra Humphreys, vice president for communications and public affairs at the Association of American Colleges and Universities, said that while “a lot of employers aren’t going to know what this leadership certificate means, a student’s ability to describe or demonstrate what they’ve learned and done could be useful.” At the same time, she added, the certificate could “help the student convey to the employer what they can do.”

But leadership isn’t employers’ top priority in hiring recent graduates, said Ed Koc, director of strategic and foundation research at the National Association of Colleges and Employers. In his group’s latest survey of employers, leadership skills ranked “about 10th on the list -- there are other things employers find more important.”

While the certificate could be “a good idea to the extent that employers looking for leadership would point to the certificate on your resume to say that you ‘have it,’ ” Koc said, “it doesn’t give you a big leg up unless it’s something you’re able to leverage in your interview, if you get one.”

Jensen Comment One of the main complaints we hear from CPA firms and business corporations that hire accounting graduates is that we're producing graduates with little leadership aptitude and skills.

What future leaders need is increased communication skill and confidence in relating with people. The old joke is that an extroverted accountant is one who looks at your shoe laces rather than only his/her own shoe laces.

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

Bill Pasewark asks and answers his own questions as the incoming editor of the AAA's Issues in Accounting Education --- Click Here
http://aaapubs.aip.org/getpdf/servlet/GetPDFServlet?filetype=pdf&id=IAEXXX000025000002000187000001&idtype=cvips&prog=normal&bypassSSO=1

Accounting Jobs Information (free site) --- http://www.accountingjobshelp.com/
Thank you Kim Eaves for the heads up.

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

What's new on MAAW?
Multiple Choice Questions for Management Accounting
James Martin added a summary page of links to multiple choice questions for 14 management accounting topics at http://maaw.info/ManagementAccountingMCQuestions.htm

"Rekindling the Debate: What’s Right and What’sWrong with Masters of Accountancy Programs: The StaffAuditor’s Perspective," by Thomas J. Frecka and Philip M. J. Reckers, Issues in Accounting Education , Vol. 25, 2010 pp. 215–226
Not available free

ABSTRACT:
Global commerce has undergone massive changes over the last two decades. No less so has the worldwide public accounting profession. We have seen two market crashes in the span of eight years, a host of financial reporting fiascoes, and the demise of Arthur Andersen. Historical cost-based accounting is giving way to fairvalue accounting, and International Financial Reporting Standards are replacing national rules and regulations. And, yet, not since the Accounting Education Change Commission 20 years ago has there been a significant nationwide dialog regarding changing societal needs and the adequacy of our collegiate accounting programs to meet those needs. With this void in mind, the Education Committee of the American Accounting Association launched in 2008 an initiative to ignite a nationwide dialog of practitioners, academics, and other prominent stakeholders to assess the quality and level of satisfaction with current Master’s of Accountancy programs, the relevance of current coursework, and to identify and prioritize future curriculum initiatives. The first phase of that initiative was a survey conducted in the late spring of 2009 of more than 500 recent graduates of Master’s of Accountancy programs (auditors with two to six years experience ); this article reports the findings of that survey. In a nutshell, these young auditors were asked what was right and what was wrong with Master’s of Accountancy programs from their perspective. This is a first step in a larger effort to help give direction to program revisions that would best serve the interests of students, the profession, and society. The purpose of the survey is not to definitively resolve outstanding controversies but rather to encourage further necessary debate. Various interpretations of the findings of the survey are inevitable, invited, and welcome. To that end, it is the authors’ intent to raise as many questions in the following pages as those resolved. Over the last decade academics have witnessed an endless litany of suggestions for curriculum changes from individuals, committees, associations, and firms. Unfortunately, those many recommendations have often been conflicting and provide limited, if any, prioritization of what to add to existing curricula and what to withdraw. Furthermore, we acknowledge that while this article does not provide a substantive discussion of the necessarily complimentary roles of university education, continuing professional education, and on-the-job training, such issues must be included in future dialogs.

Thomas J. Frecka is a Professor at the University of Notre Dame, and Philip M. J. Reckers is a Professor at Arizona State University.

Bob Jensen's threads on accounting theory and education are at
http://www.trinity.edu/rjensen/Theory01.htm
Especially note
http://www.trinity.edu/rjensen/theory01.htm#AcademicsVersusProfession

Congratulations to G. Peter Wilson
Pete Wilson of accounting at the Carroll School of Management at Boston College is the 2010 recipient of the Distinguished Achievement in Accounting Education Award from the AICPA --- http://www.webcpa.com/news/Wilson-Earns-AICPA-Accounting-Education-Award-54319-1.html

Wilson received the award for his innovative teaching practices, which have encouraged his students to pursue careers in accounting. He is in the process of creating text and software targeted to those new to accounting. When complete, the text/software will integrate financial, managerial and tax reporting research, teaching and practice; procedural and conceptual skills; and the interplay between a reporting entity’s business and accounting decisions and decisions by users of its accounting reports.

Tips about teaching, technology, and productivity

"You Can't Be Trusted If You're Trusted with Too Much," by Jason B. Jones, Chronicle of Higher Education, June 2, 2010 ---
http://chronicle.com/blogPost/You-Cant-Be-Trusted-If-Youre/24463/

The title of this post emerged at home a couple of weeks ago: the seven-year-old [YouTube] barked it at his mother as she tried to juggle, simultaneously, helping him with a convoluted craft/project and improving a policy that had been held up by the senate. He complained that she was taking too long answering an e-mail; she responded that he should trust that she was coming back; and he flipped the script: "Mom, you can't be trusted if you're trusted with too much."

There's a tricky moment in any career: When you're starting out, you want to be appreciated for your abilities, and are often frustrated that you're not being asked to do certain things that you think are within your skill set. Over time, you start to earn more respect from your colleagues, and are given more responsibilities . . . until there comes a time when you wake up in a panic every day about what you need to accomplish vs. what can plausibly be done in the time that you have. (As my wife said to my mother a few weeks ago: "I think there was a moment, back when he was 4, when we got a little overconfident about what we could plausibly do.")

I'm the last person in the world to dispense advice about this--I have a shameful list of "stuff I should've finished more quickly"--but I will risk three observations:

An e-mail that says, "hey--I haven't forgotten about X. Here's where things stand, and here's what I'm waiting on. Is that ok?" is useful, especially for service/shared governance tasks. Keeps people in the loop. (Obviously, you wouldn't want to overdo this, either.)

George wrote two posts about using your calendar to stay on top of things: "Have a life, with help from your calendar" and "Hit your deadlines, with help from your calendar". Although they're pitched to the start of the year, the summer is an excellent time to make sure your calendar accurately reflects the actual commitments you've made.

Donald E. Hall's The Academic Self: An Owner's Manual has a wealth of practical advice about how to translate academic commitments--teaching, research, and service--into step-by-step projects that can be captured on a calendar.

Nobody likes to say "no," especially to genuinely cool things. But it's generally better to say no in advance, rather than to say no by defaulting on things you care about.

How do you make decisions about choosing projects?

"Lessons for New Professors," by Elizabeth Parfitt, Inside Higher Ed, May 28, 2010 ---
http://www.insidehighered.com/advice/2010/05/28/parfitt

Bob Jensen's Somewhat Dated Advice for New Faculty ---
http://www.trinity.edu/rjensen/000aaa/newfaculty.htm

Higher Education Controversies ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm

"High-Profile Trader's Harsh Critique of For-Profit Colleges," Inside Higher Ed, May 27, 2010 ---
http://www.insidehighered.com/news/2010/05/27/qt#228602

Steven Eisman, the Wall Street trader who was mythologized in Michael Lewis's The Big Short as that rare person who saw the subprime mortgage crisis coming and made a killing as a result, thinks he has seen the next big explosive and exploitative financial industry -- for-profit higher education -- and he's making sure as many people as possible know it. In a speech Wednesday at the Ira Sohn Investment Research Conference, an exclusive gathering at which financial analysts who rarely share their insights publicly are encouraged to dish their "best investment ideas," Eisman started off with a broadside against Wall Street's college companies.

"Until recently, I thought that there would never again be an opportunity to be involved with an industry as socially destructive and morally bankrupt as the subprime mortgage industry," said Eisman, of FrontPoint Financial Services Fund. "I was wrong. The For-Profit Education Industry has proven equal to the task." Eisman's speech lays out his analysis of the sector's enormous profitability and its questionable quality, then argues that the colleges' business model is about to be radically transformed by the Obama administration's plan to hold the institutions accountable for the student-debt-to-income ratio of their graduates. "Under gainful employment, most of the companies still have high operating margins relative to other industries," Eisman said. "They are just less profitable and significantly overvalued. Downside risk could be as high as 50 percent. And let me add that I hope that gainful employment is just the beginning. Hopefully, the DOE will be looking into ways of improving accreditation and of ways to tighten rules on defaults." Stocks of the companies appeared to fall briefly in the last hour of trading Wednesday, after news of Eisman's speech made the rounds.

"Subprime goes to college: The new mortgage crisis — how students at for-profit universities could default on $275 billion in taxpayer-backed student loans," by Steven Eusnan, The New York Post, June 6, 2010 ---
http://www.nypost.com/p/news/opinion/opedcolumnists/subprime_goes_to_college_FeiheNJfGYtoSwmtl5etJP

Until recently, I thought that there would never again be an opportunity to be involved with an industry as socially destructive and morally bankrupt as the subprime mortgage industry. I was wrong. The for-profit education industry has proven equal to the task.
The for-profit industry has grown at an extreme and unusual rate, driven by easy access to government sponsored debt in the form of Title IV student loans, where the credit is guaranteed by the government. Thus, the government, the students and the taxpayer bear all the risk, and the for-profit industry reaps all the rewards. This is similar to the subprime mortgage sector in that the subprime originators bore far less risk than the investors in their mortgage paper.

Read more: http://www.nypost.com/p/news/opinion/opedcolumnists/subprime_goes_to_college_FeiheNJfGYtoSwmtl5etJP#ixzz0q6iq9jsm

Until recently, I thought that there would never again be an opportunity to be involved with an industry as socially destructive and morally bankrupt as the subprime mortgage industry. I was wrong. The for-profit education industry has proven equal to the task.
The for-profit industry has grown at an extreme and unusual rate, driven by easy access to government sponsored debt in the form of Title IV student loans, where the credit is guaranteed by the government. Thus, the government, the students and the taxpayer bear all the risk, and the for-profit industry reaps all the rewards. This is similar to the subprime mortgage sector in that the subprime originators bore far less risk than the investors in their mortgage paper.

Read more: http://www.nypost.com/p/news/opinion/opedcolumnists/subprime_goes_to_college_FeiheNJfGYtoSwmtl5etJP#ixzz0q6iq9jsm

Until recently, I thought that there would never again be an opportunity to be involved with an industry as socially destructive and morally bankrupt as the subprime mortgage industry. I was wrong. The for-profit education industry has proven equal to the task.

The for-profit industry has grown at an extreme and unusual rate, driven by easy access to government sponsored debt in the form of Title IV student loans, where the credit is guaranteed by the government. Thus, the government, the students and the taxpayer bear all the risk, and the for-profit industry reaps all the rewards. This is similar to the subprime mortgage sector in that the subprime originators bore far less risk than the investors in their mortgage paper.

A student prepares for an online quiz at home for the Universtity of Phoenix. In the past 10 years, the for-profit education industry has grown 5-10 times the historical rate of traditional post secondary education. As of 2009, the industry had almost 10% of enrolled students but claimed nearly 25% of the $89 billion of federal Title IV student loans and grant disbursements. At the current pace of growth, for-profit schools will draw 40% of all Title IV aid in 10 years.

How has this been allowed to happen?

The simple answer is that they’ve hired every lobbyist in Washington, DC. There has been a revolving door between the people who work for this industry and the halls of government. One example is Sally Stroup. In 2001-2002, she was the head lobbyist for the Apollo Group — the company behind the University of Phoenix and the largest for-profit educator. But from 2002-2006 she became assistant secretary of post-secondary education for the Department of Education under President Bush. In other words, she was directly in charge of regulating the industry she had previously lobbied for.

From 1987 through 2000, the amount of total Title IV dollars received by students of for-profit schools fluctuated between $2 billion and $4 billion per annum. But when the Bush administration took over, the DOE gutted many of the rules that governed the conduct of this industry. Once the floodgates were opened, the industry embarked on 10 years of unrestricted massive growth. Federal dollars flowing to the industry exploded to over $21 billion, a 450% increase.

At many major-for profit institutions, federal Title IV loan and grant dollars now comprise close to 90% of total revenues. And this growth has resulted in spectacular profits and executive salaries. For example, ITT Educational Services, or ESI, has a roughly 40% operating margin vs. the 7%-12% margins of other companies that receive major government contracts. ESI is more profitable on a margin basis than even Apple.

This growth is purely a function of government largesse, as Title IV has accounted for more than 100% of revenue growth.

Here is one of the more upsetting statistics. In fiscal 2009, Apollo increased total revenues by $833 million. Of that amount, $1.1 billion came from Title IV federally funded student loans and grants. More than 100% of the revenue growth came from the federal government. But of this incremental $1.1 billion in federal loan and grant dollars, the company only spent an incremental $99 million on faculty compensation and instructional costs — that’s 9 cents on every dollar received from the government going toward actual education. The rest went to marketing and paying executives.

Leaving politics aside for a moment, the other major reason why the industry has taken an ever increasing share of government dollars is that it has turned the typical education model on its head. And here is where the subprime analogy becomes very clear.

There is a traditional relationship between matching means and cost in education. Typically, families of lesser financial means seek lower cost colleges in order to maximize the available Title IV loans and grants — thereby getting the most out of every dollar and minimizing debt burdens.

The for-profit model seeks to recruit those with the greatest financial need and put them in high cost institutions. This formula maximizes the amount of Title IV loans and grants that these students receive.

With billboards lining the poorest neighborhoods in America and recruiters trolling casinos and homeless shelters (and I mean that literally), the for-profits have become increasingly adept at pitching the dream of a better life and higher earnings to the most vulnerable of society.

If the industry in fact educated its students and got them good jobs that enabled them to receive higher incomes and to pay off their student loans, everything I’ve just said would be irrelevant.

So the key question to ask is — what do these students get for their education? In many cases, NOT much, not much at all.

At one Corinthian Colleges-owned Everest College campus in California, students paid $16,000 for an eight-month course in medical assisting. Upon nearing completion, the students learned that not only would their credits not transfer to any community or four-year college, but also that their degree is not recognized by the American Association for Medical Assistants. Hospitals refuse to even interview graduates.

And look at drop-out rates. Companies don’t fully disclose graduation rates, but using both DOE data and company-provided information, I calculate drop out rates of most schools are 50%-plus per year.

Default rates on student loans are already starting to skyrocket. It’s just like subprime — which grew at any cost and kept weakening its underwriting standards to grow.

The bottom line is that as long as the government continues to flood the for-profit education industry with loan dollars and the risk for these loans is borne solely by the students and the government, then the industry has every incentive to grow at all costs, compensate employees based on enrollment, influence key regulatory bodies and manipulate reported statistics — all to maintain access to the government’s money.

Read more: http://www.nypost.com/p/news/opinion/opedcolumnists/subprime_goes_to_college_FeiheNJfGYtoSwmtl5etJP#ixzz0q6hwLIst

June 6, 2010 reply from dgsearfoss@comcast.net

Hi Bob,

Equally as bad, if not worse, are the companies that provide on-line courses to the military. They price their tuition at exactly the amount that will be covered by the military, set horribly low levels of expectation as reflected by the “testing” and “grading”, and virtually none of the “credits” are transferrable to an accredited higher education institution.

It is a scandal that should be dealt with harshly by Congress.

Jerry

On May 4, 2010, PBS Frontline broadcast an hour-long video called College Inc. --- a sobering analysis of for-profit onsite and online colleges and universities.
For a time you can watch the video free online --- Click Here
http://www.pbs.org/wgbh/pages/frontline/collegeinc/view/?utm_campaign=viewpage&utm_medium=toparea&utm_source=toparea

Bob Jensen's threads on many of the for-profit universities are at
http://www.trinity.edu/rjensen/Crossborder.htm

Although there is a gray zone, for-profit colleges should not be confused with diploma mills ---
http://www.trinity.edu/rjensen/FraudReporting.htm#DiplomaMill

Brainstorm on What For-Profit Colleges are Doing Right as Well as Wrong

"'College, Inc.'," by Kevin Carey, Chronicle of Higher Education, May 10, 2010 ---
http://chronicle.com/blogPost/College-Inc/23850/?sid=at&utm_source=at&utm_medium=en

PBS broadcast a documentary on for-profit higher education last week, titled College, Inc. It begins with the slightly ridiculous figure of Michael Clifford, a former cocaine abuser turned born-again Christian who never went to college, yet makes a living padding around the lawn of his oceanside home wearing sandals and loose-fitting print shirts, buying up distressed non-profit colleges and turning them into for-profit money machines.

Improbably, Clifford emerges from the documentary looking OK. When asked what he brings to the deals he brokers, he cites nothing educational. Instead, it's the "Three M's: Money, Management, and Marketing." And hey, there's nothing wrong with that. A college may have deep traditions and dedicated faculty, but if it's bankrupt, anonymous, and incompetently run, it won't do students much good. "Nonprofit" colleges that pay their leaders executive salaries and run multi-billion dollar sports franchises have long since ceded the moral high ground when it comes to chasing the bottom line.

The problem with for-profit higher education, as the documentary ably shows, is that people like Clifford are applying private sector principles to an industry with a number of distinct characteristics. Four stand out. First, it's heavily subsidized. Corporate giants like the University of Phoenix are now pulling in hundreds of millions of dollars per year from the taxpayers, through federal grants and student loans. Second, it's awkwardly regulated. Regional accreditors may protest that their imprimatur isn't like a taxicab medallion to be bought and sold on the open market. But as the documentary makes clear, that's precisely the way it works now. (Clifford puts the value at $10-million.)

Third, it's hard for consumers to know what they're getting at the point of purchase. College is an experiential good; reputations and brochures can only tell you so much. Fourth—and I don't think this is given proper weight when people think about the dynamics of the higher-education market—college is generally something you only buy a couple of times, early in your adult life.

All of which creates the potential—arguably, the inevitability—for sad situations like the three nursing students in the documentary who were comprehensively ripped off by a for-profit school that sent them to a daycare center for their "pediatric rotation" and left them with no job prospects and tens of thousands of dollars in debt. The government subsidies create huge incentives for for-profit colleges to enroll anyone they can find. The awkward regulation offers little in the way of effective oversight. The opaque nature of the higher-education experience makes it hard for consumers to sniff out fraudsters up-front. And the fact that people don't continually purchase higher education throughout their lives limits the downside for bad actors. A restaurant or automobile manufacturer that continually screws its customers will eventually go out of business. For colleges, there's always another batch of high-school graduates to enroll.

The Obama administration has made waves in recent months by proposing to tackle some of these problems by implementing "gainful employment" rules that would essentially require for-profits to show that students will be able to make enough money with their degrees to pay back their loans. It's a good idea, but it also raises an interesting question: Why apply this policy only to for-profits? Corporate higher education may be the fastest growing segment of the market, but it still educates a small minority of students and will for a long time to come. There are plenty of traditional colleges out there that are mainly in the business of preparing students for jobs, and that charge a lot of money for degrees of questionable value. What would happen if the gainful employment standard were applied to a mediocre private university that happily allows undergraduates to take out six-figure loans in exchange for a plain-vanilla business B.A.?

The gainful employment standard highlights some of my biggest concerns about the Obama administration's approach to higher-education policy. To its lasting credit, the administration has taken on powerful moneyed interests and succeeded. Taking down the FFEL program was a historic victory for low-income students and reining in the abuses of for-profit higher education is a needed and important step.

Continued in article

Jensen Comment
The biggest question remains concerning the value of "education" at the micro level (the student) and the macro level (society). It would seem that students in training programs should have prospects of paying back the cost of the training if "industry" is not willing to fully subsidize that particular type of training.

Education is another question entirely, and we're still trying to resolve issues of how education should be financed. I'm not in favor of "gainful employment rules" for state universities, although I think such rules should be imposed on for-profit colleges and universities.

What is currently happening is that training and education programs are in most cases promising more than they can deliver in terms of gainful employment. Naive students think a certificate or degree is "the" ticket to career success, and many of them borrow tens of thousands of dollars to a point where they are in debtor's prisons with their meager laboring wages garnished (take a debtor's wages on legal orders) to pay for their business, science, and humanities degrees that did not pay off in terms of career opportunities.

But that does not mean that their education did not pay off in terms of life's fuller meaning. The question is who should pay for "life's fuller meaning?" Among our 50 states, California had the best plan for universal education. But fiscal mismanagement, especially very generous unfunded state-worker unfunded pension plans, has now brought California to the brink of bankruptcy. Increasing taxes in California is difficult because it already has the highest state taxes in the nation.

Student borrowing to pay for pricey certificates and degrees is not a good answer in my opinion, but if students borrow I think the best alternative is to choose a lower-priced accredited state university. It will be a long, long time before the United States will be able to fund "universal education" because of existing unfunded entitlements for Social Security and other pension obligations, Medicare, Medicaid, military retirements, etc.

I think it's time for our best state universities to reach out with more distance education and training that prevent many of the rip-offs taking place in the for-profit training and education sector. The training and education may not be free, but state universities have the best chance of keeping costs down and quality up.

"Wal-Mart Employees Get New College Program—Online," by Marc Parry, Chronicle of Higher Education, June 3, 2010 ---
http://chronicle.com/blogPost/Wal-Mart-Employees-Get-New/24504/?sid=at&utm_source=at&utm_medium=en

The American Public University System has been described as a higher-education version of Wal-Mart: a publicly traded corporation that mass-markets moderately priced degrees in many fields.

Now it's more than an analogy. Under a deal announced today, the for-profit online university will offer Wal-Mart workers discounted tuition and credit for job experience.

Such alliances are nothing new; see these materials from Strayer and Capella for other examples. But Wal-Mart is the country's largest retailer. And the company is pledging to spend $50-million over three years to help employees cover the cost of tuition and books beyond the discounted rate, according to the Associated Press.

"What's most significant about this is that, given that APU is very small, this is a deal that has the potential to drive enrollments that are above what investors are already expecting from them," Trace A. Urdan, an analyst with Signal Hill Capital Group, told Wired Campus. "Which is why the stock is up."

Wal-Mart workers will be able to receive credit—without having to pay for it—for job training in subjects like ethics and retail inventory management, according to the AP.

Wal-Mart employs 1.4 million people in the U.S. Roughly half of them have a high-school diploma but no college degree, according to The New York Times. A department-level manager would end up paying about $7,900 for an associate degree, factoring in the work credits and tuition discount, the newspaper reported.

“If 10 to 15 percent of employees take advantage of this, that’s like graduating three Ohio State Universities,” Sara Martinez Tucker, a former under secretary of education who is now on Wal-Mart’s external advisory council, told the Times.

"News Analysis: Is 'Wal-Mart U.' a Good Bargain for Students?" by Marc Parry, Chronicle of Higher Education, June 13, 2010 ---
http://chronicle.com/article/Is-Wal-Mart-U-a-Good/65933/?sid=at&utm_source=at&utm_medium=en

There might have been a Wal-Mart University.

As the world's largest retailer weighed its options for making a big splash in education, executives told one potential academic partner that Wal-Mart Stores was considering buying a university or starting its own.

"Wal-Mart U." never happened. Instead, the retailer chose a third option: a landmark alliance that will make a little-known for-profit institution, American Public University, the favored online-education provider to Wal-Mart's 1.4 million workers in the United States.

A closer look at the deal announced this month shows how American Public slashed its prices and adapted its curriculum to snare a corporate client that could transform its business. It also raises one basic question: Is this a good bargain for students?

Adult-learning leaders praise Wal-Mart, the nation's largest private employer, for investing in education. But some of those same experts wonder how low-paid workers will be able to afford the cost of a degree from the private Web-based university the company selected as a partner, and why Wal-Mart chose American Public when community-college options might be cheaper. They also question how easily workers will be able to transfer APU credits to other colleges, given that the university plans to count significant amounts of Wal-Mart job training and experience as academic credit toward its degrees.

For example, cashiers with one year's experience could get six credits for an American Public class called "Customer Relations," provided they received an "on target" or "above target" on their last performance evaluation, said Deisha Galberth, a Wal-Mart spokeswoman. A department manager's training and experience could be worth 24 credit hours toward courses like retail ethics, organizational fundamentals, or human-resource fundamentals, she said.

Altogether, employees could earn up to 45 percent of the credit for an associate or bachelor's degree at APU "based on what they have learned in their career at Wal-Mart," according to the retailer's Web site.

Janet K. Poley, president of the American Distance Education Consortium, points out that this arrangement could saddle Wal-Mart employees with a "nontransferable coupon," as one blogger has described it.

"I now see where the 'trick' is—if a person gets credit for Wal-Mart courses and Wal-Mart work, they aren't likely to be able to transfer those to much of anyplace else," Ms. Poley wrote in an e-mail to The Chronicle. Transferability could be important, given the high turnover rate in the retail industry.

Inside the Deal Wal-Mart screened 81 colleges before signing its deal with American Public University. One that talked extensively with the retailer was University of Maryland University College, a 94,000-student state institution that is a national leader in online education. According to University College's president, Susan C. Aldridge, it was during early discussions that Wal-Mart executives told her the company was considering whether it should buy a college or create its own college.

When asked to confirm that, Ms. Galberth said only that Wal-Mart "brainstormed every possible option for providing our associates with a convenient and affordable way to attend college while working at Wal-Mart and Sam's Club," which is also owned by Wal-Mart Stores. "We chose to partner with APU to reach this goal. We have no plans to purchase a brick-and-mortar university or enter the online education business," she said.

The Wal-Mart deal was something of a coming-out party for American Public University. The institution is part of a 70,000-student system that also includes American Military University and that largely enrolls active-duty military personnel. As American Public turned its attention to luring the retail behemoth, it was apparently able to be more flexible than other colleges and willing to "go the extra mile" to accommodate Wal-Mart, said Jeffrey M. Silber, a stock analyst and managing director of BMO Capital Markets. That flexibility included customizing programs. APU has a management degree with courses in retail, and its deans worked with Wal-Mart to add more courses to build a retail concentration, said Wallace E. Boston, the system's president and chief executive.

It also enticed Wal-Mart with a stable technology platform; tuition prices that don't vary across state lines, as they do for public colleges; and online degrees in fields that would be attractive to workers, like transportation logistics.

Unlike American Public, Maryland's University College would not put a deep discount on the table.

Credit for Wal-Mart work was also an issue, Ms. Aldridge said.

"We feel very strongly that any university academic credit that's given for training needs to be training or experience at the university level," Ms. Aldridge said. "And we have some very set standards in that regard. And I'm not certain that we would have been able to offer a significant amount of university credit for some of the on-the-job training that was provided there."

Awarding credit for college-level learning gained outside the classroom is a long-standing practice, one embraced by about 60 percent of higher-education institutions, according to the most recent survey by the Council for Adult And Experiential Learning. A student might translate any number of experiences into credit: job training, military service, hobbies, volunteer service, travel, civic activities.

Pamela J. Tate, president and chief executive of the council, said what's important isn't the percentage of credits students get from prior learning—a number that can vary widely. What's important, she said, is that students can demonstrate knowledge. Workers might know how they keep the books at a company, she explained. But that doesn't automatically mean they've learned the material of a college accounting course.

Karan Powell, senior vice president and academic dean at American Public University system, said credit evaluation at her institution "is a serious, rigorous, and conservative process." But will the credits transfer? "Every college or university establishes its own transfer-credit policies as they apply to experiential learning as well as credit from other institutions," she said in an e-mail. "Therefore, it would depend on the school to which a Wal-Mart employee wanted to transfer."

Affordable on $12 an Hour? Then there's the question of whether low-wage workers will be able to afford the degrees. One of the key features of this deal is the discount that Wal-Mart negotiated with American Public.

"Wal-Mart is bringing the same procurement policies to education that it brings to toothpaste," said John F. Ebersole, president of Excelsior College, a distance-learning institution based in New York.

American Public University's tuition was already cheap by for-profit standards and competitive with other nonprofit college options. It agreed to go even cheaper for Wal-Mart, offering grants equal to 15 percent of tuition for the company's workers. Those employees will pay about $11,700 for an associate degree and $24,000 for a bachelor's degree.

But several experts pointed out that public colleges might provide a more affordable option.

The Western Association of Food Chains, for example, has a partnership with 135 community colleges in the western United States to offer an associate degree in retail management completely online, Ms. Tate said. Many of the colleges also grant credit for prior learning. Though the tuition varies by state, the average tuition cost to earn the degree is about $4,500, she said. By contrast, she said, the American Public degree is "really expensive" for a front-line worker who might make $12 an hour.

"What I couldn't figure out is how they would be able to afford it unless Wal-Mart was going to pay a substantial part of the tuition," she said. "If not, then what you've got is this program that looks really good, but the actual cost to the person is a whole lot more than if they were going to go to community college and get their prior learning credits assessed there."

How the retailer might subsidize its employees' education is an open question. In announcing the program, Wal-Mart pledged to spend up to $50-million over the next three years "to provide tuition assistance and other tools to help associates prepare for college-level work and complete their degrees."

Alicia Ledlie, the senior director at Wal-Mart who has been shepherding this effort, told The Chronicle in an e-mail that the company is "right now working through the design of those programs and how they will benefit associates," with more details to be released later this summer.

One thing is clear: The deal has a big financial impact on American Public. Wal-Mart estimates that about 700,000 of its 1.4 million American employees lack a college degree.

Sara Martinez Tucker, a former under secretary of education who is now on Wal-Mart's external advisory council, suggests 10 or 15 percent of Wal-Mart associates could sign up.

"That's 140,000 college degrees," she told The Chronicle. "Imagine three Ohio State Universities' worth of graduates, which is huge in American higher education."

Jensen Comment
This Wal-Mart Fringe Benefit Should Be Carefully Investigated by Employees
It does not sit well with me!

If Wal-Mart would pay the same amount of benefit for online state university degrees (e.g., the University of Wisconsin has over 100,000 online students) as the for-profit American Public University that charges higher tuition even at a Wal-Mart discount, why would a student choose the less prestigious and relatively unknown American Public University? Possibly American Public wins out because it's easier to get A & B grades with less academic ability and less work.
"Want a Higher G.P.A.? Go to a Private College: A 50-year rise in grade-point averages is being fueled by private institutions, a recent study finds," by Catherine Rampell. The New York Times, April 19, 2010 ---
http://finance.yahoo.com/college-education/article/109339/want-a-higher-gpa-go-to-a-private-college?mod=edu-collegeprep

I certainly hope that the Wal-Mart contributions toward tuition can be extended to state-supported colleges and universities having more respected credits. For example, online degrees from the University of Wisconsin or the University of Maryland are are likely much more respected for job mobility and for acceptance into graduate schools.

Giving credit for "job experience" is an absolute turn off for me. Most adults have some form of "job experience." This is just not equivalent to course credit experience in college where students face examinations and academic projects. Weaker colleges generally use credit for "job experience" ploy as a come on to attract applicants. But the credits awarded for job experience are not likely to be transferrable to traditional colleges and universities.

The "discounted tuition" in this for-profit online program is likely to be higher than the in-state tuition from state-supported colleges and universities.

I'm dubious about the standards for admission in for-profit colleges as well as the rigor of the courses. Watch the Frontline video served up by PBS.

On May 4, 2010, PBS Frontline broadcast an hour-long video called College Inc. --- a sobering analysis of for-profit onsite and online colleges and universities.
For a time you can watch the video free online --- Click Here
http://www.pbs.org/wgbh/pages/frontline/collegeinc/view/?utm_campaign=viewpage&utm_medium=toparea&utm_source=toparea

The American Public University System is accredited by the North Central Association accrediting agency that is now under investigation for weakened standards for college credits.

"Inspector General Keeps the Pressure on a Regional Accreditor," by Eric Kelderman, Chronicle of Higher Education, May 27, 2010 ---
http://chronicle.com/article/Inspector-General-Keeps-the/65691/?sid=at&utm_source=at&utm_medium=en

The inspector general of the U.S. Department of Education has reaffirmed a recommendation that the department should consider sanctions for the Higher Learning Commission of the North Central Association of Colleges and Schools, one of the nation's major regional accrediting organizations. In a report this week, the Office of Inspector General issued its final recommendations stemming from a 2009 examination of the commission's standards for measuring credit hours and program length, and affirmed its earlier critique that the commission had been too lax in its standards for determining the amount of credit a student receives for course work.

The Higher Learning Commission accredits more than 1,000 institutions in 19 states. The Office of Inspector General completed similar reports for two other regional accreditors late last year but did not suggest any sanctions for those organizations.

Possible sanctions against an accreditor include limiting, suspending, or terminating its recognition by the secretary of education as a reliable authority for determining the quality of education at the institutions it accredits. Colleges need accreditation from a federally recognized agency in order to be eligible to participate in the federal student-aid programs.

In its examination of the Higher Learning Commission, the office looked at the commission's reaccreditation of six member institutions: Baker College, DePaul University, Kaplan University, Ohio State University, the University of Minnesota-Twin Cities, and the University of Phoenix. The office chose those institutions—two public, two private, and two proprietary institutions—as those that received the highest amounts of federal funds under Title IV, the section of the Higher Education Act that governs the federal student-aid programs.

It also reviewed the accreditation status of American InterContinental University and the Art Institute of Colorado, two institutions that had sought initial accreditation from the commission during the period the office studied.

The review found that the Higher Learning Commission "does not have an established definition of a credit hour or minimum requirements for program length and the assignment of credit hours," the report says. "The lack of a credit-hour definition and minimum requirements could result in inflated credit hours, the improper designation of full-time student status, and the over-awarding of Title IV funds," the office concluded in its letter to the commission's president, Sylvia Manning.

More important, the office reported that the commission had allowed American InterContinental University to become accredited in 2009 despite having an "egregious" credit policy.

In a letter responding to the commission, Ms. Manning wrote that the inspector general had ignored the limitations the accreditor had placed on American InterContinental to ensure that the institution improved its standards, an effort that had achieved the intended results, she said. "These restrictions were intended to force change at the institution and force it quickly."

Continued in article

Jensen Comment
The most successful for-profit universities advertise heavily about credibility due to being "regionally accredited." In some cases this accreditation was initially bought rather than achieved such as by buying up a small, albeit still accredited, bankrupt not-for-profit private college that's washed up on the beach. This begs the question about how some for-profit universities maintain the spirit of accreditation acquired in this manner.

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

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

Government Aid Will Still Flow to For-Profit College Programs of Dubious Quality
"Education Dept. Will Release Stricter Rules for For-Profits but Delays One on 'Gainful Employment'," by Kelly Fields and Jennifer Gonzalez, Chronicle of Higher Education, June 15, 2010 --- http://chronicle.com/article/Education-Dept-Will-Release/65958/

After an intense lobbying effort by for-profit colleges, the Education Department announced Tuesday that it will postpone the release of a rule that proprietary institutions said would shutter thousands of their programs.

The rule, which would cut off federal student aid to programs whose graduates carry high student-loan debt relative to their incomes, is one of 14 that the department and college stakeholders have been negotiating over the past eight months. The other regulations, including one that would tighten a ban on incentive compensation for college recruiters, will be made public Friday.

In a call with reporters Tuesday, an Education Department official said the agency still plans to hold for-profits accountable for preparing their graduates for "gainful employment," but needs more time to develop an appropriate measure of that outcome. The official said the proposal will be released later this summer, and will most likely be included in a package of final rules due out in November.

"We have many areas of agreement where we can move forward," Arne Duncan, the U.S. secretary of education, said in a statement. "But some key issues around gainful employment are complicated, and we want to get it right, so we will be coming back with that shortly."

The delay gives for-profit colleges more time to fight the department's proposal to bar aid for programs in which a majority of students' loan payments would exceed 8 percent of the lowest quarter of graduates' expected earnings, based on a 10-year repayment plan. The colleges have already spent hundreds of thousands of dollars pushing an alternative that would require programs to provide prospective students with more information about their graduates' debt levels and salaries.

Their lobbying and public-relations blitz has met with mixed success. While the department has not yet abandoned plans to measure graduates' debt-to-income ratios, the rules that will be released Friday would require programs to disclose their graduation and job-placement rates and median debt levels—the approach favored by for-profits.

A Welcome Delay Trace A. Urdan, an analyst with Signal Hill Capital Group, said the delay in releasing the rest of the rule suggested that "the department has heard the message from industry and Congress, and that there was some overreaching."

"Clearly, trying to gather more data before proceeding is being responsible," he added.

For-profit colleges have complained that the department has refused to release the data it used to justify drafting the rule, and have questioned whether they even exist.

The fight over gainful employment comes amid increased federal scrutiny of the for-profit sector, which educates a growing share of students and is highly dependent on federal student aid. On Thursday, the education committee of the U.S. House of Representatives will hold a hearing to examine whether accrediting agencies are doing enough to ensure that students studying online are getting an adequate amount of instruction for the degrees they earn. The hearing will focus on a recent report by the Education Department's Office of Inspector General that questioned the decision of the Higher Learning Commission of the North Central Association of Colleges and Schools, one of the nation's major regional accrediting organizations, to approve accreditation of American InterContinental University, a for-profit college owned by the Career Education Corporation. The Senate education committee follows with a hearing next week focused on the growth of the for-profit sector and the risks that may pose to taxpayers.

In a statement issued Tuesday, the chairman of the Senate committee praised the proposed rules. "The federal government must ensure that the more than $20-billion in student aid that these schools receive is being well spent and students are being well informed and well served," said Sen. Tom Harkin, Democrat of Iowa. "For-profit colleges must work for students and taxpayers, not just shareholders."

Meanwhile, a top Republican on the panel, Sen. Lamar Alexander, of Tennessee, called the disclosures that would be required by the rules that will be released on Friday "much better than the first approach on gainful employment." Mr. Alexander, a former secretary of education, had threatened to offer an amendment to withhold the funds needed to put the rule into effect if the department followed through with its original proposal.

"Secretary Duncan is focusing on a real problem," he said. "Some students are borrowing too much and not getting enough value for what they are paying."

Tougher Stance on Recruitment But if the department is showing signs that it may soften its stance on gainful employment, it has dug in its heels on another controversial issue: recruiter compensation. During negotiations over the rules, the department proposed striking a dozen "safe harbors" from a ban on compensating recruiters based on student enrollment. It followed through with that proposal in the rules due out Friday, while promising to provide guidance on what is—and isn't—allowed under the ban.

Continued in article

Bob Jensen's threads on for-profit colleges operating in the gray zone of fraud ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#ForProfitFraud

"Ed Tech Trends to Watch in 2010," by Converge Staff, Converge Magazine, June 14, 2010 ---
http://www.convergemag.com/classtech/2010-Ed-Tech-Trends.html
Bob Jensen's education technology threads
http://www.trinity.edu/rjensen/000aaa/0000start.htm

"Special Education Students Beat the Odds With Technology," by Converge Staff, Converge Magazine, June 16, 2010 ---
http://www.convergemag.com/classtech/Special-Education-Students-Beat-the-Odds-With-Technology.html
Bob Jensen's threads on technology aids for handicapped learners are at
http://www.trinity.edu/rjensen/000aaa/thetools.htm#Handicapped

"Want a Higher G.P.A.? Go to a Private College: A 50-year rise in grade-point averages is being fueled by private institutions, a recent study finds," by Catherine Rampell. The New York Times, April 19, 2010 ---
http://finance.yahoo.com/college-education/article/109339/want-a-higher-gpa-go-to-a-private-college?mod=edu-collegeprep

Over the last 50 years, college grade-point averages have risen about 0.1 points per decade, with private schools fueling the most grade inflation, a recent study finds.

The study, by Stuart Rojstaczer and Christopher Healy, uses historical data from 80 four-year colleges and universities. It finds that G.P.A.'s have risen from a national average of 2.52 in the 1950s to about 3.11 by the middle of the last decade.

For the first half of the 20th century, grading at private schools and public schools rose more or less in tandem. But starting in the 1950s, grading at public and private schools began to diverge. Students at private schools started receiving significantly higher grades than those received by their equally-qualified peers -- based on SAT scores and other measures -- at public schools.

In other words, both categories of schools inflated their grades, but private schools inflated their grades more.

Based on contemporary grading data the authors collected from 160 schools, the average G.P.A. at private colleges and universities today is 3.3. At public schools, it is 3.0.

The authors suggest that these laxer grading standards may help explain why private school students are over-represented in top medical, business and law schools and certain Ph.D. programs: Admissions officers are fooled by private school students' especially inflated grades.

Additionally, the study found, science departments today grade on average 0.4 points lower than humanities departments, and 0.2 points lower than social science departments. Such harsher grading for the sciences appears to have existed for at least 40 years, and perhaps much longer.

Relatively lower grades in the sciences discourage American students from studying such disciplines, the authors argue.

"Partly because of our current ad hoc grading system, it is not surprising that the U.S. has to rely heavily upon foreign-born graduate students for technical fields of research and upon foreign-born employees in its technology firms," they write.

These overall trends, if not the specific numbers, are no surprise to anyone who has followed the debates about grade inflation. But so long as schools believe that granting higher grades advantages their alumni, there will be little or no incentive to impose stricter grading standards unilaterally.

Buying grades is also common in some foreign universities ---
http://works.bepress.com/cgi/viewcontent.cgi?article=1000&context=vincent_johnson

“Gaming for GPA” by Bob Jensen
So your goal in education is a gpa
That’s as close as possible to an average of A;
First you enroll in an almost unknown and easy private college
Where your transcript records accumulated knowledge.

But take the hardest courses in prestigious schools
Where you accumulate transfer credit pools;
Then transfer the A credits to your transcript cool
And bury the other credits where you were a fool.

And when the Great Scorer comes to write against your name
It’s not a question of whether you won or went lame;
You always win if you know how to play the game
And for a lifetime there’s no transcript record of your shame.

Bob Jensen's threads on grade inflation ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#GradeInflation
And http://www.trinity.edu/rjensen/Assess.htm#RateMyProfessor

"CEO Interviews on CNBC," by Felix Meschke and Andy (Young Han) Kim Nanyang, SSRN, June 20, 2010 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1627683
Thanks to Jim Mahar for this link.

Abstract:
This paper investigates whether media attention systematically affects stock prices by analyzing price and volume reactions to 6,937 CEO interviews that were broadcast on CNBC between 1997 and 2006. We document a significant positive abnormal return of 162 basis points accompanied by abnormally high trading volume over the [-2, 0] trading day window. After the interviews, prices exhibit strong mean reversion; over the following ten trading days, the cumulative abnormal return is negative 108 basis points. The pattern is robust even after controlling for the announcements of major corporate events and surrounding news articles. We also find that one standard deviation larger abnormal viewership is associated with a 0.5% higher event day abnormal return and 0.5% larger post-event reversals. Furthermore, we find evidence that enthusiastic individual investors are more likely to trade purely based on CNBC interviews not confounded by any events or news articles. These price and volume dynamics suggest that the financial news media is able to generate transitory buying pressure by catching the attention of enthusiastic individual investors.

Jensen Comment
I suspect it is safe to extrapolate (somewhat at least) these results to CEO comments in other similar and widely watched media services on stock picking in such places as the WSJ, NYT, Yahoo Finance, Motley Fools, etc.

Bob Jensen's threads on the Efficient Market Hypothesis (EMH) are at
http://www.trinity.edu/rjensen/Theory01.htm#EMH

Somebody asked me how to find the cost of corporate fraud

From: XXXXX
Sent: Wednesday, June 23, 2010 2:40 PM
To: Jensen, Robert
Subject: Cost of corporate frauds

Hi Bob,

I was tooling around your web site, and there’s a lot of good stuff there… but I was wondering if you know where I might find some stats on the cost of corporate fraud – how much is lost on market cap, jobs lost, value of 401Ks, amount of debt left unpaid, or the like.

If you can point me in the right direction I would be most appreciative.

Regards,
XXXXX

From: Jensen, Robert [mailto:rjensen@trinity.edu]
Sent: Wednesday, June 23, 2010 6:05 PM
To: XXXXX
Subject: RE: Cost of corporate frauds

If you are seeking a dollar number I don’t think anything is available. In fact, I’m not certain how to even define “cost of corporate fraud” in a measurable way when you consider the higher order costs such as lost income of unemployed or under employed victims., lost of business from suppliers, litigation costs, media reporting costs, and thousands of other factors that are interactive and not additive.

If you find someone who claims to know the cost of corporate fraud I would be immediately suspicious. Press reports often say the number is in the billions, but that could be anywhere from $1 billion to $1 trillion.

Furthermore we only know about corporate frauds that have been detected. The cost of undetected corporate fraud is a complete unknown.

Bob Jensen

From: XXXXX
Sent: Wednesday, June 23, 2010 6:07 PM
To: Jensen, Robert
Subject: RE: Cost of corporate frauds

Thanks for your response. I wasn’t finding any info, so I was beginning to think it didn’t exist.

Do you know, though, if there is anything on a particular fraud, e.g., Enron and Worldcom)?

June 25, 2010 reply from Bob Jensen

Hi XXXXX,

I was afraid you would never ask!

Try the following links:

Fraud Updates --- http://www.trinity.edu/rjensen/FraudUpdates.htm

http://www.trinity.edu/rjensen/FraudEnron.htm

http://www.trinity.edu/rjensen/FraudRotten.htm

http://www.trinity.edu/rjensen/Fraud001.htm

http://www.trinity.edu/rjensen/FraudConclusion.htm

http://www.trinity.edu/rjensen/FraudReporting.htm

"Video: Ted Talk – Sweat The Small Stuff: Hilarious examples of Behavioral Economics," Simoleon Sense, June 9, 2010 ---
http://www.simoleonsense.com/video-ted-talk-sweat-the-small-stuff-hilarious-examples-of-behavioral-economics/

Bob Jensen's not-so-hilarious threads on EMH controversies ---
http://www.trinity.edu/rjensen/Theory01.htm#EMH

"Women to CPA Firms: I Quit!" by Joanne Cleaver, BNET, June 14, 2010 ---
http://blogs.bnet.com/management/?p=1594&tag=content;col1
Thank you Roger Collins for the Heads Up!

I’m no number cruncher, but even I can see that something’s out of line here:

Women earn 51 percent of accounting undergrad degrees

Women are 51 percent of employees at public accounting firms

Women are 17.4 percent of accounting firm partners

Organizations like Catalyst and the American Institute of Certified Public Accountants have long lamented that women aren’t making partner. They’ve trotted out the predictable bromides: flexible work schedules, more mentoring, and more female role models. But none of that actually targets the crux of the problem: At what point, exactly, do women quit? Why do they leave? And what can firms and women do about it?

Recently, the two associations for women in accounting — the American Society of Women Accountants and the American Women’s Society of CPA’s — teamed up with my research firm to find out. We released the first Accounting MOVE Report on April 15 (for a little tax-accountant humor). Our top-line recommendation: With one program, firms can retain women to partnership and immediately gain clients and revenue.

Really? More money now and more women in the long run?

Yes. Here’s how: concentrate business development training at the level where women are most likely to quit. For most firms, that’s at the senior-manager level — the step right before partner. Our study of 20 firms found that women are 50 percent of all managers but 40 percent of senior managers. At firms with directors, women accounted for 33 percent. And from there, it was a dizzying drop to 17.4 percent of partners. (By the way, that 17.4 percent is in line with previous research.)

Here’s what we found at that crucial senior level: Women promoted to senior manager suddenly realize that to make that final big step to partner, they must bring in clients. But guess what? They didn’t get into accounting to be salespeople — at least, that’s what dozens of women told us. But partners must make rain. And senior managers must learn to seed the clouds. This is such an unsettling prospect to many female senior managers that they’d rather defect to the corporate world where, they believe, they won’t be under the gun to bring in business.

Three years ago New Jersey CPA firm Rothstein Kass realized that this was a killer dynamic. Now RK has a constellation of training tools for senior women poised for partnership. “Rainmakers Roundtable” first coaches each woman to articulate her own approach to drawing in new clients. When you hear yourself say it, you own it. Then, the program alternates between three sales-skills workshops and three networking events. Each networking event puts into play the newly learned skills. By the last event, the RK women are networking with senior women at law firms and investment firms.

RK principal Rosalie Mandel has been the poster girl for many of the firm’s initiatives to advance women. A decade ago, when she had her first child she forged a part-time, principal-track schedule. It worked out so well that the managing partners asked her to lead the firm’s innovations in work-life and advancing women. She was named principal partly on her successes in those arenas.

Mandel says that because intense career advancement typically overlaps with intense family responsibilities, it’s incumbent on firms to clear the internal path so that rising women can tackle career-derailing issues. “Men have that natural camaraderie,” she says. “You see that the men who golf with the big guys get pulled forward a little faster. Women don’t have that. Who has time? You come in to work, and you work hard so you can get home.”

The Rainmakers Roundtable helps make up for time spent at school plays rather than after-dinner drinks. Women learn exactly how to ask for a high-level referral. They forge alliances with similarly situated women in law and investment banking firms, with the shared goal of recruiting new clients together, for all. They polish their personal elevator pitches.

Partly due to the Roundtable, fully half of Rothstein Kass directors are women. That should translate to a healthy lift in women partners — now an unimpressive 10 percent — with the next round of promotions.

New clients = more revenue. Rainmaking women = qualified potential partners. And that’s how to move the numbers at accounting firms.

What parallel dilemmas challenge women in your industry? Could the Rainmakers Roundtable be adapted to the particular challenges facing upper-middle management women in your company?

Women Partners in the Big 4 Accounting Firms
For the tenth consecutive year, Deloitte & Touche USA LLP tops the Big Four accounting firms in percentage of women partners, principals and directors, according to Public Accounting Report's 2006 Survey of Women in Public Accounting. The survey revealed that Deloitte's percentage of women partners, principals and directors is currently 19.3 percent, surpassing that of KPMG (16.8 percent), Pricewaterhouse Coopers (15.8 percent) and Ernst & Young (13.5 percent). Deloitte has held this lead every year since the inception of the survey in 1997, according to Jonathan Hamilton, editor, Public Accounting Report.
SmartPros, December 26, 2006 --- http://accounting.smartpros.com/x55948.xml

Women now make up more than 60 percent of all accountants and auditors in the United States, according to the Clarion-Ledger. That is an estimated 843,000 women in the accounting and auditing work force.
AccountingWeb, "Number of Female Accountants Increasing," June 2, 2006 ---
http://www.accountingweb.com/cgi-bin/item.cgi?id=102218

Jensen Comment
Nearly 20 years ago, Deloitte embarked on a "Women's Initiative" to help female employees break the glass ceiling --- http://www.deloitte.com/dtt/section_node/0,1042,sid=2261,00.htm

The AAA Commons has a hive on Diversity ---
http://commons.aaahq.org/pages/home

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

"European Business Schools Set Sights on U.S.: Seeking U.S. students and a bigger global footprint, schools from Spain, France, and the U.K. are rushing to set up outposts on American soil," by Alison Damast, Business Week, June 17, 2010 ---
http://www.businessweek.com/bschools/content/jun2010/bs20100617_473655.htm?link_position=link1

Over the past decade or so, European business schools have been aggressive about reaching out to the American market, doing everything from forming alliances with U.S. schools to launching student- and faculty-exchange programs. Now a handful of elite European schools are taking this a step further, trying to create a more substantial presence in the U.S. by opening up traditional brick-and-mortar campuses.

In the past few months, schools from France to the U.K. have announced plans to build campuses in the coming year in the U.S., including one planned outpost announced just last week. It's a strategic move by these institutions to increase their stature and influence in the American market, says Robert Bruner, dean of the University of Virginia's Darden School of Business (Darden Full-Time MBA Profile).

"The U.S. is where the MBA was invented and, to some extent to establish a footprint in this market, is an additional means of legitimizing a school's brand and stature globally," says Bruner, who also chairs the Globalization of Management Education Task Force of the Association to Advance Collegiate Schools of Business, one of the leading business school accreditation agencies.

Eye on the Hot Spots

That's a viewpoint that these European B-schools are taking as they cautiously attempt to entrench themselves in the U.S. A number of the schools that have announced plans to build campuses are well-regarded universities in Europe, but not as well-known by students outside their home countries. By starting degree programs in such hot spots as Miami and New York, they say they will be able to enhance their global reputation in both the academic and business community in the U.S. as well as expand and enhance the degree programs they offer students. Another underlying motivation is the opportunity for them to recruit more American students to their campuses. At most European business schools, Americans make up just a handful of the students in the degree programs, making it hard for them to build up a strong alumni base in the U.S., deans at these schools say.

Many European business schools will be watching closely to see whether these business schools will be successful at branding themselves in the U.S., says Dave Wilson, president and chief executive of the Graduate Management Admission Council, which administers the Graduate Management Admission Test (GMAT). Of U.S. GMAT test takers, the vast majority, or about 98 percent, send their test scores to U.S. schools, leaving just a handful of American students who consider non-U.S schools. The European schools will have to work hard to attract these students to their U.S. outposts, Wilson says.

"These are sort of pioneers who are breaking new ground, and it will be a challenge to get U.S. students," Wilson says. "I think most European schools are going to sit back and watch, because this is really a brand new bet for them."

Manhattan Opening

Just this May, Spain's IESE Business School (IESE Full-Time MBA Profile) opened the doors of its New York campus on West 57th Street, a six-story building with two classrooms, breakout rooms, and office space. The school had been planning its U.S. campus for three years and has spent close to $20 million refurbishing the building, says Eric Weber, an associate dean of IESE and director of the school's New York office. Says Weber: "We're pretty bullish about the U.S."

The school will not be offering an MBA program at the New York office, but it has ambitious plans for the site, which include promotion of its custom programs for executives, establishing a research center on global business, and setting up activities for alumni and corporate sponsors. Professors from the school's Barcelona campus will take students to New York for several weeks, where they will study business in the context of New York City, Weber says.

Continued in article

Jensen Comment
One competitive advantage that foreign schools will bring to the table is to play on the wanderlust of the typical four-year college graduate. Before becoming tied down with a spouse and children, the lure of Europe is especially appealing to some graduates. Graduates recall hearing in class about all the world adventures of many of their professors, especially professors in humanities who often focus their own research on romantic European history, language, and literature. Students may see a European business school degree as having greater opportunity for job offers in Europe --- which may be a myth in many instances. Of course other students may lean toward Asian-school degrees for the same reasons. For a while Russia was popular until living in Russia became so dangerous and Russian universities became more corrupt.

Ketz Me If You Can
"Grade Inflation Op/Ed," by: J. Edward Ketz, SmartPros, June 2010 ---
http://accounting.smartpros.com/x69779.xml

I was interviewed recently about grade inflation, which motivated me to return to this familiar topic. While I have little new to offer, that does not mean that nothing can be done about the problem. If accounting faculty members have the will, they can reduce the amount of grade inflation in the system.

I remember when grade inflation began. I was an undergraduate at Virginia Tech during the Vietnam War. In 1969 Congress passed legislation, signed by President Johnson, that stopped students from staying in school indefinitely to avoid the draft, limiting the deferment to four years. The act required students to have at least a C average, else they could be drafted. (It also created the draft lottery. I even remember my draft lottery number—187.)

The public turned from supporting the war to opposing the war around this time. A number of university professors opposed the war; other faculty members who did not oppose the war did not want the blood of young men on their conscience. So, many of them refused to give less than a C grade to any student. The only significant exception was the engineering college, which apparently thought that ignorant engineers could be dangerous to society. Overall, there was an immediate and statistically significant upward shift in the university’s GPA the next quarter.

As everybody knows, the other major impact on grades is student evaluations. Universities, striving to objectivize the assessment of instructor performance, have turned to students. Universities used to employ evaluations by other faculty members—and a few still do—but faculty members are loathe to cut the throats of those who may return the favor.

There are many problems with student evaluations, but I’ll mention only one here. Instructors can manipulate the system by playing the game and patronizing the students. I learned this early in my career when I was a member of the Promotion and Tenure Committee two years in a row. The first year we had a person who regularly attained about 1.5-2.0 on a seven point scale, one being low and seven being high. When the committee castigated his teaching one year, he came back the following year with 6.5s in all his sections. The committee learned that he achieved this feat by giving students the exam questions a few days before the exam and offering coffee and donuts during the exams.

Today there is no draft, so the consequences of a bad grade does not carry the weight of yesteryear. Perhaps it will lead to a lower self-esteem, but self-esteem is overrated. It only leads to inflated egos.

I have sympathy toward untenured faculty who need to avoid giving promotion and tenure committee members reasons to deny tenure. But, tenured faculty have no such excuses. They can and should tell administrators to quit satisfying students’ demands when they involve a decline in educational quality.

This past semester a colleague and I team-taught Introductory Accounting to about 700 students (the number at the beginning of the term). About 200 students dropped the course. Of those who stayed, the class achieved a course GPA of 2.2; in other words, the median grade in the class was C+.

We think we avoided grade inflation. Our teaching evaluations will take a hit, but so what? The class deserved the grades they obtained and no higher.

Surely other instructors hold the line as well, but some others do not. We need as many faculty as possible to quit giving grades out merely because somebody paid tuition. The way to stop grade inflation is simple—just do it.

Grade Inflation is the Number One Disgrace of Higher Education ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#GradeInflation

June 8, 2010 message from Zabihollah Rezaee (zrezaee) [zrezaee@MEMPHIS.EDU]

I have developed and taught a "Corporate Governance, Ethics and Business Sustainability" course. All MBA students are required to take this course at the University of Memphis. I am attaching the course syllabus and will gladly share my PPT slides and other teaching materials.

Best,

Zabi

Zabihollah "Zabi" Rezaee, PhD, CPA, CMA, CIA, CGFM, CFE, CSOXP, CGRCP, CGOVP
Thompson-Hill Chair of Excellence/
Professor of Accountancy Fogelman College of Business and Economics 300 Fogelman College Administration Bldg.
The University of Memphis
Memphis, TN 38152-3120
901.678.4652 (phone)
901.678.0717 (fax)
zrezaee@memphis.edu (e-mail)
https://umdrive.memphis.edu/zrezaee/www/

June 8, 2010 reply from Bob Jensen

Thank you for sharing Zabi,

In addition to your attachment, I found the links at https://umdrive.memphis.edu/zrezaee/www/

You might find some helpful references at
http://www.trinity.edu/rjensen/Fraud001.htm#Governance
Includes a Harvard University Guidance Link

Bob Jensen

June 9, 2010 reply from Robert Bruce Walker [walkerrb@ACTRIX.CO.NZ]

I scanned both sets of lecture notes and note that they both concentrate on the role of the auditor and therefore put the matter of ethics and fraud into the context of large scale enterprises. At the risk of appearing, to Americans at least, even more crazy than I appear already, it might be useful if I widen the potential net in regard to ethics in business and in accounting.

As I continue my research into the origins of accounting I try to delve into the commercial practices of Arab culture, the origin of the elements that make up double entry bookkeeping. And for those of you who read what I write you would know that I ascribe a significant role to double entry in the development of the modern economic system that we now operate. Double entry is not essential to commercial practice per se - but it certainly is in the operation of the large combines (big corporate and banks) that characterizes modern commerce.

There is little, in the secondary sources at least, on actual medieval Arab accounting practice. To compensate for this I have begun to look into Arab, and more broadly, Islamic law to discern what I believe are the accounting issues presented to the people of those times. This has led me to a study of Sharia law. Many in the West would perceive this law as being a caricature of limb removal and stoning and that is there for sure. But the Qu'ran, supported by the traditions, to a significant degree embodies a commercial code of practice that translates into law or at least the Muslim version of law.

This is not surprising, perhaps, as Muhammad was, prior to his epiphanies, a merchant. This is forced on him to a substantial degree as the place where he was born, Mecca, had little else for him to do. He clearly had an innate sense of what was fair. He played the role of an arbitrator at various times. Something he saw in the merchant dominated society in which he lived sickened him. It might be related to usury (originally meaning only the lending at interest). Though it is difficult to determine as the notion of interest in his time had the taint of the ungodly.

In any event Sharia commercial conduct was based on the idea of personal responsibility, underpinned of course by divine ordination. This results in conduct anathema to our culture. For example, profit had to be fair. This tends to suggest that there is significant transparency in trade - in principle this must mean that the purchaser has some sort of right to examine profits to ensure that the profit is justified. I suppose that this cannot be done without a sophisticated book-keeping system. Contracts are not enforceable as such. One party can walk away if the contract is oppressive. We have this in our legal system to a degree. The principles of the law of equity were derived to modify the worst excesses of contract law, but the contract still has primacy nonetheless. Pooling of resources basically has to be carried out in partnerships as befits a system based on personal responsibility. Trust amongst merchants and financiers is central. That is why a bill (yes the Arabs used bills of exchange and may have invented them) drawn by one person will be honoured by another many thousands of miles away.

For some reason the concepts central to Islamic commerce - trust, fairness, personal responsibility - are lacking in the modern Western way of doing business. Equally the Islamic concepts of business would militate against the development of the large corporate or the large bank. Having said that, there is a growing trend in Britain for non-Muslims to subject themselves in commercial dispute to Sharia consideration. As the driving is to find fairness and does not rely on the corrosive effect of the adversarial system, the result is likely to be quicker, cheaper and fairer.

Whilst I stray from my mission to find the roots of accounting as I become fascinated by Muhammad and his doctrines, I wish that some elements of the impulse behind Sharia could inform our system. As a fervent atheist and possible nihilist, as befits the Nietzshean that I am, I cannot believe in the lynchpin that holds it together being God. Nonetheless I cannot escape the sense of sickness that I have when I see and experience the way commerce is conducted in our society and the excesses that ensue. I see it in the never ending series of stories that Bob digs out. I see it in my own practice of insolvency. Each fraud I see is worse than the last. I don't believe that our system can be sustained if the attitudes that cause this prevail. As I have also taken to studying Marx to understand the formation of capital in 19th century Britain, I might be seen to fall prey to the Marxist fallacy of the inevitability of the destruction of the capitalist system. I don't need this to see the potential for economic catastrophe. After all the potential is plain to see in our very recent economic and financial history. Our solution is to make ever more complicated regulation when we cannot deal with complexity that already existed.

I even begin to lose faith in accounting itself. I have always justified my faith by assuming that accounting is a force for good. However, it becomes more and more apparent to me that accounting is only necessary to sustain the huge economic combines to which we can trace many of the travails we now suffer - BP being only the last in a long line of corporate dishonor. And for those of you who do not know BP has its origins in a company named the Anglo-Persian Oil company, a company at the centre of the removal by coup of the elected Iranian leader Mossadegh with all the problems that has engendered in the last 60 years.

I don't know the solution but I sure can see the problem. Is it too much to ask that we cast aside our ethnocentrism and look at other cultures and their commercial practice?

Robert B Walker

Bob Jensen's threads on accounting history are at
http://www.trinity.edu/rjensen/Theory01.htm#AccountingHistory

-----Original Message-----
From: Robert Bruce Walker [walkerrb@ACTRIX.CO.NZ]
Sent: Friday, June 11, 2010 7:21 AM
Subject: History of Insolvency

Might I then continue by telling you of the central significance of the National Bankruptcy Act of 1898. As I said it was the culmination of 100 years of law from the time of the grant of Constitutional authority to Congress to make bankruptcy law. The law making process would be reactivated each time there was an economic convulsion. These laws had either sunset clauses or were repealed. Near the end of the century a St Louis lawyer was commissioned to prepare an Act that he would have had as debtor friendly. This was not acceptable to Congress because it preferred rehabilitation to realization. Here lies the foundation for Chapter 11.

Of more significance to the accountant is the profound change to the definition of solvency. Hitherto it had been simply 'to be able to pay debts as they fall due', a rather more elusive idea than might first appear.

In any event the definition was changed to one of a comparison between property (assets in accountant's terms) and liabilities. There was a clause relating to the exclusion of property fraudulently conveyed, but that is not significant in this context. This definition has prevailed to this day in the 1978 albeit modified in a crucial way in that it created an ambiguity tested in the TWA case in about 1996.

I have summarized the above from J Adriance Bush in an introduction the Act published in 1899. I got it from Cornell University's website. Anyway Mr Bush comments that the radically new solvency test would test the judiciary in years to come. That has been so. It has culminated somewhat finally in the TWA case. It was resolved that assets should be at fair value and the liabilities at face value. This was because one side wanted the market price internalized into the debt of TWA and another side didn't. And that some might be happy with that. However, it does beg an important question:

what if there is a liability but it has no face value? These are Bob's beloved financial instruments. They can only be recognized by reference to a current interest rate as the liabilities they absolutely are. If such liabilities are to be so recognized, why would you apply a different rate to other liabilities? That would mean more conventional liabilities - being say a bond issued - should be measured at current rate to be consistent within the balance sheet. It may sound strange at first, but it is the position adopted by FASB in concept statement 7. It irritated me to begin with but I have now accepted it as the right answer.

So we have a clash between what accounting rules say and what lawyers say.

I think you American accountants have abandoned the field. If the accountant is not the arbiter of what is and what is not solvent, then what is he or she?

Bob Jensen's threads on accounting history are at
http://www.trinity.edu/rjensen/Theory01.htm#AccountingHistory

Bookkeeping in the Ancient Arab Culture and Commerce

Hi Robert,

Thank you very much for this great historical information.

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

-----Original Message-----
From: Robert Bruce Walker [walkerrb@ACTRIX.CO.NZ]
Sent: Thursday, June 10, 2010 5:01 PM

Professor ten Have in his book History of Accountancy states:

"In this Arabic culture, bookkeeping had already reached a high level of development. The administration of the customs, some fragments of which have been preserved, included already a general ledger, general journal and cash book; the system of monthly and annual closing was known. In the State budget of 918, which is available, a distinction is made between current and extraordinary expenditure. In Palermo, Sicily, a well developed bookkeeping system has been found dating back to 1135; this shows Arab influence. There is available an Arab manual dealing with the merchandise trade at the end of the 12th century. This book was printed in 1318.

Accordingly, an assumption is that the Arabs influenced the development of bookkeeping in Italy has a very strong foundation; however, it has not been validated to this day" (page 31)

He then cites some European writer (Dr S Elzinga) writing other than in English which rather cuts off a monolingual persons such a myself. I have other material, some of which you have sent me, which suggest that double entry was present in the Nile to the Oxus region for more than 1000 years. There is a suggestion that it actually comes from India - this is consistent with the origins of the Arabic numeral (the positional number system) and of algebra itself, both of which seem to come from India. The Arabs as the great medieval traders had links to India - Muhammad himself apparently went there on a trading mission.

The trouble with double entry is that it is always present as a concept whether the person preparing the record knew it or not. I think it evolved gradually and imperceptibly. But my contention is that Arab commerce would not have been possible without it.

The best general description of the foundations of Islamic culture that I have found is that by Professor Hodgson, previously a professor of history at Chicago (now long dead), in his 3 volume The Venture of Islam. The work is absolutely breath taking in its scope but doesn't give too much about the commercial culture prior to the life of Muhammad. However, he does describe why Mecca was sited where it was. It did not have a lot going for it as it did not have much of an oasis. What it did have was a defensible position and reasonably proximity to a port. For this reason it became an important trade link between India, SE Asia and China beyond that and Constantinople and other European destinations. These trade routes were well established in the 7th century. In short Mecca, whilst it did have a shrine prior to Islam, was really dependent upon commerce at the time of Muhammad. The area from the Nile to the Oxus (Professor Hodgon's substitute for the Middle East) must be seen as the crucible of the mechanics of modern commerce. It was the cross road between the West and the East.

As may be apparent from what I say I am writing my version of the history of accounting. I am doing so in accordance with my version of the Nietzschean genealogical method. Which means of course that I can write pretty much what I want for Nietzsche says that history is better understood as myth rather than by the traditional archival methods. So perhaps I am writing a myth of accounting. At the risk of appearing pompous, it is as much the philosophy of accounting as anything else. I hope by my trawl through history and thought to inform the current day problems of accounting by tracing their genealogy as it were.

I am not writing in sequence. I have started with the Italians then back to the Arabs which I am working on - and having to fill large gaps in my knowledge for I too have been educated in an ethnocentric manner. I am writing the major piece which ends the book - that is a discussion of solvency. For this I am researching American bankruptcy law - the National Bankruptcy Act 0f 1898 being the pivot for this particular piece. What is so peculiar about the US is that the law on solvency (or otherwise) is entirely a legal pursuit, not informed by accounting in any way. That is the reason the case law never solves the problem. There are two strands in the US - one law, one accounting - both groping their way towards solving the most important accounting issue - that of solvency determination. Yet neither of them intersects. We in New Zealand 20 years ago discarded our British model for company law and took the American solvency approach by way of Canada. Whether from some conscious plan or not solvency determination in NZ was expressly linked to GAAP. Our law is now filtering into Europe.

As an aside, it is worth noting that national bankruptcy law in the US is sanctioned by the Constitution itself. The history of the development of the law through the 19th century is a fascinating subject unto itself and which has led to the absurdly debtor friendly Chapter 11. But there is a limit to what I can do.

Robert Bruce Walker
New Zealand

Bob Jensen's threads on accounting history are at
http://www.trinity.edu/rjensen/Theory01.htm#AccountingHistory

Book Review by Robert Sack, The Accounting Review, May 2010, pp. 1122-1125
DAVID MOSSO, Early Warning and Quick Response: Accounting in the Twenty-First Century (Bingley, U.K.: Emerald Group/JAI Press, 2009, ISBN 978-1-84855-644-7, pp. viii, 86).

This is an engaging book with compelling arguments for a complete overhaul of our current set of accounting standards and of the process by which they are set.1 David Mosso is well qualified to comment on both, having served as a member of the Financial Accounting Standards Board FASB from 1978 to 1987, as Vice Chair of the Board from 1986 to 1987, and as the FASB’s Assistant Director of Research from 1987 to 1996. He came to the Board with extensive experience in governmental accounting and, after his work with the FASB, served as Chair of the Federal Accounting Standards Advisory Board from 1997 to 2006. He is quick to acknowledge his role in the development of our current Generally Accepted Accounting Principles (GAAP) and to express his regret for their failings.

In essence, Mosso argues that we must replace our current mixed-attribute GAAP with full fair value accounting. His proposal, which he calls the Wealth Measurement Model, would recognize all assets and liabilities, as he defines them, at their current fair value, as defined by SFAS No. 157. That fair value balance sheet would measure the entity’s wealth at that date. Changes in the entity’s wealth from one period to the next would act as an early warning of potential trouble to all of the entity’s constituents. As to the standard-setting process, Mosso argues that the standard setter should outline the principles of the Wealth Measurement Model and then observe practice, being alert for aberrations in the way those principles are applied. New standards would mostly be interpretations of the basic principles and so could be issued quickly with a minimum of due process.

The primary line of thought in Mosso’s book is a proposal to radically revise our current accounting model. On pages 11–12, he proposes six principles for his Wealth Measurement Model, quoted as follows:

• The objective of accounting is to measure an entity’s economic wealth net worth and income earnings for the purpose of diagnosing the entity’s financial health.

• All measurable assets and liabilities of an entity must be recognized on the entity’s balance sheet, along with the owners’ equity in those assets and liabilities.

• All balance sheet assets and liabilities, and changes in them, must be measured at fair value

• All issues and redemptions of owners’ equity shares must be measured at fair value with gain or loss recognition in earnings for any difference between the fair value of the shares and the fair value of things received or given in exchange.

• All major nonmeasureable assets, liabilities, commitments, and contingencies of an entity must be disclosed in notes to the financial statements.

• The primary financial statements … must be segmented and supplemented in a manner to facilitate the diagnosis of an entity’s financial health and future prospects.

Mosso argues that these principles must be mandatory and applicable to every entity. He observes that issuing the FASB’s Concept Statements as nonauthoritative guidance was a mistake, leading them to be seen as a basis for debate rather than as a basis for decision-making.

. . .

In Chapters 9 and 10, Mosso redefines assets, liabilities, and equity in the context of his six wealth measurement principles. An asset is an economic resource that is controlled by an entity (p. 46). That definition clarifies the FASB’s current definition in that it leaves out the criteria “probable” and “future economic benefit,” both of which he argues have been confusing in practice. A liability is an unfulfilled binding promise made by an entity to transfer specified economic benefits in determinable amounts at determinable times or on demand p. 47.That definition differs from the current FASB definition in that it uses a broader “promise” criterion in lieu of the difficult-to-apply idea of a “probable future sacrifice.” Interestingly, Mosso argues that, by using these definitions, receivables and payables will be reciprocal—there will be a mutual understanding of the claim between the two parties to the transaction. That understanding will be established by a triggering act as, for example, the performance of an earnings event. We have not insisted on mutuality in our current accounting for assets and liabilities, allowing for different assessments of “probability” by the holder of the asset and the obligor.

. . .

Following on Mosso’s challenge, and the FAF’s door-opening, the academic community ought to seize on the opportunity for a larger place at the table, where we can bring our unbiased skills to bear—even beyond the work of the individual academic Board member and the contributions of the AAA Financial Accounting and Reporting Section’s Financial Reporting Policy Committee. That challenge is perhaps the key message from this thoughtprovoking book.

Jensen Comment
Financial assets and liabilities tend to be sufficiently independent such that the sum of the exit values of the parts is the sum of the value of the whole baring blockage discounts and issues of subsidiary control interactions.

But I take issue with valuation of non-financial assets where an asset's exit value is the worst possible use of the asset. Value in use entails looking at assets in interactive combination and their possibly huge covariance components of value. Furthermore they co-vary with many intangible assets and liabilities that cannot be valued even in Mosso's formulation of change. Covariance components can be defined in hypothetical models, but their measurement in reality is next to impossible --- http://www.trinity.edu/rjensen/Theory01.htm#FairValue

Fair Value Re-measurement Problems in a Nutshell: (1) Covariances and (2) Hypothetical Transactions and (3) Estimation Cost
It's All Phantasmagoric Accounting in Terms of Value in Use

In an excellent plenary session presentation in Anaheim on August 5, 2008 Zoe-Vanna Palmrose mentioned how advocates of fair value accounting for both financial and non-financial assets and liabilities should heed the cautions of George O. May about how fair value accounting contributed to the great stock market crash of 1929 and the ensuing Great Depression. Afterwards Don Edwards and I lamented that accounting doctoral students and younger accounting faculty today have little interest in and knowledge of accounting history and the great accounting scholars of the past like George O. May --- http://en.wikipedia.org/wiki/George_O._May
Don mentioned how the works of George O. May should be revisited in light of the present movement by standard setters to shift from historical cost allocation accounting to fair value re-measurement (some say fantasy land or phantasmagoric) accounting --- http://www.trinity.edu/rjensen/theory01.htm#FairValue
The point is that if fair value re-measurement is required in the main financial statements, the impact upon investors and the economy is not neutral. It may be very real like it was in the Roaring 1920s.

In the 21st Century, accounting standard setters such as the FASB in the U.S. and the IASB internationally are dead set on replacing traditional historical cost accounting for both financial (e.g., stocks and bonds) and non-financial (e.g., patents, goodwill, real estate, vehicles, and equipment) with fair values. Whereas historical costs are transactions based and additive across all assets and liabilities, fair value adjustments are not transactions based, are almost impossible to estimate, and are not likely to be additive.

If Asset A is purchased for $100 and Asset B is purchased for $200 and have depreciated book values of $50 and $80 on a given date, the book values may be added to a sum of $130. This is a basis adjusted cost allocation valuation that has well-known limitations in terms of information needed for investment and operating decisions.

If Asset A now has an exit (disposal) value of $20 and Asset B has an exit value of $90, the exit values can be added to a sum of $110 that has meaning only if each asset will be liquidated piecemeal. Exit value accounting is required for personal estates and for companies deemed by auditors to be non-going concerns that are likely to be liquidated piecemeal after debts are paid off.

But accounting standard setters are moving toward standards that suggest that neither historical cost valuation nor exit value re-measurement are acceptable for going concerns such as viable and growing companies. Historical cost valuation is in reality a cost allocation process that provides misleading surrogates for "value in use." Exit values violate rules that re-measured fair values should be estimated in terms of the "best possible use" of the items in question. Exit values are generally the "worst possible uses" of the items in a going concern. For example, a printing press having a book value of $1 million and an exit value of $100,000 are likely to both differ greatly from "value in use."

The "value in use" theoretically is the present value of all discounted cash flows attributed to the printing press. But this entails wild estimates of future cash flows, discount rates, and terminal salvage values that no two valuation experts are likely to agree upon. Furthermore, it is generally impossible to isolate the future cash flows of a printing press from the interactive cash flows of other assets such as a company's copyrights, patents, human capital, and goodwill.

What standard setters really want is re-measurement of assets and liabilities in terms of "value in use." Suppose that on a given date the "value in use" is estimated as $180 for Asset A and $300 for Asset B. The problem is that we cannot ipso facto add these two values to $480 for a combined "value in use" of Asset A plus Asset B. Dangling off in phantasmagoria fantasy land is the covariance of the values in use:

Value in Use of Assets A+B = $180 + $300 + Covariance of Assets A and B

For example is Asset A is a high speed printing press and Asset B is a high speed envelope stuffing machine, the covariance term may be very high when computing value in use in a firm that advertises by mailing out a thousands of letters per day. Without both machines operating simultaneously, the value in use of any one machine is greatly reduced.

I once observed high speed printing presses and envelope stuffing machines in action in Reverend Billy Graham's "factory" in Minneapolis. Suppose to printing presses and envelope stuffing machines we add other assets such as the value of the Billy Graham name/logo that might be termed Asset C. Now we have a more complicated covariance system:

Value in Use of Assets A+B+C = (Values of A+B+C) + (Higher Order Covariances of A+B+C)

And when hundreds of assets and liabilities are combined, the two-variate, three-variate, and n-variate higher order covariances for combined ""value in use" becomes truly phantasmagoric accounting. Any simplistic surrogate such as those suggested in the FAS 157 framework are absurdly simplistic and misleading as estimates of the values of Assets A, B, C, D, etc.

Furthermore, if the "value of the firm" is somehow estimated, it is virtually impossible to disaggregate that value down to "values in use" of the various component assets and liabilities that are not truly independent of one another in a going concern. Financial analysts are interested in operations details and components of value and would be disappointed if all that a firm reported is a single estimate of its total value every quarter.

Of course there are exceptions where a given asset or liability is independent of other assets and liabilities. Covariances in such instances are zero. For example, passive investments in financial assets generally can be estimated at exit values in the spirit of FAS 157. An investment in 1,000 shares of Microsoft Corporation is independent of ownership of 5,000 shares of Exxon. A strong case can be made for exit value accounting of these passive investments. Similarly a strong case can be made for exit value accounting of such derivative financial instruments as interest rate swaps and forward contracts since the historical cost in most instances is zero at the inception of many derivative contracts.
The problem with fair value re-measurement of passive investments in financial assets lies in the computation of earnings in relation to cash flows. If the value of 1,000 shares of Microsoft decreases by -$40,000 and the value of 5000 shares of Exxon increases by +$140,000, the combined change in earnings is $100,000 assuming zero covariance. But if the Microsoft shares were sold and the Exxon shares were held, we've combined a realized loss with an unrealized gain as if they were equivalents. This gives rise to the "hypothetical transaction" problem of fair value re-measurements. If the Exxon shares are held for a very long time, fair value accounting may give rise to years and years of "fiction" in terms of variations in value that are never realized. Companies hate earnings volatility caused by fair value "fictions" that are never realized in cash over decades of time.
Continued at http://www.trinity.edu/rjensen/Theory01.htm#FairValue

Mosso's vague about measuring fair value of non-financial assets. Presumably entry value might be used instead of exit value, but entry value is not really valuation. It is a re-definition of historical cost and is subject to all the arbitrariness of historical cost such as depreciation and amortization assumptions.

Fair value might be discounted cash flows for some assets and liabilities, but if the asset in question is a single particle amidst an entire conglomeration of heterogeneous particles, how do we allocate the present value into the whole down to its myriad of particles?

Although there are many flaws in the present mixed attributes conglomeration of valuations of assets and liabilities, I just do not see that valuation of non-financial assets at their worst possible usages makes any sense. Especially troublesome are fixed assets that have high values in use and low exit values. For example, ERP information systems, factory robots, computers, etc. may lose most of their exit value the moment they are put to use even though their expected lives may be ten or more years. Maybe I'm just an old has been who clings to admiration of the Payton and Littleton matching concept.

Furthermore, re-valuation can be a very costly process such as paying to re-value a hotel chain's hundreds of pieces of real estate scattered about the world ---
http://www.trinity.edu/rjensen/Theory01.htm#FairValue

Bob Sack concludes his book review by asserting that the "academic community ought to seize on the opportunity for a larger place at the table." Be that as it may, the academic community has be debating these issues since the days of MacNeal, Canning, Payton, Scott, Chambers, Sterling, Edwards, Bell, and on and on through tens of thousands of pages of books, journal articles, and transcripts of speeches and course notes. Woodrow Wilson was correct when he said that moving a professors is harder than moving a cemetery.

Standard setters have already commenced the Mosso express train.

Let me off as it approaches the "Non-Financial Asset Depot."

June 13, 2010 reply from Robert Bruce Walker [walkerrb@ACTRIX.CO.NZ]

I must confess that the writings of Mr Mosso are not particularly interesting to me – the ideas are not new and simply reflect a distillation of current debates. Far more significant is the writing of RA Bryer, the latest iteration of which I stumbled upon as a draft on Bob’s website (Ideology and reality in accounting: a Marxist history of US accounting theory debate from the late 19th century to FASB’s conceptual framework).

This essay works at two levels. At the first level is a brilliant narrative showing the evolution of corporate accounting and the debate about historic cost versus fair value. This was happening in the first part of the 20th century. It shows, if nothing else, that nothing is new.

The second level is, as the title suggests, an ideological analysis. Bryer suggests that one of the prime considerations in corporate accounting emerged from the fight to the death between labour and capital such as prevailed in the early 20th century in America. This fight was indeed vicious, culminating in what we would call terrorism. For example, there was a bombing at a newspaper premises in LA. Clarence Darrow no less was the defending attorney for the workers and was caught, or very close to it, in the process of jury tampering. He did, and it is almost certain he did, this because he knew that a capitalist finger was on the judicial scales. It might even be the case that the capitalist (whose name escapes me) may have been the author of the bombing himself!

In any event Bryer uses the Marxist labour theory of value (LTV) and its related theories of money and exchange to show the weird parallels between it and historic cost accounting (HCA). He seems to suggest that the notion of future value (present value) accounting is an ideological attempt to deny the validity of LTV. Conversely HCA is an affirmation of LTV, based as it is on past exchange rather than the prospect of exchange.

It is well worth looking at Marx’s analysis because it does shed light on the enterprise that is accounting – the role of commodities, the pricing mechanism and the idea of purely monetary exchange. Yet I cannot believe that there is this ideological element to accounting. I believe the impulse to HCA is an impulse concerned with the centrality and integrity of double entry bookkeeping. Bryer turns my long held view on its head.

I know he is wrong but I have to summon all my knowledge, experience and cogitation powers to prove it. All accountants academic or otherwise, especially American accountants, should read what he writes. It is one of the most important things that has ever been written about the subject of accounting.

"Of geeks and goalies," The Economist Magazine's Babbage Blog, June 26, 2010 ---
http://www.economist.com/blogs/babbage?fsrc=nlw|pub|03_30_2010|publishers_newsletter

. . .

Subsequent analysis revealed 15 previously unknown indicators of where the ball might go (he also tested 12 indicators which had already been studied in sports literature). Three patterns of coordinated "distributed movements" turned out to be telltales. As Mr Diaz explains in a press release:

"When a goalkeeper is in a penalty situation, they can't wait until the ball is in the air before choosing whether to jump left or right--a well-placed penalty kick will get past them. As a consequence, you see goalkeepers jumping before the foot hits the ball. My question is: Are they making a choice better than chance (50/50), and if so, what kind of information might they be using to make their choice?"

"When, for example, you shift the angle of your planted foot, perhaps in an attempt to hide the direction of the kick, you're changing your base of support. In order to maintain stability, maybe you have to do something else like move your arm. And it just happens naturally. If this happens over and over again, over time your motor system may learn to move the arm at the same time as the foot. In this way the movement becomes one single distributed movement, rather than several sequential movements. A synergy is developed."

The next step was to see how good 31 novices were at predicting the trajectory when shown an animation of the motion capture data which blacked out at the point of contact between the foot and the ball. Although fifteen were no better than chance, the remaining 16 were. One observed difference between the two groups was the response time, longer for the successful predictors. (Responses which took more than half a second following the blackout went unrecorded.) Whether this would ultimately translate into better performance remains moot. England's keeper may well hope so. Its strikers probably don't.

PS To be fair, this time England are approaching possible penalties very methodically, even enlisting the help of statisticians.

PPS The following anecdote is entirely extraneous to the topic at hand but it cries out for a mention. In the 2006 shoot-out against Argentina Germany's then goalkeeper, Jens Lehmann, notoriously carried a list of where the rival strikers put their penalties tucked in his sock. He actually went in the right direction--clearly a prerequisite for success--every time, saving two Argentine attempts. As Esteban Cambiasso steadied himself for the decisive shot, the German goalie conspicuously consulted a crumpled piece of paper pulled out from under his shin pad. Discomfited, the striker sent the orb to the right, directly into the hands of the lunging Lehmann. Adding insult to injury, it later transpired that he wasn't even on the list.

This is only the ending part of the article

Related items from Jensen's archives:

Goal Tenders versus Movers and Shakers
Skate to where the puck is going, not to where it is.
Wayne Gretsky (as quoted for many years by Jerry Trites at http://www.zorba.ca/ )

Jensen Comment
This may be true for most hockey players and other movers and shakers, but for goal tenders the eyes should be focused on where the puck is at every moment --- not where it's going. The question is whether an accountant is a goal tender (stewardship responsibilities) or a mover and shaker (part of the managerial decision making team). This is also the essence of the debate of historical accounting versus pro forma accounting.

Graduate student Derek Panchuk and professor Joan Vickers, who discovered the Quiet Eye phenomenon, have just completed the most comprehensive, on-ice hockey study to determine where elite goalies focus their eyes in order to make a save. Simply put, they found that goalies should keep their eyes on the puck. In an article to be published in the journal Human Movement Science, Panchuk and Vickers discovered that the best goaltenders rest their gaze directly on the puck and shooter's stick almost a full second before the shot is released. When they do that they make the save over 75 per cent of the time.
"Keep your eyes on the puck," PhysOrg, October 26, 2006 --- http://physorg.com/news81068530.html

A Different Set of Heroes, Ethics, Morals, and Rules
"Bernie Madoff, Free at Last In prison he doesn’t have to hide his lack of conscience. In fact, he’s a hero for it," Steve Fishman, New York Magazine, June 6, 2010 --- http://nymag.com/news/crimelaw/66468/

Last August, shortly after his arrival at the federal correctional complex in Butner, North Carolina, Bernard L. Madoff was waiting on the evening pill line for his blood-pressure medication when he heard another inmate call his name. Madoff, then 71, author of the most devastating Ponzi scheme in history, was dressed like every other prisoner, in one of his three pairs of standard-issue khakis, his name and inmate number glued over the shirt pocket. Rec time, the best part of a prisoner’s day, was drawing to a close, and Madoff, who liked to walk the gravel track, sometimes with Carmine Persico, the former mob boss, or Jonathan Pollard, the spy, had hurried to the infirmary, passing the solitary housing unit—the hole—ducking through the gym and the twelve-foot-high fence and turning in the direction of Maryland, the unit where child molesters are confined after they’ve served their sentences. As usual, the med line was long and moved slowly. There were a hundred prisoners, some standing outside in the heat, waiting for one nurse.

Madoff was accustomed to hearing other inmates call his name. From July 14, the day he arrived, he’d been an object of fascination. Prisoners had assiduously followed his criminal career on the prison TVs. “Hey, Bernie,” an inmate would yell to him admiringly while he was at his job sweeping up the cafeteria, “I seen you on TV.” In return, Madoff nodded and waved, smiling that sphinxlike half-smile. “What did he say?” Madoff sometimes asked.

But that evening an inmate badgered Madoff about the victims of his $65 billion scheme, and kept at it. According to K. C. White, a bank robber and prison artist who escorted a sick friend that evening, Madoff stopped smiling and got angry. “Fuck my victims,” he said, loud enough for other inmates to hear. “I carried them for twenty years, and now I’m doing 150 years.”

For Bernie Madoff, living a lie had once been a full-time job, which carried with it a constant, nagging anxiety. “It was a nightmare for me,” he told investigators, using the word over and over, as if he were the real victim. “I wish they caught me six years ago, eight years ago,” he said in a little-noticed interview with them.

And so prison offered Madoff a measure of relief. Even his first stop, the hellhole of Metropolitan Correctional Center (MCC), where he was locked down 23 hours a day, was a kind of asylum. He no longer had to fear the knock on the door that would signal “the jig was up,” as he put it. And he no longer had to express what he didn’t feel. Bernie could be himself. Pollard’s former cellmate John Bowler recalls a conversation between Pollard and Madoff: “Bernie was telling a story about an old lady. She was bugging him for her money, so he said to her, ‘Here’s your money,’ and gave her a check. When she saw the amount she says, ‘That’s unbelievable,’ and she says, ‘Take it back.’ And urged her friends [to invest].”

Pollard thought that taking advantage of old ladies was “kind of fucked up.”

“Well, that’s what I did,” Madoff said matter-of-factly.

“You are going to pay with God,” Pollard warned.

Madoff was unmoved. He was past apologizing. In prison, he crafted his own version of events. From MCC, Madoff explained the trap he was in. “People just kept throwing money at me,” Madoff related to a prison consultant who advised him on how to endure prison life. “Some guy wanted to invest, and if I said no, the guy said, ‘What, I’m not good enough?’ ” One day, Shannon Hay, a drug dealer who lived in the same unit in Butner as Madoff, asked about his crimes. “He told me his side. He took money off of people who were rich and greedy and wanted more,” says Hay, who was released in December. People, in other words, who deserved it.

There is, as it happens, honor among thieves, a fact that worked mostly to Madoff’s benefit. In the context of prison, he isn’t a cancer on society; he’s a success, admired for his vast accomplishments. “A hero,” wrote Robert Rosso, a lifer, on a website he managed to found called convictinc .com. “He’s arguably the greatest con of all time.”

From the day Bernard Lawrence Madoff, prisoner No. 61727-054, arrived at the softer of Butner’s two medium-security facilities in handcuffs and shackles, his over-the-collar hair shorn close, his rich man’s paunch diminished, he was a celebrity, even if his admirers were now murderers and sex offenders. The Butner correctional complex, which includes four prisons and a medical center, already has its share of crime kings. Pollard, the Israel cause célèbre who spied for the Jewish homeland, lived in Madoff’s housing unit, Clemson (the dorms are named after Atlantic Coast Conference colleges). Persico, the former Colombo-family godfather, lives in nearby Georgia Tech. Omar Ahmad-Rahman, the blind sheikh who helped engineer the 1993 World Trade Center bombing, is in Butner. The Rigases from Pennsylvania, the father and son who bankrupted Adelphia Communications Corporation, are there—they wear crisp, pressed uniforms, which inmates assume they pay others to maintain.

Yet even in this crowd, Madoff stands out. Every inmate remembers the day he arrived. “It was like the president was visiting,” a visitor to Butner that day told me. News helicopters buzzed overhead, and the administration locked down part of the prison, confining some inmates to their units, while an aging con man with high blood pressure shuffled through processing, where other inmates fitted him for a uniform and offered a brief orientation: “Man, chill out and go with the flow, ” was the advice of one former drug dealer.

Quickly, the flow came to Madoff. From the moment he alighted, he had “groupies,” according to several inmates. Prisoners trailed him as he took his exercise around the track. (Persico had also attracted a throng when he arrived, but was disgusted and quickly put an end to it.) “They buttered him up,” one former inmate told me. “Everybody was trying to kiss his ass,” says Shawn Evans, who spent 28 months in Butner. They even clamored for his autograph.

And Madoff was usually more than happy to respond. “He enjoyed being a celebrity,” says Nancy Fineman, an attorney to whom Madoff granted an interview shortly after his arrival at Butner. (Fineman represents victims who are suing some of Madoff’s “aiders and abettors,” as she calls them.) Madoff seemed surprised and tickled by the lavish treatment, though he steadfastly refused to sign anything. Even in prison, he wasn’t going to dilute the brand. “He was sure they would sell it on eBay,” Fineman told me. “He still did have a big ego.”

Remarkably, that ego appears to have survived intact. H. David Kotz, the Security and Exchange Commission’s inspector general, investigated his agency’s failure to uncover Madoff’s Ponzi scheme, and Madoff volunteered to speak to him—he is, no doubt, the world’s expert on the subject. He quickly reminded Kotz of his stature—“I wrote a good portion of the rules when it comes to trading,” Madoff said. He insisted that he’d been “a good trader” with a solid strategy, explaining that he’d stumbled into trouble because of his success. Hedge funds—“just marketers,” he said with evident disgust—pushed cash on him. He overcommitted, got behind, and generated a few imaginary trades, figuring he’d make it up—and never did. Whatever his own missteps, Madoff saved his scorn for the SEC. He did impressions of its agents, leaning back with his hands behind his head just as one self-serious agent did—“a guy who comes on like he’s Columbo,” but who was “an idiot,” Madoff said, as recorded in the extraordinary exhibit 104, a twelve-page account of the interview that is part of Kotz’s report. Madoff is no ironist. His disdain for the SEC is professional, even if the agency’s incompetence saved his skin for years—all Columbo had to do was make one phone call. “[It’s] accounting 101,” Madoff told Kotz, still amazed.

Madoff’s ego was on display in prison, too. “Bernie walked around prison confident,” says ex-con Keith Mack, adding, with a trace of resentment, “he acted like he beat the world.” And to most inmates he had. Many—and I communicated with more than two dozen current and recent Butner inmates (though not Madoff)—can recount stories of his conquests, a good number of them related by Madoff himself. “He said something to me one day,” recalls an ex–drug trafficker, released in February. “He could spin the globe and stop it anywhere with his finger, and chances are he had a house there or he’d been there. I was pretty blown away.” One evening, Bowler, a drug trafficker (“I’m not a con man, I’m a businessman,” he wrote to me), sat next to Madoff watching a 60 Minutes segment about him. Prison authorities keep the volume off, and inmates wear headphones and tune in to the radio signal that broadcasts the sound. Bowler removed one earpiece. “ ‘Bernie, you got ’em for millions,’ I said to him. ‘No, billions,’ he told me.” Another evening, one former inmate was watching a TV news report on the auction of Madoff’s much-chronicled watch collection—he owned more than 40, from Rolexes to a Piaget. The watch featured that evening fetched just $900, and Madoff, whose only watch now is a Timex Ironman that he bought at the commissary for $41.65 and is likely engraved with his inmate number, called out, “They told me that watch was worth $200,000.” The inmates laughed along with him. They didn’t see any reason for Madoff to regret his past. “If I’d lived that well for 70 years, I wouldn’t care that I ended up in prison,” Evans says.

Inmates were impressed by the sheer scale of Madoff’s operation and turned to him for guidance in getting their own ambitions on track. Madoff had always enjoyed being counselor to the wealthy and powerful. That had been part of the scheme’s seduction: Bernie, the scrappy kid from Queens, depended on by rich businessmen. “He wants to be remembered as a titan of Wall Street,” says Fineman, and one who subsidized the private schools and fancy vacations of his wealthy friends, even if it was with the funds of other investors. And to inmates he still was a titan.

Continued in article

Bob Jensen's threads on Madoff and Ponzi frauds in general ---
http://www.trinity.edu/rjensen/FraudRotten.htm#Ponzi

Question
Can any of you identify the mystery "Fraud Girl" who will be writing a weekly (Sunday) column for Simoleon Sense?

Hint
She seems to have a Chicago connection and seems very well informed about the blog posts of Francine McKenna.
http://retheauditors.com/
But I really do know know who is the mystery "Fraud Girl."

"Guest Post: Fraud Girl Says, “Regulators, Ignore the Masses — It’s Your Responsibility!!”
(A New SimoleonSense Series on Fraud, Forensic Accounting, and Ethics)
Simoleon Sense, April 25, 2010 --- Click Here
http://www.simoleonsense.com/guest-post-fraud-girl-says-regulators-ignore-the-masses-it%e2%80%99s-your-responsibility-must-follow-series-on-fraud-forensic-accounting-and-ethics/

I’m exceptionally proud to introduce you to Fraud Girl, our new Sunday columnist. She will write about all things corp governance, fraud, accounting, and business ethics. To give you some background (and although I can not reveal her identity). Fraud girl recently visited me in Chicago for the Harry Markopolos presentation to the local CFA. We were incredibly lucky to meet with Mr. Markopolos and enjoyed 3 hours of drinks and accounting talk. Needless to say Fraud Girl was leading the conversation and I was trying to keep up. After a brainstorm session I persuaded her to write for us and teach us about wall street screw-ups.

So watch out, shes smart, witty, and passionate about making the world a better place. I think Sundays just got a lot better…

Miguel Barbosa
Founder of SimoleonSense

P.S. For Questions or Comments: Reach fraud girl at: FraudGirl@simoleonsense.com

Regulators, Ignore the Masses — It’s Your Responsibility

Men in general judge more by the sense of sight than by the sense of touch, because everyone can see but only a few can test feeling. Everyone sees what you seem to be, few know what you really are; and those few do not dare take a stand against the general opinion, supported by the majesty of the government. In the actions of all men, and especially of princes who are not subject to a court of appeal, we must always look to the end. Let a prince, therefore, win victories and uphold his state; his methods will always be considered worthy, and everyone will praise them, because the masses are always impressed by the superficial appearance of things, and by the outcome of an enterprise. And the world consists of nothing but the masses; the few have no influence when the many feel secure.

-Niccolo Machiavelli, The Prince

Why are Machiavelli’s words so astonishingly prophetic? How does a 500 year old quote explain contagion, bubbles, and Ponzi schemes? Do financial decision makers consciously overlook reality or do they merely postpone due diligence? That is the purpose of this series — to analyze financial fraud(s) and question business ethics.

Recent accounting scandals i.e. Worldcom, Enron, Madoff, reveal a variety of methods for boosting short term performance at the expense of long run shareholder value. WorldCom recorded bogus revenue, Enron boosted their operating income through improper classifications, and Madoff ran the largest Ponzi scheme in history. Sure these scandals were unethical, deceived the public, and made a ton of money. But what is the most striking similarity? Each of these companies was seen as the golden goose egg; an indestructible force that could never fail. Of course, the key word is “seen”, regulators, attorneys, financial analysts, and auditors failed to see reality. But why?

Fiduciaries are entrusted with protecting the public and shareholders from crooks like Skilling, Pavlo, and Schrushy. An average shareholder lacks the knowledge and expertise of a prominent regulator, right? Shareholders don’t perform the company’s annual audit, review all legal documentation, or communicate with top executives. No, shareholders base their decisions off information that is “accurate” and “meticulously examined”.

Unfortunately in each of these instances regulators failed to take a stand against consensus and became another ignorant face in the crowd. “Everyone sees what you seem to be, few know what you really are; and those few do not dare take a stand against the general opinion”. Who are the few that really know who these companies are? The answer should be evident. What isn’t clear is why these cowardly few are in charge of overseeing our financial markets.

When Auditors Look The Other Way

A week ago, I came across this article: Ernst & Young defends its Lehman work in letter to clients. I chuckled as I was reading it, remembering Roxie Hart from the play Chicago shouting the words “Not Guilty” to anyone who would listen. Like Roxie, the audit team pleaded that the media was inaccurate. In recording Lehman’s Repo 105 transactions, they claimed compliance with GAAP and believed the financial statements were ‘fairly represented’. But, fair reporting is more than complying with GAAP. Often auditors are “compliant” while cooking the books (a mystery that still eludes me). In this case, the auditors blatantly covered their eyes and closed their ears to what they must have known was deliberate misrepresentation of Lehman Brother’s financial statements.

We will explore the Lehman Brothers fiasco in next week’s post…but here’s the condensed version. Days prior to quarter end, Lehman Brothers used “Repo 105” transactions, which allowed them to lend assets to others in exchange for short-term cash. They borrowed around $50 Billion; none of which appeared on their balance sheet. Lehman instead reported the debt as sales. They used the borrowed cash to pay down other debt. This reduced both their total liabilities and total assets, thereby lowering their leverage ratio.

This was allegedly in compliance with SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities that allowed Lehman to move the $50 Billion of assets from its balance sheet. As long as they followed the rules, auditors could stamp [the] financial statements with a “Fairly Represented” approval and issue an unqualified opinion.

Clearly in this case complying was unethical and probably illegal. Howard Schilit, the author of Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports, once said, “You [the auditor] work for the investor, even though you are paid by someone else”. He insists that auditors should look beyond the checklists and guidelines and should instead question everything. Auditors are the first line of defense against fraud and the shareholders are dependent upon the quality of their services. So I ask again, with respect to Lehman Brothers, were the auditors working for the investors or where they in the pockets of senior management?

What can we do?

An admired value investor believes in a similar tactic for confirming the honesty of companies. It’s known as “killing the company”, where in his words, “we think of all the ways the company can die, whether it’s stupid management or overleveraged balance sheets. If we can’t figure out a way to kill the company, then you have the beginning of a good investment”. Auditors must think like this, they must kill the company, and question everything. If you can’t kill a company, then (and only then) are the financial statements truly a fair representation of the firms operations.

There was no “killing” going on when the lead auditing partner said that his team did not approve Lehman’s Accounting Policy regarding Repo 105s but was in some way comfortable enough with them to audit their financial statements. This engagement team failed in looking beyond SFAS 140 and should have realized what every law firm (aside from one firm in London) was stating; that the accounting methods Lehman Brothers used to record Repo 105s were a deliberate attempt to defraud the public.

So I repeat: Ignoring reality is not an option. Ignoring the crowd, however, is an obligation.

See you next week….

-Fraud Girl

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

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

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

"Guest Post – Fraud Girl: “Fraud by Hindsight”- How Wall Street Firms [Legally] Get Away With Fraudulent Behavior!," Fraud Girl, Simoleon Sense, June 6, 2010 --- Click Here
http://www.simoleonsense.com/guest-post-fraud-girl-%e2%80%9cfraud-by-hindsight%e2%80%9d-how-wall-street-firms-legally-get-away-with-fraudulent-behavior/

Last week we discussed the credit rating agencies and their roles the financial crisis. These agencies provided false ratings on credit they knew was faulty prior to the crisis. In defense, these agencies (as well as Warren Buffet) said that they did not foresee the crisis to be as severe as it was and therefore could not be blamed for making mistakes in their predictions. This week’s post focuses on foreseeability and the extent to which firms are liable for incorrect predictions.

Like credit agencies, Wall Street firms have been accused of knowing the dangers in the market prior to its collapse. I came across this post (Black Swans*, Fraud by hindsight, and Mortgage-Backed Securities) via the Wall Street Law Blog that discusses how firms could assert that they can’t be blamed for events they couldn’t foresee. It’s a doctrine known as Fraud by Hindsight (“FBH”) where defendants claim “that there is no fraud if the alleged deceit can only be discerned after the fact”. This claim has been used in numerous securities fraud lawsuits and surprisingly it has worked in the defendant’s favor on most occasions.

Many Wall Street firms say they “could not foresee the collapse of the housing market, and therefore any allegations of fraud are merely impermissible claims of fraud by hindsight”. Was Wall Street able to foresee the housing market crash prior to its collapse? According to the writers at WSL Blog, they did foresee it saying, “From 1895 through 1996 home price appreciation very closely corresponded to the rate of inflation (roughly 3% per year). From 1995 through 2006 alone – even after adjusting for inflation – housing prices rose by more than 70%”. Wall Street must (or should) have foreseen a drastic change in the market when rises in housing costs were so abnormal. By claiming FBH, however, firms can inevitably “get away with murder”.

What exactly is FBH and how is it used in court? The case below from Northwestern University Law Review details the psychology and legalities behind FBH while attempting to show how the FBH doctrine is being used as a means to dismiss cases rather than to control the influence of Wall Street’s foreseeability claims.

Link Provided to Download "Fraud by Hindsight" (Registration Required)

I’ve broken down the case into two parts. The first part provides two theories on hindsight in securities litigation: The Debiasing Hypothesis & The Case Management Hypothesis. The Debiasing Hypothesis provides that FBH is being used in court as a way to control the influence of ‘hindsight bias’. This bias says that people “overstate the predictability of outcomes” and “tend to view what has happened as having been inevitable but also view it as having appeared ‘relatively inevitable’ before it happened”. The Debiasing Hypothesis tries to prove that FBH aids judges in “weeding out” the biases so that they can focus on the allegations at hand.

The Case Management Hypothesis states that FBH is a claim used by judges to easily dismiss cases that they deem too complicated or confusing. According to the analysis, “…academics have complained that these [securities fraud] suits settle without regard to merit and do little to deter real fraud, operating instead as a needless tax on capital raising. Federal judges, faced with overwhelming caseloads, must allocate their limited resources. Securities lawsuits that are often complex, lengthy, and perceived to be extortionate are unlikely to be a high priority. Judges might thus embrace any doctrine [i.e. FBH doctrine] that allows them to dispose of these cases quickly” (782-783). The case attempts to prove that FBH is primarily used for case management purposes rather than for controlling hindsight bias.

The psychological aspects behind hindsight bias are discussed thoroughly in this case. Here are a few excerpts from the case regarding this bias:

(1)“Studies show that judges are vulnerable to the bias, and that mere awareness of the phenomenon does not ameliorate its influence on judgment. The failure to develop a doctrine that addresses the underlying problem of judging in hindsight means that the adverse consequences of the hindsight bias remain a part of securities litigation. Judges are not accurately sorting fraud from mistake, thereby undermining the system, even as they seek to improve it” (777).

(2) “Judges assert that a company’s announcement of bad results, by itself, does not mean that a prior optimistic statement was fraudulent. This seems to be an effort to divert attention away from the bad outcome and toward the circumstances that gave rise to that outcome, which is exactly the problem that hindsight bias raises. That is, if people overweigh the fact of a bad outcome in hindsight, then the cure is to reconstruct the situation as people saw it beforehand. Thus, the development of the FBH doctrine suggests a judicial understanding of the biasing effect of judging in hindsight and of a means to address the problem” (781).

(3) “Once a bad event occurs, the evaluation of a warning that was given earlier will be biased. In terms of evaluating a decision-maker’s failure to heed a warning, knowledge that the warned-of outcome occurred will increase the salience of the warning in the evaluator’s mind and bias her in the direction of finding fault with the failure to heed the warning. In effect, the hindsight bias becomes an ‘I-told-you-so’ bias.” (793).

(4) “In foresight, managers might reasonably believe that the contingency as too unlikely to merit disclosure, whereas in hindsight it seems obvious a reasonable investor would have wanted to know it. Likewise, as to warning a company actually made, in foresight most investors might reasonably ignore them, whereas in hindsight they seem profoundly important. If defendants are allowed to defend themselves by arguing that a reasonable investor would have attended closely to these warnings, then the hindsight bias might benefit defendants” (794).

Next week we’ll explore the second part of the case and discuss the importance of utilizing FBH as a means of deterring the hindsight bias. We’ll see how the case proves that FBH is not being used for this purpose and is instead used as a mechanism to dismiss cases that simply do not want to be heard.

See you next week…
-Fraud Girl

Bob Jensen's Rotten to the Core threads on credit rating agencies ---
http://www.trinity.edu/rjensen/FraudRotten.htm#CreditRatingAgencies

Bob Jensen's Rotten to the Core threads on banks and brokerages ---
http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking

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

June 8, 2010 reply from Robert Bruce Walker [walkerrb@ACTRIX.CO.NZ]

The link below is a book review of Michael Lewis’s latest book ‘The Big Short’. The book is clearly based on an article that Bob uncovered about 9 months ago. The mechanism underpinning the ‘short’ is better explained in the NYRB essay and, presumably, in the book itself. It seems that the ‘mezzanine’ tranches (BBB rated) of a series of MBS were packaged, rated AAA and then issued in another MBS. Dubious this might be, but fraud it will not be. It lacks the central element of mens rea. In the face of an accusation of fraud the accused will generally resort to the defence of incompetence or inadequacy – a dangerous thing when facing civil action as well – but better than being seen to have acted ‘knowingly’. No-one knew the property markets would collapse. Many people, including me*, thought that it was inevitable – but we did not know it.

http://www.nybooks.com/articles/archives/2010/jun/10/heart-crash/?pagination=false

*When I was first told of the ‘low doc’ loan concept by an investment manager, I could hardly believe it. He, on the other hand, described the packager of such products as very clever. The investor in question failed badly due to an over-exposure to MBS. Funny that.

"Guest Post – Fraud Girl: “Fraud by Hindsight”- How Wall Street Firms [Legally] Get Away With Fraudulent Behavior! Part 2," by Fraud Girl, Simoleon Post, June 13, 2010 --- Click Here
http://www.simoleonsense.com/guest-post-fraud-girl-%e2%80%9cfraud-by-hindsight%e2%80%9d-how-wall-street-firms-legally-get-away-with-fraudulent-behavior-part-2/

Last week we discussed the first part of the “Fraud by Hindsight” study. As we learned, the FBH doctrine is utilized in securities litigation cases. In learning about the FBH doctrine we reviewed the Debiasing Hypothesis and the Case Management Hypothesis. According to the Debiasing Hypothesis, FBH is used as a tool to “weed out” hindsight bias in order to focus on legal issues at hand. The Case Management Hypothesis, on the other hand declares that FBH is used to dismiss securities fraud cases in order to facilitate judicial control over them. This week we will strive to analyze how Fraud By Hindsight has evolved, meaning, how the courts apply the doctrine (in real life), which differs markedly from the doctrine’s theoretical meaning.

History

The first mention of FBH was in 1978 with Judge Friendly in the case Denny v. Barber. The plaintiff in this case claimed that the bank had “engaged in unsound lending practices, maintained insufficient loan loss reserves, delayed writing off bad loans, and undertook speculative investments” (796). Sound familiar? Anyway — the plaintiff plead that the bank failed to disclose these problems in earlier reports and instead issued reports with optimistic projections. Judge Friendly claimed FBH stating that there were a number of “intervening events” during that period (i.e. increasing prices in petroleum and the City of New York’s financial crisis) that were outside the control of managers and it was therefore insufficient to claim that the defendant should have known better when out-of-the-ordinary incidents have occurred. The end result of the case provided that “hindsight alone might not constitute a sufficient demonstration that the defendants made some predictive decision with knowledge of its falsity or something close to it” (797). Friendly established that FBH is possible, but that in this case the underlying circumstances did not justify a judgment against the bank.

The second relevant mention of FBH was in 1990 with Judge Easterbrook in the case DiLeo v. Ernst & Young. Like the prior case, DiLeo involved problems with loans where the plaintiff plead that the bank and E&Y had known but failed to disclose that a substantial portion of the bank’s loans were uncollectible. This case was different, in that there were no “intervening events” that could have blind sighted managers from issuing more accurate future projections. Still, Easterbrook claimed FBH and said, “the fact that the loans turned out badly does not mean that the defendant knew (or should have known) that this was going to happen” (799-800). Easterbrook believed that the plaintiff must be able to separate the true fraud from the underlying hindsight evidence in order to prove their case.

Easterbrook’s articulation of the FBH doctrine set the stage for all future securities class action cases. As the authors state, the phrase was cited only about twice per year before DiLeo but it increased to an average of twenty-seven times per year afterwards. Unfortunately, the courts found Easterbrook’s perception of the phrase to be more compelling. Instead of providing that the hindsight might play a role determining if fraud has occurred, Easterbrook claimed that there simply is no “fraud by hindsight”. This allows the courts to adjudicate cases solely on complaint, therefore supporting the Case Management Hypothesis.

The results of many tests provided in this case proved that courts were using the doctrine as a means to dismiss cases. Of all the tests, I found one to be most interesting: The Stage of the Proceedings. The results of the test shows that “over 90 percent of FBH applications involve judgments on the pleadings” (814) stage rather than at summary judgment. In the preliminary (pleading) stages, the knowledge of information is not provided, meaning that it is less likely that hindsight bias will affect their decisions. The more the judge delves into the case, the more they are susceptible to the hindsight bias. If the judge is utilizing the FBH doctrine mostly during the pleading stages where hindsight bias is “weak”, then the Debiasing Hypothesis is not valid.

The authors point out the problems with utilizing the FBH doctrine in this way:

“The problem, however, is that the remedy is applied at the pleadings stage, not the summary judgment stage. At the pleadings stage, a bad outcome truly is relevant to the likelihood of fraud. At this stage, the Federal Rules do not ask the courts to make a judgment on the merits, and hence the remedy of foreclosing further litigation is inappropriate. By foreclosing further proceedings, courts are not saying that they do not trust their own judgment, but that they do not trust the process of civil discovery to identity whether fraud occurred” (815).

Because cases are being dismissed so early in the litigation process, courts are not allowing for the discovery of fraud that may be apparent even though hindsight is a factor in the case.

By gathering this and other evidence, the case concludes that judges utilize FBH as a case management tool. They cited that the development of the FBH doctrine could be described as “naïve cynicism”. Though judges understand that hindsight bias must be taken into consideration, they express the belief that the problem does not affect their own judgment. The courts are relying on their own intuitions and gathering the necessary facts to prove fraud by hindsight. The authors note a paradox here saying, “Judges simultaneously claim that human judgment cannot be trusted, and yet they rely on their own judgment”.

The problem is that the naively cynical (FBH) approach has led to securities fraud cases to be governed by moods. The authors say that “In the 1980s and 1990s, as concern with frivolous securities litigation rose, courts and Congress simply made it more difficult for plaintiffs to file suit. In the post-Enron era, this skepticism about private enforcement of securities fraud might have abated somewhat, leading to lesser pleading requirements” (825).

Recap & Implications

Overall the case proves that the courts have not yet been able to establish a sensible mechanism for sorting fraud from mistake. It therefore allows cases that really involve fraud to potentially be dismissed. In cases since DiLeo, the win rate for defendants in FBH cases is 70 percent, as compared with 47 percent in those cases that did not mention it. The mere declaration of “Fraud by Hindsight” gives the defendant an automatic advantage over the plaintiff. Now, the defendant may in fact be innocent – but the current processes are not able to determine who is or isn’t guilty. Remember, judges spend much of their time in these cases separating the hindsight bias from the fraud. This task can become very complex and time consuming.

In sum, the increasing use of FBH has been beneficial for (1) judges because they don’t have to listen to these complicated cases and (2) defendant’s because they are likely to win the case by using the doctrine. The only ones who don’t benefit from doctrine are the plaintiff’s who may truly have been victims of fraud. It is crucial that the judiciary revise the way the FBH is interpreted in order to protect the innocent and convict the guilty.

Have any ideas on how to fix the FBH problem? Send me an email at fraudgirl @ simoleonsense.com.

See you next week.

- Fraud Girl

Click Here To Access The Original Fraud by Hindsight Case – Part II ---
http://www.scribd.com/doc/32994403/Fraud-by-Hindsight-Part-II

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

“What A Tangled Web We Weave: AIG’s Cassano Says He Told PwC Everything,” by Francine McKenna, re:TheAuditors, June 30, 2010 ---
http://retheauditors.com/2010/06/30/going-concern-what-a-tangled-web-we-weave-aigs-cassano-says-he-told-pwc-everything/

My new column is up @Going Concern:

Joseph Cassano, the former head of AIG’s Financial Products Group, testifies today for the Financial Crisis Inquiry Commission, a bipartisan commission with a critical non-partisan mission — to examine the causes of the financial crisis.

[...]

The Department of Justice cleared Mr. Cassano in May. No criminal charges will be filed. U.K.’s Serious Fraud Office dropped probes last month, and the U.S. Securities and Exchange Commission also closed their investigations too…the investigations went south when, “prosecutors found evidence Mr. Cassano did make key disclosures. They obtained notes written by a PwC auditor suggesting Mr. Cassano informed the auditor and senior AIG executives about the adjustment…[and] told AIG shareholders in November 2007 that AIG would have “more mark downs,” meaning it would lower the value of its swaps.”

So who’s telling the truth? Was PwC duped by AIG? Who is looking out for AIG shareholders and the US taxpayer in this mess?

Based on my reading of the Audit Committee minutes, I believe that PwC was aware of weaknesses in internal controls over the AIGFP super senior credit default portfolio throughout 2007 and prior. Why were they pussy-footing around still on January 15, 2008 as to whether these control weaknesses were a significant deficiency (which would not have to have been disclosed) or a material weakness (which eventually was)?

Read the rest here.
http://goingconcern.com/2010/06/what-a-tangled-web-we-weave-aig’s-cassano-says-he-told-pwc-everything/

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

"PwC May Have Overlooked Billions in Illegal JP Morgan Transactions. Oopsie," by Adrenne Gonzalez, Going Concern, June 10, 2010 ---
http://goingconcern.com/2010/06/pwc-may-have-overlooked-billions-in-illegal-jp-morgan-transactions-oopsie/

Now £15.7 billion may not seem like much to you if you are, say, Bill Gates or Ben Bernanke but for PwC UK, it may be the magic number that gets them into a whole steaming shitpile of trouble.

UK regulators allege that from 2002 – 2009, PwC client JP Morgan shuffled client money from its futures and options business into its own accounts, which is obviously illegal. Whether or not JP Morgan played with client money illegally is not the issue here, the issue is: will PwC be liable for signing off on JPM’s activities and failing to catch such significant shenanigans in a timely manner?

PwC did not simply audit the firm, they were hired to provide annual client reports that certified client money was safe in the event of a problem with the bank. Obviously that wasn’t the case.

The Financial Reporting Council and the Institute of Chartered Accountants of England are investigating the matter, and the Financial Services Authority has already fined P-dubs £33.3 million for co-mingling client money and bank money. That’s $48.8 million in Dirty Fed Notes if you are playing along at home.

Good luck with that, PwC. We genuinely mean that.

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

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

Bob Jensen's Rotten to the Core threads on banks and brokerages ---
http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking

Are the Canadian critics being too kind and gentle on themselves?
"Have Canadian Law Schools Become 'Psychotic Kindergartens'?" Inside Higher Ed, June 7, 2010 ---
http://www.insidehighered.com/news/2010/06/07/qt#229422

Canadian bloggers have been buzzing in the last week about a harsh critique of the country's law schools, which are compared to "psychotic kindergartens" in a journal article published by Robert Martin, a retired law professor at the University of Western Ontario. The article was published last year in the journal Interchange, but has only recently been the topic of debate. The article portrays law schools as politically correct and focused on obscure issues. Martin closes his piece by suggesting that Canada's law schools all be shut down and turned over to the homeless as a place to live -- thus in Martin's view solving multiple social problems at the same time. The article is available only to subscribers of the journal, and while its focus is law schools, it isn't much more kind to the rest of the country's universities. "Each fall, a horde of illiterate, ignorant cretins enters Canada's universities. A few years later, they all move on, just as illiterate, just as ignorant and rather more cretinous, but now armed with bits of paper, which most of them are probably not able to read, called degrees," he writes. The Canadian legal blog SLAW features a defense of legal education in the country and criticism of Martin's views.

Our Compassless Colleges: What Are Students Really Not Learning" ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#Berkowitz

Questions
What is driving tuition increases in law schools?
Are these same cost drivers impacting on some business schools and accountancy programs for the same reasons?
Why are minority enrollments increasing with the exception of African American law students?

Jensen Comment
Before reading the argument below, it should be noted that court decisions have been adverse to affirmative action admissions and financial aid, most notably the famous case that shook the foundations of the University of Michigan ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#AcademicStandards

"Law-School Cost Is Pushed Up by Quest for Prestige, Not Accreditation, GAO Survey Finds," by Eric Kelderman, Chronicle of Higher Education, October 26, 2009 ---
http://chronicle.com/article/Competition-Not/48940/?sid=at&utm_source=at&utm_medium=en

Critics have sometimes blamed the accreditation standards of the American Bar Association for driving up the cost of law school and making it more difficult for students of color to be admitted to those programs.

But a report released on Monday by the Government Accountability Office says that most law schools surveyed instead blamed competition for better rankings and a more hands-on approach to educating students for the increased price of a law degree. In addition, the federal watchdog agency reported that, over all, minorities are making up a larger share of law-school enrollments than in the past, although the percentage of African-American students in those programs is shrinking. The GAO attributed that decrease to lower undergraduate grade-point averages and scores on law-school admissions tests.

Law-school accreditation is technically voluntary but practically important: 19 states now require candidates to have a degree from an institution approved by the bar association to be eligible to take the bar examination. And a degree from an ABA-accredited institution makes a student eligible to take the bar exam in any state.

The costs of getting a law degree, however, have increased at a faster rate than the costs of comparable professional programs, says the report, "Higher Education: Issues Related to Law School Cost and Access." In-state tuition and fees at public law schools averaged $14,461 in the 2007-8 academic year, 7.2 percent higher than the cost 12 years earlier. In comparison, the cost of a medical degree from a public institution increased 5.3 percent over the same period, to $22,048 annually.

Law-school costs for nonresidents and at private institutions also increased at a slower rate over that period, but now total about twice as much or more in dollars compared with residents' costs at public institutions.

The reasons for the fast-rising costs are that law schools are providing courses and student-support programs that require more staff and faculty, the federal survey found. In addition, law schools spent more on faculty salaries and library resources, among other things, to boost their standing in the U.S. News & World Report annual rankings, law-school officials told the GAO.

Those findings stand in contrast to some criticisms that the accreditation standards for faculty and facilities are a major factor in the cost of law schools. "Officials from more than half of the ABA-accredited schools we spoke with stated they would meet or exceed some ABA accreditation standards even if they were not required," the report says.

Law-school officials also cited recent declines in state appropriations as a reason for rising tuition, federal researchers reported.

Accreditation standards also were not widely blamed for the declining share of African-American law students, most of those surveyed said. Between the 1994-95 and 2006-7 academic years, the percentage of black students has shrunk from 7.5 percent of law school students to 6.5 percent, even as the number of blacks earning bachelor's degrees has grown by two percentage points.

"Most law-school officials, students, and minority-student-group representatives we interviewed focused on issues such as differences in LSAT scores, academic preparation, and professional contacts, rather than accreditation standards, to explain minority access issues," the report says.

But the report also noted that some officials blamed not only accreditation, but also rankings by U.S. News & World Report for lower or static enrollment rates of minorities: "Schools are reluctant to admit applicants with lower LSAT scores because the median LSAT score is a key factor in the U.S. News & World Report rankings."

The study was a requirement of the Higher Education Opportunity Act, passed in 2008, and was meant to compare the costs and level of minority enrollment at law schools to similar professional-degree programs, including medical, dental, and veterinary colleges. Federal researchers surveyed officials at 22 institutions, including three that are not accredited by the ABA, and students in two law programs, one of which did not have the ABA's stamp of approval.

Bob Jensen's threads on accreditation are at
http://www.trinity.edu/rjensen/assess.htm#AccreditationIssues

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

You can search video and start the video when a particular word crops up
YouTube's Interactive Transcripts --- http://googlesystem.blogspot.com/2010/06/youtubes-interactive-transcripts.html

YouTube added a cool feature for videos with closed captions: you can now click on the "transcript" button to expand the entire listing. If you click on a line, YouTube will show the excerpt from the video corresponding to the text. If you use your browser's find feature, you can even search inside the video. Here's an an example of video that includes a transcript.

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

Evolution from Education to Training and Back to Education
"As Doctoral Education in Europe Evolves, Educators Meet to Chart Its Progress," by Aisha Labi, Chronicle of Higher Education, June 6, 2010 ---
http://chronicle.com/article/As-Doctoral-Education-in/65799/

Doctoral education across Europe is evolving quickly and, even as universities shift their focus from traditional training based largely on individual relationships to structured programs, in-depth research must remain at the core of Ph.D. work, educators from across Europe agreed at a two-day conference here on the future of doctoral education in Europe.

The conference, the third annual meeting of the European University Association's Council for Doctoral Education, came five years after European educators, meeting in Salzburg, Austria, agreed to a set of 10 core principles for for doctoral education.

European higher education has undergone profound changes since the Salzburg meeting, with nearly 50 countries across Europe making huge strides in the past decade toward harmonizing their university systems as part of the Bologna Process, which culminated earlier this year in the official creation of the European Higher Education Area.

The initial focus of many of the Bologna reforms was on what are referred to as the first- and second-degree cycles, resulting in bachelor's and master's degrees. Unlike the first two cycles, the doctoral cycle is not tied to earning a set number of credits, nor should it be, participants at the Berlin meeting agreed, although a working declaration agreed to at the meeting's conclusion noted that "thinking in credits could be a useful common ground for joint programs or moving between programs."

In a period of "breathtaking transformation," American Ph.D. programs have served as a "loose model" for many of the new doctoral schools that are quickly becoming the norm in European doctoral education, noted Giuseppe Silvestri, a former rector of the University of Palermo and a member of the steering committee of the Council for Doctoral Education. But the advent of structured programs in Europe does not mean that doctoral education is becoming uniform, he emphasized, and indeed the sheer diversity of programs, including those that span institutions in several countries or pilot programs for a selected number of candidates at a single institution, is striking.

The American model for graduate education is also evolving, in many cases as a result of some of the same changes that are affecting Europe, Karen P. DePauw, a former chair of the Council of Graduate Schools and vice president and dean for graduate education at Virginia Tech, told the conference. As in Europe, graduate education in American universities is taking place in an increasingly internationalized context, with faculty members and graduate students collaborating more with international colleagues, and with formal degree programs involving international partner universities on the rise. The spread of the Bologna Process has created new challenges as well, she noted, including increased competition among programs with high numbers of international students. Research remains at the core of the American doctorate, but is also increasingly being incorporated much more into master's and even undergraduate programs, she said.

Internationalization is an essential component of quality doctoral education, Juan José Moreno Navarro, director general for university policy at the Spanish Ministry of Education, emphasized, because "quality research is international." The working conclusions produced by the conference emphasized the central role of internationalization as "a means to research capacity," and noted that institutions need to have in place both top-down strategies to organize international engagements but also bottom-up support from research staffs for such collaborations.

In the United States, a Commission on the Future of Graduate Education in the United States, organized by two education groups, recently issued a set of recommendations for improving graduate education, including a call for increased government financing for graduate studies. Higher education in Europe is still largely paid for by public subsidies, and European graduates do not struggle with the same kinds of educational-debt burdens that their American counterparts often face. But sustained financing for graduate studies also faces constraints.

Seeking Professional Status Izabela Stanislawiszyn, president of Eurodoc, an association of European doctoral students, spoke about concerns of doctoral candidates, who want to be seen not as students but as early-stage professionals. The distinction is more than semantic. In most European countries, being an employee carries benefits, such as access to pensions and career security, that students do not enjoy. "We prefer to be treated as professionals, not as students," she said.

Europe's 680,000 doctoral candidates represent a "real engine of growth," Ms. Stanislawiszyn said, and much of the conference discussion touched on their future trajectories and how doctoral education can better prepare them for careers in academe and beyond.

In Germany, especially, which counts for a fourth of all European doctorates, many Ph.D. holders end up working in industry. For many employers, graduates who have shown that they are capable of doing the kind of intellectual "deep dig" that comes from doctoral research are especially attractive job candidates, said Wilhelm Krull, secretary general of Germany's Volkswagen Foundation, Germany's largest nongovernmental backer of scientific research.

Jean Chambaz, vice president for research at the University of Paris VI (Pierre et Marie Curie), chairs the steering committee for the Council for Doctoral Education. He warned against a "false dichotomy" between careers in academe and industry. "I don't think that we remain an academic when we go from the Ph.D. to the postdoc to an academic career," he said. "You enter an academic career, and the Ph.D. should be considered the first step of a career, when you're trained through the practice of research, whatever you do later in your career."

Still, especially in a climate of increased pressure from the governments that still provide most of the financing for higher education to demonstrate the relevance and values of the degrees that are being produced, focusing on the doctorate's essential academic, research-oriented dimension is crucial, Geoffrey Boulton, a professor of geosciences at the University of Edinburgh, emphasized. "The ivory tower is important," he said. "It is where professors and others are able to patrol the boundaries of what we know with a microscope. It may seem irrelevant to others, but don't deride the ivory tower; we have to defend it."

The conference produced a series of draft recommendations for the progress of doctoral education in Europe that will be distributed among member institutions for their input.

Bob Jensen's threads on the sorry state of accounting doctoral programs in North America ---
http://www.trinity.edu/rjensen/Theory01.htm#DoctoralPrograms

UCLA Award Finalist: Congratulations to Francine McKenna --- http://www.anderson.ucla.edu/x32584.xml
As reported by Going Concern, May 25, 2010

2010 Gerald Loeb Award Finalists Announced by UCLA Anderson School of Management [UCLA]
Congratulations are due to our own Francine McKenna (look for her column later today) who was named as a finalist for a Gerald Loeb Award for Distinguished Business and Financial Journalism in the “Online Commentary and Blogging Category” for her work at re:The Auditors.

Other nominees include Adrian Wooldridge, Steven N. Kaplan, Nell Minow, Patrick Lane, Brad DeLong, Luigi Zingales, Saugato Datta, Thomas Picketty and Chris Edwards for “Online Debates” for The Economist; David Pogue for “Pogue’s Posts” for The New York Times; Jim Prevor for “Business, Finances and Public Policy” for The Weekly Standard.

Jensen Comment
Francine puts in more investigative research into her blog and Twitter feeds than most any blogger I can think of at the moment. In addition to investigating the literature, she often goes directly to sources seeking interviews.

The competition for the Gerald Loeb Award is intense. Among the other competitors is one of my favorites, David Pogue.

"Florida Appeals Court Turns Down Heat, For Now, On BDO Seidman," by Francine McKenna, re: theAuditors, June 24, 2010 ---
http://retheauditors.com/2010/06/24/florida-appeals-court-turns-down-heat-for-now-on-bdo-seidman/

I was surprised by the news that the record verdict against BDO Seidman in the Bankest fraud had been reversed. I was stunned not because the verdict had been reversed on appeal but by the reasons why. Everyone has to prepare for a new trial because a judge erred in the setup of the proceedings.

That’s not supposed to happen.

It was a screwy sequence of events, for sure. Every time I wrote about the case I had to carefully consider how to present all the twists and turns, ins and outs and complex machinations the court forced both sides to endure.

The 20-page opinion was written by Judge Vance E. Salter. Judges Gerald B. Cope and Linda Ann Wells concurred. Salter said Rodriguez’s trial-planning decision was based on good intentions for efficiency purposes.

“These objectives are much harder to achieve, however, in a complex case,” Salter said.

Rodriguez ordered the first phase of the trial to determine whether BDO Seidman had committed gross negligence, but Salter noted that was two months before the jury considered issues of causation, reliance and comparative fault.

One potential negative for the plaintiffs in the retrial is the likely judge. Miami-Dade Circuit Judge John Schlesinger, the judge who rendered the verdict for the defense in the BDO International phase of the case, has taken over Judge Jose Rodriguez’s civil division and will hear the retrial. I was not impressed with Judge Schlesinger’s level of interest or aptitude during the BDO International trial for this “complex case brought by plaintiffs not in privity with the accounting firm/defendant.”

From Leagle’s posting of the opinion: The salutary objectives of judicial economy (no phase II damages trial is required if the jury returns a defense verdict in phase I), and the reduction of a longer case into more digestible “phases,” often support bifurcation and the exercise of that discretion. These objectives are much harder to achieve, however, in a complex case brought by plaintiffs not in privity with the accounting firm/defendant. In such a case, liability ultimately turns on specific demonstrations of knowledge, intent, and reliance. The evidence pertaining to those issues is inextricably intertwined with the claims and affirmative defenses on issues of comparative fault, causation, and gross negligence.

Bankest’s attorney Steven Thomas is optimistic about a retrial. Me? Not so much. This isn’t because I doubt Mr. Thomas’ ability to kick tail as he did in the original trial. This isn’t because the case doesn’t have sufficient merit.

From Michael Rapoport at DJ/Wall Street Journal: Steven Thomas, an attorney for Espirito Santo, said he was looking forward to a retrial. “The evidence of BDO Seidman’s failures of even the most basic auditing procedures is so overwhelming that we expect a new jury will reach the same conclusion as the original jury,” he said in a statement.

My doubts about the efficacy of a new trial are based on the disappointing, frustrating and completely unsatisfying way the court and the judges in this case have proceeded. Some of the additional comments raised by the Appeals Court do not bode well for this plaintiff’s chances next time around. This is in spite of the fact they made a point of saying they would stop at the prejudice imposed by the trifurcation issue and say no more that would prejudice a new trial.

Because of the prejudice inherent in the premature, first-phase gross negligence finding, we do not address in detail other aspects of the trial. Our conclusion regarding the “trifurcation” issue renders moot or pretermits our consideration of most of the other parts of the jury’s verdicts and the remaining points on appeal and cross-appeal.

There are two other issues raised by the Appeals Court that may prove problematic to the plaintiffs in a retrial.

Continued in article

Here's Jim Peterson’s review of the court outcome --- Click Here
http://www.jamesrpeterson.com/home/2010/06/seidman-gets-a-new-trial-in-bankest-and-how-does-winning-feel-.html
In particular, Jim thinks BDO Seidman is headed down the tubes in spite of this “win” on appeal.

Bob Jensen's threads on BDO Seidman, are at
http://www.trinity.edu/rjensen/Fraud001.htm

"Koss Sues Grant Thornton, Blames Firm’s Assignment of Newbie Auditors," by Caleb Newquist , Going Concern, June 25, 2010 ---
http://goingconcern.com/2010/06/koss-sues-grant-thornton-blames-firms-assignment-of-newbie-auditors/

Koss hired one of the best accounting firms in the world, Grant Thornton, and should have been able to rely on Thornton’s audits to uncover wrongdoing, Avenatti said. The suit against the auditing firm says auditors assigned to Koss were not properly trained.

The lawsuit lists hundreds of checks that Sachdeva ordered drawn on company accounts to pay for her personal expenses. She disguised the recipients — upscale retailers such as Neiman Marcus, Saks Fifth Avenue and Marshall Fields — by using just the initials. But the suit says Grant Thornton could have ascertained the true identity of the recipients by inspecting the reverse side of the checks, which showed the full name.

Continued in article

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

"Will Auditors Ever Answer To Investors For Aiding And Abetting?," by Francine McKenna, re: TheAuditors, June 16, 2010 ---
http://retheauditors.com/2010/06/16/will-auditors-ever-answer-to-investors-for-aiding-and-abetting/

The House – Senate Wall Street Reform and Consumer Protection Act Conference reconvened on Tuesday, June 15 and Compliance Week says a version of the Specter Bill – to repeal the Supreme Court’s Stoneridge decision – will not be included in whatever comes out of the process.

Bruce Carton in Compliance Week: As this process gets underway, auditors, lawyers, bankers and other advisers to public companies are quietly breathing a sigh of relief that one of the items no longer on the table is an amendment proposed by Sen. Arlen Specter that would have overturned the U.S. Supreme Court’s 2008 ruling in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., thereby permitting “aiding and abetting” liability for a company’s auditors and others. The final version of the financial reform bill that passed the Senate did not include the Specter amendment.

However, a coalition of state regulators, public pension funds, professors, consumers and investors and the attorneys who advise them, are still working to put something back in the bill as an amendment to restore the right of investors to defend themselves and hold white collar criminals accountable.

Their email to me states:

The amendment brought by Senators Arlen Specter (D-PA), Jack Reed (D-RI), Dick Durbin (D-IL) and many other senior Democrats would have enacted one simple change in current anti-investor law – law that was “legislated” by a conservative Supreme Court rather than the U.S. Congress. The reform would have restored the right of pension funds and other investors to hold accountable in courts those who knowingly aid and abet securities fraud.

This legal right of investors, which for fifty years helped white collar crime victims recover their losses while also deterring future fraud enablers, was stripped from shareholders and bondholders by the radical Stoneridge Supreme Court decision of 2008, which expanded upon an earlier misguided Court decision in order to throw out thousands of remaining meritorious fraud claims brought by retirement funds and individual investors against investment banks and others who helped design the Enron fraud – the largest financial crime in U.S. history.

Earlier this Spring, a Federal appeals court cited the “Supremes” and threw out the legitimate claims of ripped-off shareholders and bondholders in the billion dollar Refco, Inc. derivatives fraud. In Refco, a now criminally convicted corporate lawyer had worked with Refco’s senior execs to execute fake transactions as a paper trail leading to falsified financial statements that were issued to investors and the public.

Both Congressman Barney Frank and Senator Ted Kaufman responded to questions about the Specter amendment during my visit to Washington DC for Compliance Week’s Annual Conference. House Financial Services Committee Chairman Frank said at the conference that he was in favor of bringing the amendment back in the bill. Senator Kaufman, although a co-sponsor of the original amendment, is in favor but does not think it’s likely.

I’ve written quite a bit about the impact of third party liability on the auditors in fraud claims and the Stoneridge decision.

In February of 2008 , I wrote about Treasury’s attempt to address the nagging issues of viability and sustainability of the accounting profession.

They punted.

I have consistently disagreed with the Big 4’s claim that auditor liability caps are necessary to avoid losing one of the remaning firms to catastrophic litigation. I have lamented the fact that the auditors don’t get sued often enough for my tastes and, when they do, they often settle. I’ve also said that they don’t deserve our pity, as they are less than transparent regarding their true financial capacity to address ongoing litigation…

“The Treasury Department established the Advisory Committee on the Auditing Profession to examine the sustainability of a strong and vibrant auditing profession.”

John P. Coffey, the Co-Managing Partner of Bernstein Litowitz Berger & Grossmann LLP… agrees with what I have been saying on this blog all last year.

It is with this perspective that I address one of the questions the Committee is considering, namely, whether there ought to be a cap on auditor liability. I respectfully submit that the case for such a cap has not been made…

…the fact that, in today’s environment, auditors are rarely named as defendants in these actions. In a three-year period immediately before the PSLRA was enacted – April 1992 through April 1995 – auditors were named as defendants in 81 of 446 private securities class actions filed, for an average of 27 suits per year, or 18% of all private securities class actions. As the reforms of the PSLRA and the concomitant jurisprudence took hold, that number dropped precipitously. Auditors were named as defendants in only five suits in 2005, and only two cases in each of 2006 and 2007.

The number for 2007 is especially telling because approximately one out of every eleven companies with U.S.-listed securities – almost 1200 companies in all – filed financial restatements in 2007 to correct material accounting errors. Further, an analysis of securities actions filed in 2006 and 2007 demonstrates a significant decline in the number of cases alleging GAAP violations, appearing to suggest “a movement away from the focus in recent years on the validity of financial results and accounting treatment.”

Well, that’s changed post-financial crisis. In addition to the big frauds like Satyam, Glitnir, the Madoff feeder funds and garden variety accounting malpractice claims, the auditors are named in high profile subprime cases where fraud is alleged such as New Century and Lehman.

It’s still not a deluge, since the PSLRA makes it damn difficult to draw the auditors in without a smoking gun or, actually, a rogue mechanical pencil. Even with a top notch bankruptcy examiner’s report – I’m talking Refco here – it’s not easy.

July 11, 2007, Bloomberg

Refco Inc.’s tax accountant, Ernst & Young, and a company law firm may have helped the defunct futures trader defraud investors, according to an examiner’s report unsealed today.

Ernst & Young, the second-biggest U.S. accounting firm, and Mayer Brown Rowe & Maw, a Chicago-based law firm, might face claims by Refco for aiding and abetting the fraud, examiner Joshua Hochberg said in a report filed in U.S. Bankruptcy Court in New York. Grant Thornton, the sixth biggest U.S. accounting firm, might face claims of professional negligence for work it did before Refco’s bankruptcy, Hochberg said.

Contrast that seemingly slam-dunk assessment with this report on August 22, 2009:

Two accounting firms and a law firm won dismissal of a lawsuit on behalf of former Refco Inc currency trading customers who lost more than $500 million when the defunct futures and commodities broker went bankrupt.

U.S. District Judge Gerard Lynch on Tuesday said Marc Kirschner, a trustee representing the customers, failed to show that Ernst & Young LLP [ERNY.UL], Grant Thornton LLP and the law firm Mayer Brown LLP knew of or substantially assisted in the fraudulent diversion of assets that led to Refco’s demise.

The Manhattan federal judge, however, gave permission for Kirschner to file a new complaint. Citing the trustee’s access to a “substantial trove” of Refco documents, Lynch said: “It is far from clear that repleading would be futile.”

In his 35-page opinion, Lynch said Grant Thornton’s work gave it “a complete picture of how Refco and the Refco fraud, functioned.”

He also said Mayer Brown “actively participated in carrying out Refco’s fraudulent misstatement of its financial position,” while Ernst performed to work for Refco “despite apprehending the scope of the fraud.”

Judges, even while granting motions to dismiss, have more than once bemoaned the fact that the law does not allow them to act differently. In case after case, the judges are forced to let culpable third-party actors in these frauds off the hook.

Continued in article

Bob Jensen's threads on auditing firm litigation woes ---
http://www.trinity.edu/rjensen/fraud001.htm

Bob Jensen's threads on professionalism and independence in auditing --- a
http://www.trinity.edu/rjensen/fraud001.htm#Professionalism

"A Missed Opportunity on Financial Reform: How could Fannie Mae and Freddie Mac have escaped Congress's attention?" by Walter Levitt, The Wall Street Journal, June 24, 2010 ---
http://online.wsj.com/article/SB10001424052748704853404575322491510468572.html#mod=djemEditorialPage_t

As a lifelong Democrat and public servant to four presidents, I had hoped the financial reform bill would be the best example of my party's long-standing reputation for standing on the side of individual investors.

It's not. The bill, already weakened by deal-making as it emerged from the Senate, has been bled dry of nearly every meaningful protection of investors.

Ironically, the authors of this bill are the same Democrats who normally would have opposed many of its features if they were in the minority. Now in the majority, these politicians are investor advocates in their press releases alone.

The Democrats had the chance to do this bill the right way. They should have been motivated by Congress's previous failure to adopt meaningful reform, which left investors unprepared for the crisis. And they had the input of talented leaders and experts who attempted to help lawmakers deal with systemic risk and gaps in basic investor protections.

Whatever these positive contributions, Congress more than overwhelmed them with sins of commission and sins of omission. One of many bad ideas that made it into the bill: Public companies will now have a wider loophole to avoid doing internal audits investors can trust. This requirement was the most important pro-investor reform of the last decade, and it worked. Of the 522 U.S. financial restatements in 2009, 374 were at small firms not subject to auditor reviews.

But the reform bill about to be passed expands the number of small companies exempt from Sarbanes-Oxley audit requirements. When fraud is happening at a public company, small or large, investors care. Now, thanks to Democratic leadership, investors are less likely to know.

There are many missed opportunities in this bill, but these are the biggest:

First, Democratic leaders in Congress failed to revoke the 1975 law that prevents municipal bond issuers from facing the kind of regulation and scrutiny of the corporate bond market. If the municipal bond market melts down in the next few years, we'll know who to blame.

Second, they failed to pass a meaningful majority-vote or proxy access rule for corporate ballots. Instead, thanks to Sen. Chris Dodd (D., Conn.), the Senate passed a proxy access rule that is comically useless: You need 5% of shares to get on the proxy. Very rarely do investors assemble such large stakes in any company.

Third, New York Sen. Chuck Schumer's wise idea to let the Securities and Exchange Commission (SEC) become a self-funded agency will likely be killed by appropriators who are unwilling to give up the power of the purse.

Fourth, Democratic leaders left in place the confusing dual regulatory structure of the SEC and the Commodity Futures Trading Commission. A merger was necessary to eliminate regulatory arbitrage and corrosive bureaucratic turf battles, yet it didn't happen.

Fifth, Senate Democrats failed to support Rep. Barney Frank's (D., Mass.) effort to pass a new law to overcome the legal precedent of the 2008 Supreme Court's Stoneridge decision, which allows third-party consultants, accountants and other abettors of fraud to avoid liability. Again, another sellout of investor interests.

Sixth, Congress didn't deal with the massive problems of Fannie Mae and Freddie Mac. It's one thing to fail to see trouble before it happens. Now, there's no excuse. The central role played by these two organizations in the financial crisis is indisputable. Congress had a chance to fully restrict these agencies from anything but the most basic market-making activities, and it didn't.

Finally, Democrats could have proposed a law obligating investment advisers to serve their clients' interests above all others. That was in the House version of the bill, but the Senate punted the idea, and it's is likely to end up kicked down the road even further.

The sad reality is that we may not have a chance to enact these kinds of reforms until after the next major financial crisis. For those of us who champion the rights of investors, that's too long to wait—especially since until very recently we didn't think we would have to.

Mr. Levitt, chairman of the Securities and Exchange Commission from 1993 to 2001, now serves as an adviser to the Carlyle Group and Goldman Sachs.

Bob Jensen's threads on Freddie and Fannie are at
http://www.trinity.edu/rjensen/2008Bailout.htm

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

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

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

The Largest Earnings Management Fraud in History and Congressional Efforts to Cover it Up

Without trying to place the blame on Democrats or Republicans, here are some of the facts that led to the eventual fining of Fannie Mae executives for accounting fraud and the firing of KPMG as the auditor on one of the largest and most lucrative audit clients in the history of KPMG. The restated earnings purportedly took upwards of a million journal entries, many of which were re-valuations of derivatives being manipulated by Fannie Mae accountants and auditors (Deloitte was charged with overseeing the financial statement revisions.

Fannie Mae may have conducted the largest earnings management scheme in the history of accounting.

You can read the following at http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm

. . . flexibility also gave Fannie the ability to manipulate earnings to hit -- within pennies -- target numbers for executive bonuses. Ofheo details an example from 1998, the year the Russian financial crisis sent interest rates tumbling. Lower rates caused a lot of mortgage holders to prepay their existing home mortgages. And Fannie was suddenly facing an estimated expense of $400 million.

Well, in its wisdom, Fannie decided to recognize only $200 million, deferring the other half. That allowed Fannie's executives -- whose bonus plan is linked to earnings-per-share -- to meet the target for maximum bonus payouts. The target EPS for maximum payout was $3.23 and Fannie reported exactly . . . $3.2309. This bull's-eye was worth $1.932 million to then-CEO James Johnson, $1.19 million to then-CEO-designate Franklin Raines, and $779,625 to then-Vice Chairman Jamie Gorelick.

That same year Fannie installed software that allowed management to produce multiple scenarios under different assumptions that, according to a Fannie executive, "strengthens the earnings management that is necessary when dealing with a volatile book of business." Over the years, Fannie designed and added software that allowed it to assess the impact of recognizing income or expense on securities and loans. This practice fits with a Fannie corporate culture that the report says considered volatility "artificial" and measures of precision "spurious."

This disturbing culture was apparent in Fannie's manipulation of its derivative accounting. Fannie runs a giant derivative book in an attempt to hedge its massive exposure to interest-rate risk. Derivatives must be marked-to-market, carried on the balance sheet at fair value. The problem is that changes in fair-value can cause some nasty volatility in earnings.

So, Fannie decided to classify a huge amount of its derivatives as hedging transactions, thereby avoiding any impact on earnings. (And we mean huge: In December 2003, Fan's derivatives had a notional value of $1.04 trillion of which only a notional $43 million was not classified in hedging relationships.) This misapplication continued when Fannie closed out positions. The company did not record the fair-value changes in earnings, but only in Accumulated Other Comprehensive Income (AOCI) where losses can be amortized over a long period.

Fannie had some $12.2 billion in deferred losses in the AOCI balance at year-end 2003. If this amount must be reclassified into retained earnings, it might punish Fannie's earnings for various periods over the past three years, leaving its capital well below what is required by regulators.

In all, the Ofheo report notes, "The misapplications of GAAP are not limited occurrences, but appear to be pervasive . . . [and] raise serious doubts as to the validity of previously reported financial results, as well as adequacy of regulatory capital, management supervision and overall safety and soundness. . . ." In an agreement reached with Ofheo last week, Fannie promised to change the methods involved in both the cookie-jar and derivative accounting and to change its compensation "to avoid any inappropriate incentives."

But we don't think this goes nearly far enough for a company whose executives have for years derided anyone who raised a doubt about either its accounting or its growing risk profile. At a minimum these executives are not the sort anyone would want running the U.S. Treasury under John Kerry. With the Justice Department already starting a criminal probe, we find it hard to comprehend that the Fannie board still believes that investors can trust its management team.

Fannie Mae isn't an ordinary company and this isn't a run-of-the-mill accounting scandal. The U.S. government had no financial stake in the failure of Enron or WorldCom. But because of Fannie's implicit subsidy from the federal government, taxpayers are on the hook if its capital cushion is insufficient to absorb big losses. Private profit, public risk. That's quite a confidence game -- and it's time to call it.

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

:"Sometimes the Wrong 'Notion': Lender Fannie Mae Used A Too-Simple Standard For Its Complex Portfolio," by Michael MacKenzie, The Wall Street Journal, October 5, 2004, Page C3

Lender Fannie Mae Used A Too-Simple Standard For Its Complex Portfolio

What exactly did Fannie Mae do wrong?

Much has been made of the accounting improprieties alleged by Fannie's regulator, the Office of Federal Housing Enterprise Oversight.

Some investors may even be aware the matter centers on the mortgage giant's $1 trillion "notional" portfolio of derivatives -- notional being the Wall Street way of saying that that is how much those options and other derivatives are worth on paper.

But understanding exactly what is supposed to be wrong with Fannie's handling of these instruments takes some doing. Herewith, an effort to touch on what's what -- a notion of the problems with that notional amount, if you will.

Ofheo alleges that, in order to keep its earnings steady, Fannie used the wrong accounting standards for these derivatives, classifying them under complex (to put it mildly) requirements laid out by the Financial Accounting Standards Board's rule 133, or FAS 133.

For most companies using derivatives, FAS 133 has clear advantages, helping to smooth out reported income. However, accounting experts say FAS 133 works best for companies that follow relatively simple hedging programs, whereas Fannie Mae's huge cash needs and giant portfolio requires constant fine-tuning as market rates change.

A Fannie spokesman last week declined to comment on the issue of hedge accounting for derivatives, but Fannie Mae has maintained that it uses derivatives to manage its balance sheet of debt and mortgage assets and doesn't take outright speculative positions. It also uses swaps -- derivatives that generally are agreements to exchange fixed- and floating-rate payments -- to protect its mortgage assets against large swings in rates.

Under FAS 133, if a swap is being used to hedge risk against another item on the balance sheet, special hedge accounting is applied to any gains and losses that result from the use of the swap. Within the application of this accounting there are two separate classifications: fair-value hedges and cash-flow hedges.

Fannie's fair-value hedges generally aim to get fixed-rate payments by agreeing to pay a counterparty floating interest rates, the idea being to offset the risk of homeowners refinancing their mortgages for lower rates. Any gain or loss, along with that of the asset or liability being hedged, is supposed to go straight into earnings as income. In other words, if the swap loses money but is being applied against a mortgage that has risen in value, the gain and loss cancel each other out, which actually smoothes the company's income.

Cash-flow hedges, on the other hand, generally involve Fannie entering an agreement to pay fixed rates in order to get floating-rates. The profit or loss on these hedges don't immediately flow to earnings. Instead, they go into the balance sheet under a line called accumulated other comprehensive income, or AOCI, and are allocated into earnings over time, a process known as amortization.

Ofheo claims that instead of terminating swaps and amortizing gains and losses over the life of the original asset or liability that the swap was used to hedge, Fannie Mae had been entering swap transactions that offset each other and keeping both the swaps under the hedge classifications. That was a no-go, the regulator says.

"The major risk facing Fannie is that by tainting a certain portion of the portfolio with redesignations and improper documentation, it may well lose hedge accounting for the whole derivatives portfolio," said Gerald Lucas, a bond strategist at Banc of America Securities in New York.

The bottom line is that both the FASB and the IASB must someday soon take another look at how the real world hedges portfolios rather than individual securities. The problem is complex, but the problem has come to roost in Fannie Mae's $1 trillion in hedging contracts. How the SEC acts may well override the FASB. How the SEC acts may be a vindication or a damnation for Fannie Mae and Fannie's auditor KPMG who let Fannie violate the rules of IAS 133.

Question
How many of you recall the infamous Footnote 16 testimony of C.E. Andrews in the Senate hearings when Andersen was near but not quite over the cliff?

"McGladrey Reorganizes, Celebrates New Logo With Monster Cake," by Susan Black, Big Four Blog, June 24, 2010 ---
http://bigfouralumni.blogspot.com/2010/06/mcgladrey-reorganizes-celebrates-new.html

RSM McGladrey (tax and consulting) and partner firm McGladrey & Pullen (assurance) recently decided to go to market under the "McGladrey" brand. Combined, the firms are fifth-largest U.S. firm with revenues of $1.5 billion, 7,000 professionals in nearly 90 offices. Also, the firms recently realigned to focus on national lines of business and industry. Both firms are members of RSM International, the sixth largest global network in the world, and operate as separate legal entities in an alternative practice structure

We wonder if this is the influence of C.E. Andrews, who took over last year 2009 as president and chief operating officer of RSM McGladrey. C.E. Andrews was almost 30 years at Andersen; most recently as head of Audit. And Andersen did shorten its prior name of Arthur Andersen and changed its logo from the double doors to the orange sun.

Continued in article

When C.E. Andrews Fumbled a Footnote
Flashback to Year 2002 --- http://www.trinity.edu/rjensen/FraudEnron.htm#Senator

A Senator Complains to C.E. Andrews, the Head of Auditing at Andersen, About Enron's Related Party Disclosure in Enron's Year 2000 Annual Report

SEN. DORGAN: Should it raise a red flag for an auditor if the chief financial officer of a company is personally involved in complex financial transactions in their own firm? This was the case with Mr. Fastow who had a personal stake, as I understand it, in the success of these SPEs and was compensated in that matter. Should that concern an auditor and did it concern Andersen?

MR. ANDREWS: Senator, as it pertains to related party transactions, again, the accounting and disclosure rules require that related party transactions be reviewed and disclosed where there would be material on financial statements and, in this case, that related party transaction was disclosed in the footnotes to the Enron financial statements.

SEN. DORGAN: Do you have those footnotes with you?

MR. ANDREWS: Chairman, I do not.

SEN. DORGAN: The reason I ask is I've read some of those footnotes and I think it would have been impossible for even the most experienced analyst to understand what those footnotes meant, and that is of concern.

The exchange above is quoted from http://www.c-span.org/enron/scomm_1218.asp#open

The footnote being referred to above is Footnote 16 from the Year 2000 Annual Report that can be downloaded from http://www.enron.com/corp/investors/annuals/2000/ar2000.pdf

I have reproduced Footnote 16 below. Who do you think is correct with respect to the related-party disclosure adequacy in the disputed Footnote 16 --- C.E. Andrews or Senator Dorgan?

Do the related party disclosures in the footnote below add value to you when analyzing risk? Does this tell you that Enron's CFO made over $30 million from his limited partnership that entered into derivatives for Enron?

Footnote 16 from the Year 2000 Enron Annual Report
http://www.enron.com/corp/investors/annuals/2000/ar2000.pdf
16. RELATED PARTY TRANSACTIONS In 2000 and 1999, Enron entered into transactions with limited partnerships (the Related Party) whose general partner's managing member is a senior office of Enron. The limited partners of the Related Party are unrelated to Enron. Management believes that the terms of the transactions with the Related Party were reasonable compared to those which could have been negotiated with unrelated third parties. In 2000, Enron entered into transactions with the Related Party to hedge certain merchant investments and other assets. As part of the transactions, Enron (i) contributed to newly-formed entities (the Entities) assets valued at approximately $1.2 billion, including $150 million in Enron notes payable, 3.7 million restricted shares of outstanding Enron common stock and the right to receive up to 18.0 million shares of outstanding Enron common stock in March 2003 (subject to certain conditions) and (ii) transferred to the Entities assets valued at approximately $309 million, including a $50 million note payable and an investment in an entity that indirectly holds warrants convertible into common stock of an Enron equity method investee. In return, Enron received economic interests in the Entities, $309 million in notes receivable, of which $259 million is recorded at Enron's carryover basis of zero, and a special distribution from the Entities in the form of $1.2 billion in notes receivable, subject to changes in the principal for amounts payable by Enron in connection with the execution of additional derivative instruments. Cash in these Entities of $172.6 million is invested in Enron demand notes. In addition, Enron paid $123 million to purchase share-settled options from the Entities on 21.7 million shares of Enron common stock. The Entities paid Enron $10.7 million to terminate the share-settled options on 14.6 million shares of Enron common stock outstanding. In late 2000, Enron entered into share-settled collar arrangements with the Entities on 15.4 million shares of Enron common stock. Such arrangements will be accounted for as equity transactions when settled. In 2000, Enron entered in derivative transactions with the Entities with a combined notional amount of approximately $2.1 billion to hedge certain merchant investments and other assets. Enron's notes receivable balance was reduced by $36 million as a result of premiums owed on derivative transactions. Enron recognized revenues of approximately $500 million related to the subsequent change in the market value of these derivatives, which offset market value changes of certain merchant investments and price risk management activities. In addition, Enron recognized $44.5 million and $14.1 million of interest income and interest expense, respectively, on the notes receivable from and payable to the Entities. In 1999, Enron entered into a series of transactions involving a third party and the Related Party. The effect of the transactions was (i) Enron and the third party amended certain forward contracts to purchase shares of Enron common stock, resulting in Enron having forward contracts to purchase Enron common shares at the market price on that day, (ii) the Related Party received 6.8 million shares of Enron common stock subject to certain restrictions and (iii) Enron received a note receivable, which was repaid in December 1999, and certain financial instruments hedging an investment held by Enron. Enron recorded the assets received and equity issued at estimated fair value. In connection with the transactions, the Related Party agreed that the senior officer of Enron would have no pecuniary interest in such Enron common shares and would be restricted from voting on matters related to such shares. In 2000, Enron and the Related Party entered into an agreement to terminate certain financial instruments that had been entered into during 1999. In connection with this agreement, Enron received approximately 3.1 million shares of Enron common stock held by the Related Party. A put option, which was originally entered into in the first quarter of 2000 and gave the Related Party the right to sell shares of Enron common stock to Enron at a strike price of $71.31 per share, was terminated under this agreement. In return, Enron paid approximately $26.8 million to the Related Party. In 2000, Enron sold a portion of its dark fiber inventory to the Related Party in exchange for $30 million cash and a $70 million note receivable that was subsequently repaid. Enron recognized gross margin of $67 million on the sale. In 2000, the Related Party acquired, through securitizations, approximately $35 million of merchant investments from Enron. In addition, Enron and the Related Party formed partnerships in which Enron contributed cash and assets and the Related Party contributed $17.5 million in cash. Subsequently, Enron sold a portion of its interest in the partnership through securitizations. See Note 3. Also Enron contributed a put option to a trust in which the Related Party and Whitewing hold equity and debt interests. At December 31, 2000, the fair value of the put option was a $36 million loss to Enron. In 1999, the Related Party acquired approximately $371 million of merchant assets and investments and other assets from Enron. Enron recognized pre-tax gains of approximately $16 million related to these transactions. The Related Party also entered into an agreement to acquire Enron's interests in an unconsolidated equity affiliate for approximately $34 million.

Footnote 16 Analysis by Frank Partnoy
Testimony of Frank Partnoy Professor of Law, University of San Diego School of Law Hearings before the United States Senate Committee on Governmental Affairs, January 24, 2002 --- http://www.senate.gov/~gov_affairs/012402partnoy.htm Part C of the Testimony C. Using Derivatives to Inflate the Value of Troubled Businesses A third example is even more troubling. It appears that Enron inflated the value of certain assets it held by selling a small portion of those assets to a special purpose entity at an inflated price, and then revaluing the lion’s share of those assets it still held at that higher price. Consider the following sentence disclosed from the infamous footnote 16 of Enron’s 2000 annual report, on page 49: “In 2000, Enron sold a portion of its dark fiber inventory to the Related Party in exchange for $30 million cash and a $70 million note receivable that was subsequently repaid. Enron recognized gross margin of $67 million on the sale.” What does this sentence mean? It is possible to understand the sentence today, but only after reading a January 7, 2002, article about the sale by Daniel Fisher of Forbes magazine, together with an August 2001 memorandum describing the transaction (and others) from one Enron employee, Sherron Watkins, to Enron Chairman Kenneth Lay. Here is my best understanding of what this sentence means: First, the “Related Party” is LJM2, an Enron partnership run by Enron’s Chief Financial Officer, Andrew Fastow. (Fastow reportedly received $30 million from the LJM1 and LJM2 partnerships pursuant to compensation arrangements Enron’s board of directors approved.) Second, “dark fiber” refers to a type of bandwidth Enron traded as part of its broadband business. In this business, Enron traded the right to transmit data through various fiber-optic cables, more than 40 million miles of which various Internet-related companies had installed in the United States. Only a small percentage of these cables were “lit” – meaning they could transmit the light waves required to carry Internet data; the vast majority of cables were still awaiting upgrades and were “dark.” The rights associated with those “dark” cables were called “dark fiber.” As one might expect, the rights to transmit over “dark fiber” are very difficult to value. Third, Enron sold “dark fiber” it apparently valued at only $33 million for triple that value: $100 million in all – $30 million in cash plus $70 million in a note receivable. It appears that this sale was at an inflated price, thereby enabling Enron to record a $67 million profit on that trade. LJM2 apparently obtained cash from investors by issuing securities and used some of these proceeds to repay the note receivable issued to Enron. What the sentence in footnote 16 does not make plain is that the investor in LJM2 was persuaded to pay what appears to be an inflated price, because Enron entered into a “make whole” derivatives contract with LJM2 (of the same type it used with Raptor). Essentially, the investor was buying Enron’s debt. The investor was willing to buy securities in LJM2, because if the “dark fiber” declined in price – as it almost certainly would, from its inflated value – Enron would make the investor whole. In these transactions, Enron retained the economic risk associated with the “dark fiber.” Yet as the value of “dark fiber” plunged during 2000, Enron nevertheless was able to record a gain on its sale, and avoid recognizing any losses on assets held by LJM2, which was an unconsolidated affiliate of Enron, just like JEDI. As if all of this were not complicated enough, Enron’s sale of “dark fiber” to LJM2 also magically generated an inflated price, which Enron then could use in valuing any remaining “dark fiber” it held. The third-party investor in LJM2 had, in a sense, “validated” the value of the “dark fiber” at the higher price, and Enron then arguably could use that inflated price in valuing other “dark fiber” assets it held. I do not have any direct knowledge of this, although public reports and Sherron Watkins’s letter indicate that this is precisely what happened. For example, suppose Enron started with ten units of “dark fiber,” worth $100, and sold one to a special purpose entity for $20 – double its actual value – using the above scheme. Now, Enron had an argument that each of its remaining nine units of “dark fiber” also were worth $20 each, for a total of $180. Enron then could revalue its remaining nine units of “dark fiber” at a total of $180. If the assets used in the transaction were difficult to value – as “dark fiber” clearly was – Enron’s inflated valuation might not generate much suspicion, at least initially. But ultimately the valuations would be indefensible, and Enron would need to recognize the associated losses. It is an open question for this Committee and others whether this transaction was unique, or whether Enron engaged in other, similar deals. It seems likely that the “dark fiber” deal was not the only one of its kind. There are many sentences in footnote 16.

Bob Jensen's threads on the fall of Andersen, Enron, and WorldCom ---
http://www.trinity.edu/rjensen/FraudEnron.htm

"Auditors Under Fire. In The UK. That Is All," by Francine McKenna, re: TheAuditors, June 7, 2010 ---
http://retheauditors.com/2010/06/07/auditors-under-fire-in-the-uk-that-is-all/

It seems as if the British are paying attention more closely to the audit industry and their complicity in the financial crisis and other failures than the media, legislators and regulators in the US.

Well… there was that blip of interest when the Lehman Bankruptcy Examiner called out Ernst & Young for their malpractice in that colossal failure.

But the stories mentioning Ernst & Young have mostly stopped for now. There were a few floating into my inbox the last few days mentioning EY’s request for a motion to dismiss in some Lehman litigation. Let’s hope there’s no judge in New York who wants to be known as the one who let EY or anyone else involved in that mess off the hook too early and too easily.

It’s not surprising to me that the dialogue about auditor failure along with others in the crisis is loudest in the UK. It was the British – Prem Sikka, Richard Murphy and Dennis Howlett – who first took notice of what I was writing here, three years ago, before anyone else. They were so surprised to find someone in the US who was free to write so so critically.

“In a separate statement, the [Accountant's Joint Disciplinary Scheme] said the case also gave rise to concerns about the dominance of the Big Four accountancy firms.

The JDS said it had found it difficult to get any expert evidence for its investigation because specialists were confined “almost exclusively” to the Big Four, and because of conflicts of interest, these were unable to comment.”

It is a dialogue. The audit firm leadership in the UK actually talk back and speak their mind. In their own voice, it seems. Sometimes to comic effect.

There are so many corks popping the UK, hitting them in the eyes, audit firm leadership is actually trying to preempt. They’re shaking in their £1000 bespoke leather slip-ons.

Well, not really.

Maybe their bottom lips are quivering a bit in quiet indignation.

Mr Powell, 54, also has plans to continue to grow the business, in particular to double the revenues of the [PwC] consultancy practice against a backdrop of scything cuts in UK and European government spending.

The response of the affable and youthful-looking Mr Powell to this mounting in-tray is softly spoken and mostly diplomatic, although there are flashes of steel, as perhaps expected from the boss of a firm which counts 90 per cent of the FTSE 100 as its clients in one capacity or another across audit, tax and consulting.

He tells the Financial Times in an interview in his offices overlooking the River Thames that it is “time to turn up the heat in the organisation”.

However, on regulatory inquiries he wants a debate. First with Vince Cable, the business secretary, about changing “ground rules” for auditors and then with investors and regulators about the desire for more subjectivity in the audit report.

In what context were the “affable and youthful-looking” Mr. Powell’s comments made, whilst sipping tea in his “offices overlooking the River Thames” ? PwC is being skewered in the UK press over its complete and utter lack of competence in the JP Morgan “billions in client funds in the wrong accounts” debacle.

Didn’t hear about it? It’s a British thing.

Mr Powell’s comments come as PwC’s audit practice may face a separate inquiry by the Financial Reporting Council, which oversees auditors, after the Financial Services Authority last week revealed the firm had failed over a seven-year period to spot that JPMorgan had accidentally placed as much as $23bn (£16bn) of client funds into the wrong bank accounts. PwC has declined to comment.

His comments also follow government plans to cut public sector spending on consulting services, an area that contributes up to 40 per cent of PwC’s £450m consulting and advisory business. PwC aims to at least double revenues and staff in its consulting business in the next five years, and has seen “well into double-digit” growth in its UK consulting practice in the past 11 months, Mr Powell said.

Big Four efforts to aggressively expand their consulting practices have attracted some controversy, as they had scaled them back after the Enron crisis amid concerns it could affect the independence of their audit reports.

Indeed. I must say old chap… Getting a little squidgy for you?

Remember, PwC is not only long time auditor for JP Morgan Chase but also Bank of America, AIG, Freddie Mac, Northern Rock, Goldman Sachs and several Madoff feeder funds. And don’t ever forget Glitnir and Satyam.

How’s that for an all-star lineup of litigation?

Ernst and Young, for its part, had a long, protracted and quite embarrassing run with the Equitable Life litigation. But as that immortal Brit once said, “All’s well that ends well.”

Ernst & Young’s statement about the official disciplinary investigation into its role in the Equitable Life affair may well lead the casual reader to think it had come away triumphant…It was still fined £500,000 with costs of £2.4m. But it now crows that the most serious allegations – that it lacked objectivity and independence – have been thrown out. The firm also comments that the appeal tribunal took the view that Equitable and E&Y were right to think it “very unlikely” the insurer would lose the court case, and that there was no requirement to disclose a “remote contingency”…It is true that the disaster at Equitable was primarily the doing of its former executives, and that auditors cannot be expected to discover all management folly and incompetence. But shouldn’t any audit firm worth its salt be embarrassed by failing to spot a scandal of this magnitude?

Ernst & Young apologized to the policy holders. Apologized. It’s all behind us now. The audit partner in question has since retired. Just like Bally’s.

Ease of abdication of responsibility by the firms is the lamentable downside of proceedings that take forever and a day to conclude.

In a statement, Ernst & Young said: “Any lessons from our audit of Equitable have long been learned and embedded in our audit systems and procedures. We extend our sympathies to the policyholders of Equitable Life, who have been impacted by the near-collapse of the society, following events which lay well outside of our control and the remit of our role as auditor.”

This fine was handy pocket change for EY and nothing compared to what they face potentially in the Lehman litigation. It’s only unfortunate for EY it lasted so long and cost them so much in solicitor fees.

So why hasn’t the same contained outrage over the auditors role in the crisis and other failures crossed lips like spittle in the US? Why hasn’t Congress demanded EY or one of the others testify over their role in the crisis? Why hasn’t mainstream media stayed on the story and written about the pile of steaming lawsuits suffocating each and every one of the Big 4 audit firms in the US?

Will the media, regulators and legislators wait until the New Century v. KPMG case finally comes to trial? I’d better brace myself for the calls from newbie journalists all over again.

Or maybe we’ll putter along with updates as Satyam, Glitnir, Lehman, Anglo Irish and others play out in the New York courts.

The Deloitte SAP case in Marin County is pretty sexy. Michael Krigsman rightly calls it a game changer for systems integrators. Who dares to call a spade and spade and accuse a Big 4 of fraud for the bait and switch which is putting junior folks on a big SAP engagement when you promised experienced ones?

Municipalities hungry for cash, that’s who.

Continued at http://retheauditors.com/2010/06/07/auditors-under-fire-in-the-uk-that-is-all/

June 7, 2010 reply from Robert Bruce Walker [walkerrb@ACTRIX.CO.NZ]

Here is Accountancy’s report on the JP Morgan client accounting fiasco. You will see that PwC was actually engaged to provide some sort of specific certification in that respect. Whilst trust account auditing can be tricky, you don’t need to be an audit ‘expert’ to track GBP 16 billion. A few simple tracing tests ought to do it.

"PwC in potential inquiry over client money breach: FSA fines JP Morgan record £33m," by Pat Sweet

PricewaterhouseCoopers could face an inquiry by accounting regulators over its repeated certification that JP Morgan Securities Ltd (JPMSL) kept clients' funds separate from its own - a certification which is now in contention after the bank was discovered to have breached the rules.

The role of PwC - also the bank's auditors - in the certification of how the investment bank handled client funds is now under scrutiny, following a record £33.3m fine on the bank by the Financial Services Authority, which discovered that JPMSL had mixed its own funds with those of clients.

Under the FSA’s client money rules, firms are required to keep client money separate from the firm's money in segregated accounts with trust status. This helps to protect client money in the event of the firm's insolvency.

The FSA fined JPMSL after it found to have mixed client funds with its own cash over a seven year period. Up to £16bn of clients’ money went into the wrong bank accounts.

The FSA plans to pass on the details of its investigation to both the Financial Reporting Council and the ICAEW, which will then determine whether any further action is necessary, according to the Times.

In addition to serving as principal auditor, PwC was retained by JP Morgan Securities Limited to produce an annual client asset returns report, to confirm that customers’ funds were being effectively ring-fenced and therefore protected in the event of the bank’s collapse.

However, PwC signed off the client report even though JP Morgan was in breach of the rules.

The money at risk in this case consisted of funds held by customers of JPMSL's futures and options business — a sum that varied from £1.3bn to £15.7bn between 2002 and July 2009, when the breach came to light.

PwC has declined to comment.

Jensen Comment
One of the most consistent advocates of the “insurance” alternative is Josh Ronen at NYU --- http://pages.stern.nyu.edu/~jronen/

Financial Statements Insurance ---
http://pages.stern.nyu.edu/~jronen/articles/December_final_Version.pdf

A proposed corporate governance reform: Financial statements insurance ---
http://pages.stern.nyu.edu/~jronen/articles/Journal_of_Engineering.pdf

Financial Statements Insurance Enhances Corporate Governance in a Sarbanes-Oxley Environment ---
http://pages.stern.nyu.edu/~jronen/articles/FSI_enhances_int.pdf

Financial Statements Insurance ---
http://pages.stern.nyu.edu/~jronen/articles/Forensic_Accounting.pdf

Other papers listed at
http://pages.stern.nyu.edu/~jronen/

"Video: Ernst & Young Fined Over Equitable Life," by Emma Hunt, Accountancy Age, June 11, 2010 --- http://www.accountancyage.com/accountancyage/video/2264616/video-ernst-young-fined

Bob Jensen's threads on Ernst & Young are at
http://www.trinity.edu/rjensen/Fraud001.htm

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

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

Bob Jensen's threads on auditing professionalism and independence are at
http://www.trinity.edu/rjensen/Fraud001.htm#Professionalism

From: The Summa [mailto:no-reply@wordpress.com]
Sent: Saturday, June 26, 2010 1:14 AM
To: Jensen, Robert
Subject: [New comment] Economic Consequences and the Political Nature of Accounting Standard Setting

Tammy Buck added a new comment to the post Economic Consequences and the Political Nature of Accounting Standard Setting.
http://profalbrecht.wordpress.com/2010/01/06/economic-consequences-and-the-political-nature-of-accounting-standard-setting/comment-page-3/

Tammy Buck said on Economic Consequences and the Political Nature of Accounting Standard Setting June 3, 2010 at 5:19 pm Prof Albrecht – Thanks for the thought provoking article! I would like to point out that your statement – “First, financial statements are intended to provide information to investors for making investment decisions.” – is itself a value judgment of what accounting standards/financial statements are & ought to do. If this is “true” (or rather, more desirable), then certain accounting standards ought to be chosen over others. But if isn’t desirable (maybe financial statements have another purpose?), then conservatively biased standards might not be appropriate. Who decides this focus? Investors, professors, the SEC, FASB, Fortune 500 firms? Maybe it’s the open process of democratic process. So of course accounting standards aren’t pure theoretical truth. But shouldn’t some independence be desirable? Should (there I go with a value judgment!) the FASB be independent from both the Big 4 & the big public companies? Do you really want Goldman Sachs having a significant influence over GAAP (for instance)? Just some questions. Maybe I just think accounting standard setter independence sounds theoretically better, but my position is naive.

thanks,
Tammy Buck

Jensen Comment
I think independence is a goal we should strive for in standard setting, and I think that making FASB members sever their previous financial ties with employers is probably a good but overrated idea. One cannot so easily sever relationships with former employers, colleagues, and friends. I was more disturbed by the reduction of the FASB’s numbers of members such that biased board members have much more clout. There’s a certain amount of democratic strength in numbers on the IASB. If the FASB was not self destructing I would work much harder to plug for a larger FASB.

Having said this, I will now give you my subjective opinion on the number one cause of new or revised standards/interpretations that add great complexity to accounting rules. The number one cause is the creative effort that clients use to circumvent the spirit and intent of accounting “rules” and “guidelines.”

One needs only to look carefully at the contracts being written to find clues about efforts to deceive. When companies (like Avis, Safeway, and all the airlines) were forming unconsolidated lease holding subsidiaries to hide enormous amounts of capital lease debt from their consolidated balance sheets, the FASB rewrote the consolidation rules. In the 1980s when companies were keeping increasing amounts (trillions) of derivative financial instruments debt off the books (interest rate swaps were not even disclosed let alone booked), the FASB was forced to write FAS 119, 133, and all the ensuing amending standards and complicated DIG interpretations. When Andy Fastow, with the help of Andersen consultants, invented ways to keep over a billion dollars worth of debt off Enron’s books using over 3,000 SPEs, the FASB rewrote more complicated rules for SPEs.

More recently Lehman Bros. took advantage of a loophole in the spirit of FAS 140 that allowed Lehman to mask debt with repo sales rules that have always been inane in my viewpoint. Belatedly, Lehman’s debt masking is leading to new rules about repo accounting “sales” that are deceptive and not really sales at all.

And, like Francine, I don’t trust the dependency of auditors on the CEOs and CFOs of their largest clients. Just as Andersen auditors caved in to Enron’s proposed deceptions, I think E&Y auditors caved in to Lehman’s proposed deceptions. As Tom Selling stated, “the audit (financing) model is broken.” However, unlike Francine, I firmly believe that public sector auditing would exacerbate the problem. Hence I view the “independence problem” as being much more critical with audit firms than with standard setters.

For audit firms, the long-run answer might be the replacement of assurance with insurance, although there are many unresolved questions about insurance in this context.

For standard setters, the long-run answer might be more research funding, larger boards, faster turnover of board members, and more serious lobbying rules.

Hence my conclusion is that the never-ending efforts of some clients to deceive investors is the primary instigator of complicated new standards and interpretations. Perhaps that’s as it should be. I’m not in favor of watering down complicated standards on the naïve assumption that auditors will one day get tougher, on “principle,” with the hosts that feed them. And I think that today’s database technology is up to the task of auditing with complicated standards and interpretations.

Perhaps the DIG should be expanded to a SIG for helping auditors and clients with questions about any standard in problematic circumstances. One thing that really continues to bother me, however, is how Ken Lay manipulated the SEC into a ruling that officially allowed Enron to embark on some of Enron’s most deceptive accounting. Can a DIG or a SIG be similarly manipulated by big corporations?

The FASB and IASB processes of setting standards are far from perfect, but perhaps you’re too young to remember the really bad old days of the ARB, APB, and IASC --- historic standard setters that ducked controversial issues opposed by audit clients and issued rulings only about milk toast issues.

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

Bob Jensen's threads on auditing independence and professionalism are at
http://www.trinity.edu/rjensen/Fraud001.htm#Professionalism

"KPMG chief calls for audit reform," by Mario Christodoulou, Accountancy Age, June 18, 2010 ---
|http://www.financialdirector.co.uk/accountancyage/news/2264982/kpmg-chief-calls-audit-reform
Thank you to David Albrecht for the heads up.

KPMG’s senior partner has added his voice to growing calls for reform to audit in the wake of the crisis.

In a speech at the ICAEW on Wednesday John Griffith-Jones he said it is was time for “really bold thinking” about the future of audit.

He suggested auditors might work “collaboratively” with regulators and rating agencies, along with boards and management to discuss risk.

“What is the point, they and others ask, of doing extensive and increasingly elaborate audits of the financial accounts of our banks, when audits failed to identify the huge and systemic risks which led to the near collapse of the Global banking system in the Autumn of 2008?” he said.

“It is a straightforward question; It deserves a straightforward answer.”

It followed an earlier call from PwC senior partner Ian Powell to reform the audit model.

“The overall model is long overdue some serious market-wide discussion. For me, the fundamental questions revolve around the scope of the audit; should this be extended and the nature of audit reporting extended with it,” he said in an April speech to ICAS members.

Also in April, Graham Clayworth, audit partner at BDO, said the profession needed to consider providing assurance around a company’s business model and risks, typically, “front of the book” disclosures.

“We have to ask what comfort the auditor can give in terms of the information that is in the front… “The concession that the profession will have to make for additional liability limits will be to extend work that the auditor does at the front of the book,” said.

Why must we worry about the hiring-away pipeline?

Credit Rating Agencies ---- http://en.wikipedia.org/wiki/Credit_rating_agency

A credit rating agency (CRA) is a company that assigns credit ratings for issuers of certain types of debt obligations as well as the debt instruments themselves. In some cases, the servicers of the underlying debt are also given ratings. In most cases, the issuers of securities are companies, special purpose entities, state and local governments, non-profit organizations, or national governments issuing debt-like securities (i.e., bonds) that can be traded on a secondary market. A credit rating for an issuer takes into consideration the issuer's credit worthiness (i.e., its ability to pay back a loan), and affects the interest rate applied to the particular security being issued. (In contrast to CRAs, a company that issues credit scores for individual credit-worthiness is generally called a credit bureau or consumer credit reporting agency.) The value of such ratings has been widely questioned after the 2008 financial crisis. In 2003 the Securities and Exchange Commission submitted a report to Congress detailing plans to launch an investigation into the anti-competitive practices of credit rating agencies and issues including conflicts of interest.

Agencies that assign credit ratings for corporations include:

A. M. Best (U.S.)

Baycorp Advantage (Australia)

Dominion Bond Rating Service (Canada)

Dun & Bradstreet

China Credit Information Service (China)

Fitch Ratings (U.S.)

Japan Credit Rating Agency (Japan)

Moody's Investors Service (U.S.)

Standard & Poor's (U.S.)

Rating Agency Malaysia (Malaysia)

Egan-Jones Rating Company (U.S.)

Brickwork Rating (India)

The Pakistan Credit Rating Agency Limited (Pakistan)

How to Get AAA Ratings on Junk Bonds

Pay cash under the table to credit rating agencies
Promise a particular credit rating agency future multi-million contracts for rating future issues of bonds
Hire away top-level credit rating agency employees with insider information and great networks inside the credit rating agencies

By now it is widely known that the big credit rating agencies (like Moody's, Standard & Poor's, and Fitch) that rate bonds as AAA to BBB to Junk were unethically selling AAA ratings to CDO mortgage-sliced bonds that should've been rated Junk. Up to now I thought the credit rating agencies were merely selling out for cash or to maintain "goodwill" with their best customers to giant Wall Street banks and investment banks like Lehman Bros., AIG., Merrill Lynch, Bear Stearns, Goldman Sachs, etc. ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze
But it turns out that the credit rating agencies were also in that "hiring-away" pipeline.

Wall Street banks and nvestment banks were employing a questionable tactic used by large clients of auditing firms. It is common for large clients to hire away the lead auditors of their CPA auditing firms. This is a questionable practice, although the intent in most instances (we hope) is to obtain accounting experts rather than to influence the rigor of the audits themselves. The tactic is much more common and much more sinister when corporations hire away top-level government employees of regulating agencies like the FDA, FAA, FPC, EPA, etc. This is a tactic used by industry to gain more control and influence over its regulating agency. Current regulating government employees who get too tough on industry will, thereby, be cutting off their chances of getting future high compensation offers from the companies they now regulate.

The investigations of credit rating agencies by the New York Attorney General and current Senate hearings, however, are revealing that the hiring-away tactic was employed by Wall Street Banks for more sinister purposes in order to get AAA ratings on junk bonds. Top-level employees of the credit rating agencies were lured away with enormous salary offers if they could use their insider networks in the credit rating agencies so that higher credit ratings could be stamped on junk bonds.

"Rating Agency Data Aided Wall Street in Deals," The New York Times, April 24, 2010 ---
http://dealbook.blogs.nytimes.com/2010/04/24/rating-agency-data-aided-wall-street-in-deals/#more-214847

One of the mysteries of the financial crisis is how mortgage investments that turned out to be so bad earned credit ratings that made them look so good, The New York Times’s Gretchen Morgenson and Louise Story report. One answer is that Wall Street was given access to the formulas behind those magic ratings — and hired away some of the very people who had devised them.

In essence, banks started with the answers and worked backward, reverse-engineering top-flight ratings for investments that were, in some cases, riskier than ratings suggested, according to former agency employees. Read More »

"Credit rating agencies should not be dupes," Reuters, May 13, 2010 ---
http://www.reuters.com/article/idUSTRE64C4W320100513

THE PROFIT INCENTIVE

In fact, rating agencies sometimes discouraged analysts from asking too many questions, critics have said.

In testimony last month before a Senate subcommittee, Eric Kolchinsky, a former Moody's ratings analyst, claimed that he was fired by the rating agency for being too harsh on a series of deals and costing the company market share.

Rating agencies spent too much time looking for profit and market share, instead of monitoring credit quality, said David Reiss, a professor at Brooklyn Law School who has done extensive work on subprime mortgage lending.

"It was incestuous -- banks and rating agencies had a mutual profit motive, and if the agency didn't go along with a bank, it would be punished."

The Senate amendment passed on Thursday aims to prevent that dynamic in the future, by having a government clearinghouse that assigns issuers to rating agencies instead of allowing issuers to choose which agencies to work with.

For investigators to portray rating agencies as victims is "far fetched," and what needs to be fixed runs deeper than banks fooling ratings analysts, said Daniel Alpert, a banker at Westwood Capital.

"It's a structural problem," Alpert said.

Continued in article

Also see http://blogs.reuters.com/reuters-dealzone/

Jensen Comment
CPA auditing firms have much to worry about these investigations and pending new regulations of credit rating agencies.

Firstly, auditing firms are at the higher end of the tort lawyer food chain. If credit rating agencies lose class action lawsuits by investors, the credit rating agencies themselves will sue the bank auditors who certified highly misleading financial statements that greatly underestimated load losses. In fact, top level analysts are now claiming that certified Wall Street Bank financial statement were pure fiction:

"Calpers Sues Over Ratings of Securities," by Leslie Wayne, The New York Times, July 14, 2009 --- http://www.nytimes.com/2009/07/15/business/15calpers.html

Secondly, the CPA profession must begin to question the ethics of allowing lead CPA auditors to become high-level executives of clients such as when a lead Ernst & Young audit partner jumped ship to become the CFO of Lehman Bros. and as CFO devised the questionable Repo 105 contracts that were then audited/reviewed by Ernst & Yound auditors. Above you read that: "In fact, rating agencies sometimes discouraged analysts from asking too many questions, critics have said." We must also worry that former auditors sometimes discourage current auditors from asking too many questions.
http://retheauditors.com/2010/03/15/liberte-egalite-fraternite-lehman-brothers-troubles-for-ernst-young-threaten-the-big-4-fraternity/

Credit rating of CDO mortgage-sliced bonds turned into fiction writing by hired away raters!
Frank Partnoy and Lynn Turner contend that Wall Street bank accounting is an exercise in writing fiction:
Watch the video! (a bit slow loading)
Lynn Turner is Partnoy's co-author of the white paper."Make Markets Be Markets"
"Bring Transparency to Off-Balance Sheet Accounting," by Frank Partnoy, Roosevelt Institute, March 2010 ---
http://www.rooseveltinstitute.org/policy-and-ideas/ideas-database/bring-transparency-balance-sheet-accounting
Watch the video!

At the height of the mortgage boom, companies like Goldman offered million-dollar pay packages to (credit agency) workers like Mr. Yukawa who had been working at much lower pay at the rating agencies, according to several former workers at the agencies.

In some cases, once these (former credit agency) workers were at the banks, they had dealings with their former colleagues at the agencies. In the fall of 2007, when banks were hard-pressed to get mortgage deals done, the Fitch analyst on a Goldman deal was a friend of Mr. Yukawa, according to two people with knowledge of the situation.

"Prosecutors Ask if 8 Banks Duped Rating Agencies," by Loise Story, The New York Times, May 12, 2010 ---
http://www.nytimes.com/2010/05/13/business/13street.html

The New York attorney general has started an investigation of eight banks to determine whether they provided misleading information to rating agencies in order to inflate the grades of certain mortgage securities, according to two people with knowledge of the investigation.

The investigation parallels federal inquiries into the business practices of a broad range of financial companies in the years before the collapse of the housing market.

Where those investigations have focused on interactions between the banks and their clients who bought mortgage securities, this one expands the scope of scrutiny to the interplay between banks and the agencies that rate their securities.

The agencies themselves have been widely criticized for overstating the quality of many mortgage securities that ended up losing money once the housing market collapsed. The inquiry by the attorney general of New York, Andrew M. Cuomo, suggests that he thinks the agencies may have been duped by one or more of the targets of his investigation.

Those targets are Goldman Sachs, Morgan Stanley, UBS, Citigroup, Credit Suisse, Deutsche Bank, Crédit Agricole and Merrill Lynch, which is now owned by Bank of America.

The companies that rated the mortgage deals are Standard & Poor’s, Fitch Ratings and Moody’s Investors Service. Investors used their ratings to decide whether to buy mortgage securities.

Mr. Cuomo’s investigation follows an article in The New York Times that described some of the techniques bankers used to get more positive evaluations from the rating agencies.

Mr. Cuomo is also interested in the revolving door of employees of the rating agencies who were hired by bank mortgage desks to help create mortgage deals that got better ratings than they deserved, said the people with knowledge of the investigation, who were not authorized to discuss it publicly.

Contacted after subpoenas were issued by Mr. Cuomo’s office notifying the banks of his investigation, representatives for Morgan Stanley, Credit Suisse, UBS and Deutsche Bank declined to comment. Other banks did not immediately respond to requests for comment.

In response to questions for the Times article in April, a Goldman Sachs spokesman, Samuel Robinson, said: “Any suggestion that Goldman Sachs improperly influenced rating agencies is without foundation. We relied on the independence of the ratings agencies’ processes and the ratings they assigned.”

Goldman, which is already under investigation by federal prosecutors, has been defending itself against civil fraud accusations made in a complaint last month by the Securities and Exchange Commission. The deal at the heart of that complaint — called Abacus 2007-AC1 — was devised in part by a former Fitch Ratings employee named Shin Yukawa, whom Goldman recruited in 2005.

At the height of the mortgage boom, companies like Goldman offered million-dollar pay packages to workers like Mr. Yukawa who had been working at much lower pay at the rating agencies, according to several former workers at the agencies.

Around the same time that Mr. Yukawa left Fitch, three other analysts in his unit also joined financial companies like Deutsche Bank.

In some cases, once these workers were at the banks, they had dealings with their former colleagues at the agencies. In the fall of 2007, when banks were hard-pressed to get mortgage deals done, the Fitch analyst on a Goldman deal was a friend of Mr. Yukawa, according to two people with knowledge of the situation.

Mr. Yukawa did not respond to requests for comment. A Fitch spokesman said Thursday that the firm would cooperate with Mr. Cuomo’s inquiry.

Wall Street played a crucial role in the mortgage market’s path to collapse. Investment banks bundled mortgage loans into securities and then often rebundled those securities one or two more times. Those securities were given high ratings and sold to investors, who have since lost billions of dollars on them.

. . .

At Goldman, there was even a phrase for the way bankers put together mortgage securities. The practice was known as “ratings arbitrage,” according to former workers. The idea was to find ways to put the very worst bonds into a deal for a given rating. The cheaper the bonds, the greater the profit to the bank.

The rating agencies may have facilitated the banks’ actions by publishing their rating models on their corporate Web sites. The agencies argued that being open about their models offered transparency to investors.

But several former agency workers said the practice put too much power in the bankers’ hands. “The models were posted for bankers who develop C.D.O.’s to be able to reverse engineer C.D.O.’s to a certain rating,” one former rating agency employee said in an interview, referring to collateralized debt obligations.

A central concern of investors in these securities was the diversification of the deals’ loans. If a C.D.O. was based on mostly similar bonds — like those holding mortgages from one region — investors would view it as riskier than an instrument made up of more diversified assets. Mr. Cuomo’s office plans to investigate whether the bankers accurately portrayed the diversification of the mortgage loans to the rating agencies.

Bob Jensen's Rotten to the Core threads on banks and investment banks ---
http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking

Bob Jensen's Rotten to the Core threads on credit rating agencies ---
http://www.trinity.edu/rjensen/FraudRotten.htm#CreditRatingAgencies

Bob Jensen's threads on credit rating agency scandals ---
http://www.trinity.edu/rjensen/FraudRotten.htm#CreditRatingAgencies

"Blackboard's 'Next Generation' Software Gets Mixed Reviews," by Sophia Li, Chronicle of Higher Education, June 4, 2010 ---
http://chronicle.com/blogPost/Blackboards-Next-Generation/24539/?sid=wc&utm_source=wc&utm_medium=en

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

Bob Jensen's threads on the history of course management systems ---
http://www.trinity.edu/rjensen/290wp/290wp.htm

"Volcker and Derivatives: The end game for financial reform," The Wall Street Journal, June 24, 2010 ---
http://online.wsj.com/article/SB10001424052748704853404575323032606552688.html

Financial reform in the hands of a Democratic Congress is looking eerily similar to health-care reform: Public skepticism is proving to be no brake on the liberal ambitions, and substance is increasingly divorced from the problems Washington claims to be solving.

The bill emerging from House-Senate conference seems less concerned with preventing future bank bailouts than with preventing future bank profits. And if some Main Street companies suffer collateral damage in the drive to reduce Wall Street's over-the-counter derivatives trading, Democrats appear to view them as acceptable casualties.

As early as today, House and Senate negotiators may agree on a Volcker Rule, limiting the risks big banks can take in trading for their own account, as well as a separate set of rules regulating the derivatives trades banks can do on behalf of clients. America doesn't need both.

A Volcker Rule won't be easy to implement but it makes policy sense: limit the opportunities for banks to speculate with federally insured deposits. Combined with high capital standards, this won't lead to perfect outcomes—we're talking about regulation, after all—but it would once again draw a risk-taking line that was crossed too often in 2008.

The other new rules, however, could harm taxpayers and commercial customers more than banks. For taxpayers, the danger comes from Senate plans to force much of the derivatives market through too-big-to-fail clearinghouses. Lead Senate negotiator Chris Dodd has backed a plan to explicitly give these clearinghouses taxpayer assistance in the event they face a liquidity crisis.

The other dangerous idea is to force commercial companies to post additional margin even if they do not speculate but are simply using derivatives to hedge legitimate risks. A recent Business Roundtable survey finds that 90% of large corporations use derivatives and that the average firm would have to tie up 15% of the cash on its balance sheet if subjected to the new margin requirements.

To take one example, Caterpillar might pay a bank to assume the risk of currency fluctuations in foreign markets so that it can focus on making bulldozers. It's possible that, depending on the movements of the dollar against foreign currencies, such a contract will ultimately require Caterpillar to pay more to the bank. Forcing banks to demand more cash up front from such companies is like saying regulators should approve every loan a bank makes, and review every single decision to extend credit.

The theory that derivatives caused the financial crisis also continues to take a beating, most recently from regulation cheerleader Elizabeth Warren. The Troubled Asset Relief Program's Congressional overseer recently put out a report on the government's 2008 seizure of AIG. While the report has its flaws, Ms. Warren explodes the myth that the entire problem at AIG was caused by its credit-default-swap contracts. She explains that it was the housing bets, many of which were made without using CDS, that brought AIG to the brink of collapse.

The message to Congress is to take Volcker but pass on punishing derivatives. Which means we'll probably get the opposite.

Jensen Comment
I personally don't agree with the above editorial position of regulation of derivatives. I think derivatives markets should be regulated along the lines recommended by my hero Frank Partnoy ---
http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds

GLOBAL DERIVATIVE DEBACLES: From Theory to Malpractice --- 
http://www.worldscibooks.com/economics/7141.html 
by Laurent L Jacque (Tufts University, USA & HEC School of Management, France) 
World Scientific Books, ISBN: 978-981-283-770-7, 628pp 
978-981-281-853-9: US$54 / £36   US$40.50 / £27 
Table of Contents (44k) --- http://www.worldscibooks.com/etextbook/7141/7141_toc.pdf 
Preface (27k)--- http://www.worldscibooks.com/etextbook/7141/7141_preface.pdf  
Chapter 1: Derivatives and the Wealth of Nations (133k) --- 
http://www.worldscibooks.com/etextbook/7141/7141_preface.pdf

Contents:

Derivatives and the Wealth of Nations --- http://www.worldscibooks.com/etextbook/7141/7141_preface.pdf

Forwards:

Showa Shell Sekiyu K K

Citibank's Forex Losses

Bank Negara Malaysia

Futures:

Amaranth Advisors LLC

Metallgesellschaft

Sumitomo

Options:

Allied Lyons

Allied Irish Banks

Barings

Société Générale

Swaps:

Procter and Gamble

Gibson Greeting Cards

Orange County

Long-Term Capital Management

AIG

From Theory to Malpractice: Lessons Learned

Jensen Comment
This book is weak on derivatives accounting but stronger on economics, finance, and law.
Chapter 1 has a short summary of ancient history.

Bob Jensen's threads and timeline on the history of derivatives instruments scandals and frauds ---
http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds

One of my heroes in life is Frank Partnoy
I quote him scores of times at http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds

"Living Like It's 1931: Law professor Frank Partnoy questions whether the regulatory reform bill under debate in Congress will be enough to move the economy toward prosperity," by Sarah Johnson, CFO.com, June 17, 2010 ---
http://www.cfo.com/article.cfm/14505447/c_14505581?f=home_todayinfinance

The calendar says 2010, but Frank Partnoy believes that in certain respects, we're living like it's 1931. That was a transitional year between the 1929 stock market crash and the passing of two transformative securities laws, in 1933 and 1934, that established a regulatory body for public companies, mandated widespread financial reporting, and created antifraud remedies.

Seven decades later, optimists would like to believe that the regulatory reform bill in Congress will mark the beginning of better days for the U.S. economy. But Partnoy, a University of San Diego law and finance professor and longtime follower of regulatory reforms, thinks 2010 will likewise be considered a transitional time. "We're still in the middle of the ball game in terms of regulatory response," he told CFO in a recent interview.

In Partnoy's view, the regulatory response to the financial crisis thus far has been "muddled." Congress is plodding through more than 1,500 pages of reforms that will affect various areas of the U.S. financial system. The reforms include a new government authority to prevent financial institutions from becoming too big to fail, a consumer protection agency, regulations for the derivatives market, and even some measures that could be deemed antiregulation (such as a provision that would exempt the smallest U.S. publicly traded companies from getting an audit opinion on their internal controls).

The bill is expected to be finalized at the end of this month. Around the same time, Partnoy will speak about the new regulatory reforms and their resemblance to past reforms at the upcoming CFO Core Concerns Conference, to be held June 27-29 in Baltimore. An edited version of CFO's recent interview with Partnoy follows.

How can we assess whether the new legislation will be successful? The only way we'll know is to wait and hope. If we could go back in time a few years with these proposed rules, would the crisis have been prevented? The answer is no. Congress is considering more than 1,500 pages of reform, but most of that is not directed at problems that would have prevented the crisis.

What piece of the legislation do you most hope will survive the process? The most crucial part is the removal of regulatory references to credit ratings. I have my fingers crossed that it will pass. Participants in the financial markets need to stop relying on Moody's and S&P.

Why isn't a similar proposal by the Securities and Exchange Commission to end the practice good enough? The SEC doesn't have the power to change a statute; Congress does. And many of these references extend beyond the securities area, outside the purview of the SEC. In addition, it's important for Congress to fire a shot across the bow of all regulators to let them know that it's not appropriate to rely on ratings. It's the kind of reform that needs to come from the top, and that means Congress.

In a joint paper with former SEC chief accountant Lynn Turner, you called on Congress to "clarify that financial statements have primacy over footnotes, not the other way around." Why do you think our financial-reporting system has evolved to become, in your view, not as transparent as it should be? It's been a slow evolution that has been driven by lobbying, in particular by major financial institutions. This started in the 1980s, when accounting standard-setters were trying to figure out whether swaps should be accounted for on the balance sheet. Once that argument was lost — once we went down the road of saying that swaps were different — it was a very slippery slope. There's a focused group of market participants who benefit from off-balance-sheet treatment but only a few who represent investor interests. Analysts are in an interesting position because on the one hand, they would be able to do a better job if they had more information about exposures and liabilities. But if everything is off-balance-sheet, they have a comparative advantage in finding out what's buried on page 246 of Form 10-K.

Do you see any signs that this issue will be addressed in the legislation? Congress, Wall Street, and large institutional investors all seem to have united against putting these financial instruments on the balance sheet. It seems unlikely that there will be any kind of substantive change.

What's your view on proposed reforms for derivatives? What I regard as the most important reform has met with mixed reactions. That would be simply for banks to more accurately report their exposure to derivatives and give better information about worst-case scenarios. Those initiatives have taken a back seat to the push for requiring that derivatives be traded on exchanges, and then for trying to move derivatives outside of the banking sector. Keep in mind, the transactions that generated the crisis were not transactions that would ever find a home on an exchange. They're private, custom-tailored deals that fall outside of the legislation. Paradoxically, we might end up with a law that will hurt useful markets in plain-vanilla derivatives, yet will not resolve problems.

Another one of my heroes is former Coopers partner and SEC Chief Accountant Lynn Turner. My two heroes, Turner and Partnoy, write about how bank financial statements should be classified under "Fiction."

Frank Partnoy and Lynn Turner contend that bank accounting is an exercise in writing fiction:
Watch the video! (a bit slow loading)
Lynn Turner is Partnoy's co-author of the white paper "Make Markets Be Markets"
"Bring Transparency to Off-Balance Sheet Accounting," by Frank Partnoy, Roosevelt Institute, March 2010 ---
http://www.rooseveltinstitute.org/policy-and-ideas/ideas-database/bring-transparency-balance-sheet-accounting
Watch the great video!

Great Speeches About the State of Accountancy
"20th Century Myths," by Lynn Turner when he was still Chief Accountant at the SEC in 1999 --- http://www.sec.gov/news/speech/speecharchive/1999/spch323.htm

Bob Jensen's threads on accounting theory are at
http://www.trinity.edu/rjensen/Theory01.htm

Bob Jensen's timeline of derivative financial instruments frauds can be found at
http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds

Oil and Water Must Read: Economists versus Criminologists
:"Why the ‘Experts’ Failed to See How Financial Fraud Collapsed the Economy," by "James K. Galbraith, Big Picture, June 2, 2010 ---
http://www.ritholtz.com/blog/2010/06/james-k-galbraith-why-the-experts-failed-to-see-how-financial-fraud-collapsed-the-economy/

The following is the text of a James K. Galbraith’s written statement to members of the Senate Judiciary Committee delivered this May. Original PDF text is here.

Chairman Specter, Ranking Member Graham, Members of the Subcommittee, as a former member of the congressional staff it is a pleasure to submit this statement for your record.

I write to you from a disgraced profession. Economic theory, as widely taught since the 1980s, failed miserably to understand the forces behind the financial crisis. Concepts including “rational expectations,” “market discipline,” and the “efficient markets hypothesis” led economists to argue that speculation would stabilize prices, that sellers would act to protect their reputations, that caveat emptor could be relied on, and that widespread fraud therefore could not occur. Not all economists believed this – but most did.

Thus the study of financial fraud received little attention. Practically no research institutes exist; collaboration between economists and criminologists is rare; in the leading departments there are few specialists and very few students. Economists have soft- pedaled the role of fraud in every crisis they examined, including the Savings & Loan debacle, the Russian transition, the Asian meltdown and the dot.com bubble. They continue to do so now. At a conference sponsored by the Levy Economics Institute in New York on April 17, the closest a former Under Secretary of the Treasury, Peter Fisher, got to this question was to use the word “naughtiness.” This was on the day that the SEC charged Goldman Sachs with fraud.

There are exceptions. A famous 1993 article entitled “Looting: Bankruptcy for Profit,” by George Akerlof and Paul Romer, drew exceptionally on the experience of regulators who understood fraud. The criminologist-economist William K. Black of the University of Missouri-Kansas City is our leading systematic analyst of the relationship between financial crime and financial crisis. Black points out that accounting fraud is a sure thing when you can control the institution engaging in it: “the best way to rob a bank is to own one.” The experience of the Savings and Loan crisis was of businesses taken over for the explicit purpose of stripping them, of bleeding them dry. This was established in court: there were over one thousand felony convictions in the wake of that debacle. Other useful chronicles of modern financial fraud include James Stewart’s Den of Thieves on the Boesky-Milken era and Kurt Eichenwald’s Conspiracy of Fools, on the Enron scandal. Yet a large gap between this history and formal analysis remains.

Formal analysis tells us that control frauds follow certain patterns. They grow rapidly, reporting high profitability, certified by top accounting firms. They pay exceedingly well. At the same time, they radically lower standards, building new businesses in markets previously considered too risky for honest business. In the financial sector, this takes the form of relaxed – no, gutted – underwriting, combined with the capacity to pass the bad penny to the greater fool. In California in the 1980s, Charles Keating realized that an S&L charter was a “license to steal.” In the 2000s, sub-prime mortgage origination was much the same thing. Given a license to steal, thieves get busy. And because their performance seems so good, they quickly come to dominate their markets; the bad players driving out the good.

The complexity of the mortgage finance sector before the crisis highlights another characteristic marker of fraud. In the system that developed, the original mortgage documents lay buried – where they remain – in the records of the loan originators, many of them since defunct or taken over. Those records, if examined, would reveal the extent of missing documentation, of abusive practices, and of fraud. So far, we have only very limited evidence on this, notably a 2007 Fitch Ratings study of a very small sample of highly-rated RMBS, which found “fraud, abuse or missing documentation in virtually every file.” An efforts a year ago by Representative Doggett to persuade Secretary Geithner to examine and report thoroughly on the extent of fraud in the underlying mortgage records received an epic run-around.

When sub-prime mortgages were bundled and securitized, the ratings agencies failed to examine the underlying loan quality. Instead they substituted statistical models, in order to generate ratings that would make the resulting RMBS acceptable to investors. When one assumes that prices will always rise, it follows that a loan secured by the asset can always be refinanced; therefore the actual condition of the borrower does not matter. That projection is, of course, only as good as the underlying assumption, but in this perversely-designed marketplace those who paid for ratings had no reason to care about the quality of assumptions. Meanwhile, mortgage originators now had a formula for extending loans to the worst borrowers they could find, secure that in this reverse Lake Wobegon no child would be deemed below average even though they all were. Credit quality collapsed because the system was designed for it to collapse.

A third element in the toxic brew was a simulacrum of “insurance,” provided by the market in credit default swaps. These are doomsday instruments in a precise sense: they generate cash-flow for the issuer until the credit event occurs. If the event is large enough, the issuer then fails, at which point the government faces blackmail: it must either step in or the system will collapse. CDS spread the consequences of a housing-price downturn through the entire financial sector, across the globe. They also provided the means to short the market in residential mortgage-backed securities, so that the largest players could turn tail and bet against the instruments they had previously been selling, just before the house of cards crashed.

Latter-day financial economics is blind to all of this. It necessarily treats stocks, bonds, options, derivatives and so forth as securities whose properties can be accepted largely at face value, and quantified in terms of return and risk. That quantification permits the calculation of price, using standard formulae. But everything in the formulae depends on the instruments being as they are represented to be. For if they are not, then what formula could possibly apply?

An older strand of institutional economics understood that a security is a contract in law. It can only be as good as the legal system that stands behind it. Some fraud is inevitable, but in a functioning system it must be rare. It must be considered – and rightly – a minor problem. If fraud – or even the perception of fraud – comes to dominate the system, then there is no foundation for a market in the securities. They become trash. And more deeply, so do the institutions responsible for creating, rating and selling them. Including, so long as it fails to respond with appropriate force, the legal system itself.

Control frauds always fail in the end. But the failure of the firm does not mean the fraud fails: the perpetrators often walk away rich. At some point, this requires subverting, suborning or defeating the law. This is where crime and politics intersect. At its heart, therefore, the financial crisis was a breakdown in the rule of law in America.

Ask yourselves: is it possible for mortgage originators, ratings agencies, underwriters, insurers and supervising agencies NOT to have known that the system of housing finance had become infested with fraud? Every statistical indicator of fraudulent practice – growth and profitability – suggests otherwise. Every examination of the record so far suggests otherwise. The very language in use: “liars’ loans,” “ninja loans,” “neutron loans,” and “toxic waste,” tells you that people knew. I have also heard the expression, “IBG,YBG;” the meaning of that bit of code was: “I’ll be gone, you’ll be gone.”

If doubt remains, investigation into the internal communications of the firms and agencies in question can clear it up. Emails are revealing. The government already possesses critical documentary trails — those of AIG, Fannie Mae and Freddie Mac, the Treasury Department and the Federal Reserve. Those documents should be investigated, in full, by competent authority and also released, as appropriate, to the public. For instance, did AIG knowingly issue CDS against instruments that Goldman had designed on behalf of Mr. John Paulson to fail? If so, why? Or again: Did Fannie Mae and Freddie Mac appreciate the poor quality of the RMBS they were acquiring? Did they do so under pressure from Mr. Henry Paulson? If so, did Secretary Paulson know? And if he did, why did he act as he did? In a recent paper, Thomas Ferguson and Robert Johnson argue that the “Paulson Put” was intended to delay an inevitable crisis past the election. Does the internal record support this view?

Let us suppose that the investigation that you are about to begin confirms the existence of pervasive fraud, involving millions of mortgages, thousands of appraisers, underwriters, analysts, and the executives of the companies in which they worked, as well as public officials who assisted by turning a Nelson’s Eye. What is the appropriate response?

Some appear to believe that “confidence in the banks” can be rebuilt by a new round of good economic news, by rising stock prices, by the reassurances of high officials – and by not looking too closely at the underlying evidence of fraud, abuse, deception and deceit. As you pursue your investigations, you will undermine, and I believe you may destroy, that illusion.

But you have to act. The true alternative is a failure extending over time from the economic to the political system. Just as too few predicted the financial crisis, it may be that too few are today speaking frankly about where a failure to deal with the aftermath may lead.

In this situation, let me suggest, the country faces an existential threat. Either the legal system must do its work. Or the market system cannot be restored. There must be a thorough, transparent, effective, radical cleaning of the financial sector and also of those public officials who failed the public trust. The financiers must be made to feel, in their bones, the power of the law. And the public, which lives by the law, must see very clearly and unambiguously that this is the case.

Thank you.

~~~

James K. Galbraith is the author of The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too, and of a new preface to The Great Crash, 1929, by John Kenneth Galbraith. He teaches at The University of Texas at Austin

June 9, 2010 reply from Thompson, Shari [shari.thompson@PVPL.COM]

Bob, that is an awesome article! I can only hope that the system listens!

Bob Jensen's threads on the subprime sleaze is at
http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze

History of Fraud in America --- http://www.trinity.edu/rjensen/415wp/AmericanHistoryOfFraud.htm

Lecture Notes for a Forensic Accounting Course

June 2, 2010 message from J. S. Gangolly [gangolly@CSC.ALBANY.EDU]

Two years ago I taught a Forensic Investigations course. I had prepared extensive lecturenotes, etc.

All materials are available at the following addresses:

Course outline:
http://www.albany.edu/acc/courses/acc551fall2008/acc551fall2008.pdf

Lecture notes:
http://www.albany.edu/acc/courses/acc551fall2008/acc551fall2008lecturenotes.pdf

I also gave group assignments, etc. that I can send if there is a need.

Jagdish

I filed this under "Things That Wrankle Tax Professor Amy Dunbar at the University of Connecticut"
"Supreme Court Declines to Hear Textron Work Product Privilege Case," Journal of Accountancy, June 2006 ---
http://www.journalofaccountancy.com/Web/20102952.htm

June 1, 2010 reply from Amy Dunbar [Amy.Dunbar@BUSINESS.UCONN.EDU]

Here’s my two cents worth on Textron. The Supreme Court’s denial of cert implies that the IRS and perhaps other claimants do not have to worry about work product privilege with respect to workpapers created in the ordinary course of doing business. I find that case troubling because it may mean that any reserve workpapers could now be open to litigants in general. I don’t have any trouble with IRS having access to the workpapers because I am not convinced that the tax assessment process should be considered an adversarial process, which is what the work product privilege was meant to protect. However, “FAS 5” contingencies, now fondly known as ASC Topic 450 contingencies, are typically adversarial, and should be protected under work product privilege. If anyone can tell me why my concern is misplace I would love to hear your reasoning.

The court noted: “ In some instances the spreadsheet entries estimated the probability of IRS success at 100 percent.” A 100% reserve???? How common is this? I think the IRS should find out. The proposed Form 1120 Schedule UTB won’t help with this because the actual reserves do not have to be disclosed, only the maximum liability associated with the tax position.

I love the following quote:

“Textron apparently thinks it is "unfair" for the government to have access to its spreadsheets, but tax collection is not a game. Underpaying taxes threatens the essential public interest in revenue collection. If a blueprint to Textron's possible improper deductions can be found in Textron's files, it is properly available to the government unless privileged. Virtually all discovery against a party aims at securing information that may assist an opponent in uncovering the truth. Unprivileged IRS information is equally subject to discovery.”

Obviously the tax division of the auditing firm didn’t recommend these transactions because PCAOB Rule 3522 requires recommended tax products to have a more likely than not probability of success.

“A registered public accounting firm is not independent of its audit client if the firm, or any affiliate of the firm, during the audit and professional engagement period, provides any non-audit service to the audit client related to marketing, planning, or opining in favor of the tax treatment of, …

a transaction that was initially recommended, directly or indirectly, by the registered public accounting firm and a significant purpose of which is tax avoidance, unless the proposed tax treatment is at least more likely than not to be allowable under applicable tax laws.”

I doubt the tax division signed the return either in view of preparer penalties, but I think that the very large corporations typically file their own returns, so preparer penalties are not a deterrent, but I may be wrong about my assumption.

A 100% reserve for a position will exist any time a position doesn’t meet the more-likely-than not test under FIN 48, but Textron was pre-FIN 48.

Amy Dunbar
UConn

June 1, 2010 reply from Francine McKenna [retheauditors@GMAIL.COM]

Here's what I've written about Textron.
http://retheauditors.com/2009/01/28/round-and-round-she-goes-where-she-stops-nobody-knows/

"...In other news on Thursday, Ernst and Young was also watching, I’m sure, while one of the defendants in their very own tax shelter case plead guilty. Although the four former EY partners charged have not yet been tried, a guilty plea by a former investment advisor who helped market the tax shelters is certainly a damaging development.

And in a win of sorts for now for EY, their client Textron won a ruling that allows them to withhold their tax accrual workpapers from the IRS. The ruling is important because it speaks to the protection of attorney-client privilege when the work product in question has been shown to a company’s external auditors. From the blog, ataxingmatter, a short explanation of why the court’s decision was wrong:

“During an audit of the company covering its 1998-2001 tax years, the IRS requested Textron’s tax accrual workpapers, but the company refused to provide them, claiming that they are protected by various privileges, including the work-product privilege, even though they were at the least “dual purpose documents”. The First Circuit upheld the privilege, and even concluded that the company had not waived the protection by showing the internal workpapers to its outside auditor, Ernst & Young, calling the auditor-client relationship a “cooperative not adversarial relationship” that was unlikely to lead to litigation.

Even so, the court acknowledged that E&Y’s own workpapers, which likely incorporate and even reveal Textron’s analyses, may be discoverable on remand, under the Arthur Young Supreme Court opinion. The court’s determination that the company’s internal tax accrual workpapers may not be summonsed is manifestly inconsistent with the court’s conclusion that the outside auditor’s workpapers incorporating the same analysis may be.”

Auditors, in the course of performing their audit, require free and open access to documents and to executives in order to do a complete, thorough, and professional job. We have seen similar issues raised when discussing changes and additional disclosures under FAS 5. Auditors understand the delicate balance and, although fully understanding of their responsibilities to push for full disclosure, are not willing to push when they believe more disclosure is contrary to their client’s (read corporate executives’) best interest even if additional disclosure may be in the best interest of investors and shareholders.

So, a ruling here that allows attorney-client privilege for their clients while still allowing the auditors to have access to the information is good for the auditors. Their clients can not use the excuse of losing this protection to keep important information from them.

So, here’s the conundrum:

1) Audit workpapers are not protected.

2) Clients will remain skittish about sharing information with auditors that they want to remain protected under work-product doctrine or the broader attorney-client privilege.

3)Auditors themselves are not comfortable with broader, more detailed legal contingency disclosures, for example, and have said so with regard to expanded disclosure under FAS 5.

Result:

Auditors will see less and less of what is relevant to audit “in accordance with applicable auditing standards and supported by appropriate audit evidence.”

Regards,
Francine

Bob Jensen's threads on Ernst & Young litigation are at
http://www.trinity.edu/rjensen/Fraud001.htm

Question
Has Francine gone a "bridge too far?"
As I write this, Kenny Rogers is singing "You've got to know when to hold 'em and when to fold 'em"
http://www.youtube.com/watch?v=D8o6Os0xQf8

"Bigger, Stronger, Faster: The PCAOB After The Supreme Court Ruling," by Francine McKenna, re: TheAuditors, June 9, 2010 ---
http://retheauditors.com/2010/06/09/bigger-stronger-faster-the-pcaob-after-the-supreme-court-ruling/

Jensen Comment
Although I love the intensity and investigative effort that Francine pours into her blog, she does have a tendency to make conjectures that are unsupported hypotheses that she considers "truth." These hardly satisfy this old academic.

Example of an unsupported conjecture in the above blog post:

This is not the way to treat a regulator. Although the inspection process is intense, time consuming and very expensive for the audit firms to comply with, they are clearly paying it only lip service. They view it as a necessary evil rather than a constructive or a deterrent force. This must change if the PCAOB is ever going to be an effective tool for protecting the investor public

She has not convinced me that the inspections are failures to a degree that she repeatedly alleges in her posts. We need much more intensive research into how the audit firms are reacting to the inspection process before inspections take place and after inspection reports are released to the public ---
http://pcaobus.org/Inspections/Pages/default.aspx

From: Jim Fuehrmeyer [mailto:jfuehrme@nd.edu]
Sent: Tuesday, March 23, 2010 9:21 AM
To: Jensen, Robert
Subject: FW: Deloitte

Bob,

I was the “Professional Practice Director”, that’s the audit quality control guy, for Deloitte’s Chicago office for the six years prior to my retirement in May 2007. I got to experience first-hand everything from the absorption of AA’s people in Chicago to the advent of the PCAOB and its annual inspection process the first few years. I don’t think most folks have any appreciation for the very real impact the PCAOB has had on the profession. The quality of documentation, the increased amount of partner involvement, the added quality control processes, the expansion of detail testing – the PCAOB has had a huge impact. Most folks also don’t have an appreciation for the impact of 404 not only on the audit process but on corporate cultures as well. As you pointed out a few messages ago, we do see all the failings in the press, but what we don’t see is all the positives and all the improvements.

Hope your wife is doing OK.

Jim

JAMES L. FUEHRMEYER, JR.
Associate Professional Specialist
Department of Accountancy

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

MENDOZA COLLEGE OF BUSINESS
UNIVERSITY OF NOTRE DAME
384 Mendoza College of Business
Notre Dame, IN 46556
office: (574) 631-1752 | fax: (574) 631-5255
e: jfuehrme@nd.edu | w: http://business.nd.edu

"Bigger, Stronger, Faster: The PCAOB After The Supreme Court Ruling." by Francine McKenna, re:TheAuditors, June 29. 2010 ---
http://retheauditors.com/2010/06/26/bigger-stronger-faster-the-pcaob-after-the-supreme-court-ruling/

. . .

It’s been apparent to me that the audit firms don’t take the inspection results seriously, and don’t significantly change their processes as a result. In some cases they publicly embarrassed the PCAOB by openly disagreeing with them.

This is not the way to treat a regulator. Although the inspection process is intense, time consuming and very expensive for the audit firms to comply with, they are clearly paying it only lip service. They view it as a necessary evil rather than a constructive or a deterrent force. This must change if the PCAOB is ever going to be an effective tool for protecting the investor public.

Continued in articl

Once again Francine makes a weak case with anecdotal evidence that CPA auditors do not take the PCAOB inspections seriously. This is counter to what researchers and CPA firm executives claim to be more serious auditing efforts because of the entire Sarbanes legislation.

For a counter argument that Sarbanes and the PCAOB were not so irrelevant see Professor Mark Nelson's counter conclusions drawn from an FEI study--- .

Here are some research studies you may have overlooked. I have not studied all of them in detail, but it appears they have differing degrees of relevance on your negative opinions about the PCAOB and SOX. Some are supportive of your audit firm “lip service only” conjecture, while others contradict your conjecture. There are also differing conclusions regarding the need for small firm relief from Section 404.

Here’s a nice review and analysis of an FEI Study (of clients expected to hate SOX)
Mark Nelson has a nice summary of why SOX happened and how it is impacting corporations --- Click Here
http://citebm.business.illinois.edu/TWC%20Class/Project_reports_Fall2008/Sarbanes-Oxley/Mark%20Nelson/Mark%20Nelson%20BADM%20458%20Final%20Paperx.pdf

SEC Research Study (More varied set of respondents)
http://www.sec.gov/news/studies/2009/sox-404_study.pdf

This report also presents the general findings of in-depth phone interviews of external users and auditors of financial statements, conducted by the Office of the Chief Accountant. The results of the interviews were generally consistent with the findings of the Web survey, although these parties were less knowledgeable about the costs of complying with Section 404. External users tended to put a heavy premium on having high quality financial statements that are in compliance with generally accepted accounting principles, and these users felt that companies need effective ICFR to ensure this is the case.

In sum, the evidence from the survey response data shows that the cost of Section 404 compliance decreased following the Commission’s reforms introduced in 2007 and is expected to decrease further based on respondents’ estimates for the fiscal year in progress at the time of the survey. Moreover, the survey participants perceive the reforms to have been a significant catalyst for these changes. This evidence may prove useful in understanding the effects of the 2007 reforms as well as guiding any subsequent regulatory efforts.

Internal Controls After Sarbanes-Oxley: Revisiting Corporate Law's Duty of Care as Responsibility for Systems
http://scholarship.law.georgetown.edu/cgi/viewcontent.cgi?article=1130&context=facpub

Sarbanes-Oxley section 404 compliance: Recent changes in US-traded foreign firms' internal control reporting
Click Here
http://www.emeraldinsight.com/Insight/viewContentItem.do;jsessionid=45A42C9C311A9743DCD3645988CF123E?contentType=Article&hdAction=lnkpdf&contentId=1795163

The Case Against Exempting Smaller Reporting Companies from Sarbanes-Oxley Section 404: Why Market-Based Solutions are Likely to Harm Ordinary Investors
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1421844

Also see
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=983772

http://works.bepress.com/cgi/viewcontent.cgi?article=1000&context=paul_arnold

More on the Costs and Benefits of Section 404 of Sarbanes-Oxley
http://reneejones.wordpress.com/2007/07/02/more-on-the-costs-and-benefits-of-section-404-of-sarbanes-oxley/
Also see
http://cardozolawreview.com/PastIssues/29.2_prentice.pdf

Also see http://www.nysscpa.org/cpajournal/2008/808/perspectives/p13.htm

http://www.cluteinstitute-onlinejournals.com/PDFs/1228.pdf

Sarbanes-Oxley 404 material weaknesses and discretionary accruals
Click Here
http://www.sciencedirect.com/science?_ob=ArticleURL&_udi=B7GWN-4VB55BW-1&_user=10&_coverDate=06%2F30%2F2010&_rdoc=1&_fmt=high&_orig=search&_sort=d&_docanchor=&view=c&_searchStrId=1366747316&_rerunOrigin=google&_acct=C000050221&_version=1&_urlVersion=0&_userid=10&md5=7d0a63a66e7ec311aff0d298f1f3cde5

Ed Swanson
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=547922

Has SOX Made New York Less Competitive in Global Markets?
http://blogs.law.harvard.edu/corpgov/2007/07/18/has-sox-made-new-york-less-competitive-in-global-markets/

A Canadian Perspective
http://www.luc.edu/law/activities/publications/lljdocs/vol39_no3/ben_ishai.pdf

This is just a sampling.
There are many more such impact research studies.

June 12, 2010 reply from Francine McKenna

Dear Bob,

Thanks so much. There are many, many studies on the costs and benefits of SOx but I take those with a grain of salt. I do not believe that fundamental internal controls over financial reporting are a "cost-benefit" kind of decision. Identifying your controls over financial reporting (and making sure they are designed effectively), documenting them in policies and procedures for your staff to follow and testing their operating effectiveness are the minimum for running a good accounting department. SOx did not mandate anything other than what companies should have been doing all along.

I have written about all of the various studies by Treasury and SEC CIFR on "simplifying financial reporting". Look where they got us.
http://retheauditors.com/2008/06/06/day-1-the-rest-of-the-gang-robert-pozen/

You'd be surprised by how often I cite academic studies. In fact, here's an interesting one I found on the way to something else that you may like.
http://www.antitrustinstitute.org/archives/files/AAI%20Working%20Paper%20No.%2008-03_091820081520.pdf

The American Antitrust Institute

AAI Working Paper No. 08-03

ABSTRACT

Title: THE AUDIT INDUSTRY: WORLD’S WEAKEST OLIGOPOLY?

Author: Bernard Ascher, Research Fellow, American Antitrust Institute

When I encourage more studies, I mean the kind you lament all the time are not done often enough because of the focus on accountics - non-accountics studies about strategy, business model and inner workings of the audit firms and the impact of regulation and the external economic environment on the firms. I see those are done by a group of professors at Harvard Business School that focus on professional services. They develop case studies for teaching that are very helpful to me even if I do not always agree with their conclusions.

I attended this program in 2003 while I was a Regional Vice President at Jefferson Wells/Manpower. I wish I could go every year.
http://www.exed.hbs.edu/programs/lpsf/

Francine

June 12 reply from Bob Jensen

Hi Francine,

Below your wrote: “If I hear positive stories (about the Big Four) I expect them to show up somewhere else.”

Although I also greatly admire and quote Prim Sikka’s writings, I think both you and he have similar expectations.

I guess that’s another version of cherry picking what testimonials you write up, which I guess is all right as long as you’ve owned up to cherry picking the negatives. And you’ve just owned up to this in your remarks below.

But thank you Francine for what you do with great skill. You and Prim brought a beacons of light into the academic world even if they only shine in one direction.

What’s interesting to me, however, is where admittedly biased analysts occasionally gain credibility by taking opposite sides now and then. I sometimes, certainly not always, find this in academia when researchers fairly present both sides on a contentious issue. It also happens when honest researchers report research outcomes inconsistent with their hopes and anticipations. I continually strive for such academic balance myself which is why I obviously frustrate my good friends Paul Williams, Amy Dunbar, Denny Beresford, and Francine McKenna now and then.

In the media world, this is one of the reasons I like the extremely biased Jon Stewart on Comedy Central. On occasion Jon pleases me when he does something totally out of character like ridicule MSNBC’s Keith Olbermann. Conversely you would never see Keith Olbermann invite David Walker to his show even though no one strives harder than David Walker to be bipartisan. Keith only invites his choir members as guests on Countdown as if he’s afraid of dealing head on in an argument. “Truth tellers” like Keith only like to hear their own versions of truth.

http://www.youtube.com/watch?v=0ZylQXm-vis

Saturday Night Live did a balancing act when it belittled President Obama for zero important accomplishments and portrayed Sarah Palin as a simpleton who can analyze Russia’s foreign policy by looking out from her front porch.

http://www.youtube.com/watch?v=D_Jf9s23uF0

http://www.youtube.com/watch?v=eXVIwo5fLYs

Thank you Francine for what you do with great skill. You and Prim brought a beacons of light into the academic world even if they only shine in one direction.

One point upon which we greatly differ, however, is that the main problem with CPA auditing is that it’s in the private sector. Professionalism in government agencies just has too many contradictions to give me a warm and fuzzy feeling that government can do a better job auditing the Fortune 500. Government auditors just don’t cut it any better as a rule than private sector CPA firms in compliance auditing of any type. The big difference, however, is that you can’t sue the government for incompetence and fraud unless it grants permission to be sued. Also hell almost freezes over before a government bureaucrat can be fired even with adverse media attention. This is often not so when there’s adverse media attention in the private sector.

Bob Jensen

From: AECM, Accounting Education using Computers and Multimedia [mailto:AECM@LISTSERV.LOYOLA.EDU] On Behalf Of Francine McKenna re: The Auditors Blog
Sent: Friday, June 11, 2010 11:54 AM
To: AECM@LISTSERV.LOYOLA.EDU
Subject: Re: Has Francine gone a "bridge too far?"

Half of my contacts are still working for the firms. Is that an endorsement of glass half full or a capitulation? My site is a critical look at the firms. If I hear positive stories I expect them to show up somewhere else. Like on the firms' own web sites. I am not the place to look for them. That focus and that bias is clearly and repeatedly disclosed.

From: "Jensen, Robert" <rjensen@TRINITY.EDU>
Date: Fri, 11 Jun 2010 10:49:04 -0500
To: <AECM@LISTSERV.LOYOLA.EDU>
Subject: Re: Has Francine gone a "bridge too far?"

But do your contacts ever say anything good about the professionalism of their employers?

It seems like you only report the negatives.

My own contacts seem much more upbeat about the Big Four.
Guess we have a different set of contacts.

Bob Jensen

From: AECM, Accounting Education using Computers and Multimedia [mailto:AECM@LISTSERV.LOYOLA.EDU] On Behalf Of Francine McKenna re: The Auditors Blog
Sent: Friday, June 11, 2010 10:28 AM
To: AECM@LISTSERV.LOYOLA.EDU
Subject: Re: Has Francine gone a "bridge too far?"

Bob, you misunderstand me. I am very pro-SOx for all the reasons you mention and all the ones I have. I am critical of the Big 4 audit firm model and how leadership must focus on profit to the detriment of the investor.

I do not depend on a "few disgruntled partners." My sample size is quite large including many who hold or have held leadership roles.

From: "Jensen, Robert" <rjensen@TRINITY.EDU>
Date: Fri, 11 Jun 2010 09:03:18 -0500
To: <AECM@LISTSERV.LOYOLA.EDU>
Subject: Re: Has Francine gone a "bridge too far?"

I especially recommend Mark Nelson’s paper and his conclusion (Mark is actually one of our leading accountics researchers).

Click Here
http://citebm.business.illinois.edu/TWC%20Class/Project_reports_Fall2008/Sarbanes-Oxley/Mark%20Nelson/Mark%20Nelson%20BADM%20458%20Final%20Paperx.pdf

If companies, as you state, “did what they needed to be doing all along” then we would never have had all those enormous pre-SOX scandals that threatened the very survival of equity markets in the United States (as aptly pointed out by Mark).

Especially note Mark’s conclusion that SOX worked pretty much as intended --- much to the amazement of many audit clients going into SOX compliance with enormous skepticism. The SEC study seems to confirm that SOX and the PCAOB are really preventing much, certainly not all, the fraud that arose like the mushroom cloud prior to the desparation SOX legislation.

The WSJ editors are consistently, like you, enormous skeptics of SOX and Big Four auditing firms in general, but then WSJ editors, unlike you, will defend some big-time felons to the end (e.g., Mike Milken and the big time options back dating executives).

I think Abe Brilloff for many years repeatedly, at an enormous personal cost, demonstrated how relying upon the assumed professionalism and ethics among “professionals” just is not enough to protect society from the greed of professionals that seems to germinate from unfettered opportunity.

I sometimes think that you overly rely upon interviews with a few disgruntled insiders in the Big Four. A random sampling might point sometimes to different conclusions about how insiders in general feel about the Big Four and professionalism that is strived for in audits and Section 404 investigations.

By the way, are systems engineers and IT auditors really so distinct professionally? I assumed that an IT auditor had to have a great deal of systems engineering skills.

Bob Jensen

"The Big 4 Audit Report: Should the Public Perceive It as a Label of Quality?" by Ross D. Fuerman,," Accounting and the Public Interest 9 (1), 148 (2009) ---
http://aaapubs.aip.org/getabs/servlet/GetabsServlet?prog=normal&id=APIXXX000009000001000148000001&idtype=cvips&gifs=Yes&ref=no

ABSTRACT:
There has been little research comparing the relative performance of the Big 4 CPA firms. Users of audited financial statements often practically have no other CPA firms to choose from for auditing services in the large public company auditing services market and thus desire more of this information. In 1,017 financial reporting lawsuits against Big 5 auditees filed from 1999 through 2004, the auditor litigation outcomes are used to proxy for the likelihood of audit failure and thus for audit quality. Control variables significant in prior empirical work were used in polytomous regression and in logistic regression. Ernst & Young has comparatively better auditor litigation outcomes, which proxy for a lower likelihood of audit failure and a stronger level of audit quality. The Ernst & Young results are robust; they are insensitive to the use of ten different model specifications. There is also evidence suggesting that PricewaterhouseCoopers may be a comparatively high quality auditor, but these latter results are sensitive to the model specification. Clearly, the null hypothesis of consistency in audit quality among the Big 4 CPA firms is rejected. ©2009 American Accounting Association

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

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

"What Will Audit Firms Do On Their PCAOB Annual Reports?" Big Four Blog, June 18, 2010 ---
http://www.bigfouralumni.blogspot.com/

Jensen Question
Is there a reason the wording is “do on” instead of “put on?”

Bob Jensen's threads on auditing professionalism ---
http://www.trinity.edu/rjensen/fraud001.htm#Professionalism

"Today in Auditor Musical Chairs: KPMG and Deloitte Both Get the Boot (from troublesome clients)," Caleb Newquist, Going Concern, June 29, 2010 --- http://goingconcern.com/2010/06/today-in-auditor-musical-chairs-kpmg-and-deloitte-both-get-the-boot/

Jensen Comment
Note in particular that KPMG was concerned about poor internal controls.

Cloud Computing --- http://en.wikipedia.org/wiki/Cloud_computing

"How Cloud Computing Can Transform Business," by Bernard Golden, Harvard Business Review Blog, June 4, 2010 ---
http://blogs.hbr.org/cs/2010/06/business_agility_how_cloud_com.html?cm_mmc=npv-_-DAILY_ALERT-_-AWEBER-_-DATE

You're in a meeting. You and your team identify a great new business opportunity. If you can launch in 60 days, a rich new market segment will be open for your product or service. The action plan is developed. Everything's a go.
And then you come down to earth. You need new computer equipment, which takes weeks, or months, to install. You also need new software, which adds more weeks or months. There's no way to meet the timeframe required by the market opening. You are stymied by your organization's lack of IT agility.

Or, you could have the experience the New York Times had when it needed to convert a large number of digital files to a format suitable to serve up over the web. After the inevitable "it will take a lot of time and money to do this project," one of their engineers went to the Amazon Web Services cloud, created 20 compute instances (essentially, virtual servers), uploaded the files, and converted them all over the course of one weekend.

Total cost? $240.
This example provides a sense of why cloud computing is transforming the face of IT, with the potential to deliver real business value. The rapid availability of compute resources in a cloud computing environment enables business agility — the dexterity for businesses to quickly respond to changing business conditions with IT-enabled offerings.

Notwithstanding the fact that IT seems to always have the latest, greatest thing on its mind, cloud computing has the entire IT industry excited, with companies such as IBM, Microsoft, Amazon, Google and others investing billions of dollars in this new form of computing. And in terms of IT users, Gartner recently named cloud computing as the second most important technology focus area for 2010.

But what is cloud computing exactly? Why is it different than what went before? And why should you care? While there are many definitions of cloud computing, I look to the definition of cloud computing from the National Institute of Standards and Testing (NIST), part of the US Department of Commerce. In its cloud computing definition, NIST identifies five characteristics of cloud computing, which include:

on-demand self service, which allows business units to get the computing resources they need without having to go through IT for equipment .

broad network access, which enables applications to be built in ways that align with how businesses operate today - mobile, multi-device, etc.

resource pooling, which allows for pooling of computing resources are to serve multiple consumers

rapid elasticity, which allow for quick scalability or downsizing of resources depending on demand

and measured service, which means that business units only pay for the compute resources they use. Translation: IT costs match business success.

To offer a concrete example of how cloud computing agility enables organizations to respond to business opportunity, let me share the experience of one of our clients, the Silicon Valley Education Foundation. Its Lessonopoly application allows 13,000 teachers throughout Silicon Valley to collaborate on lesson plans. NBC approached SVEF just before this year's Winter Olympics with science-focused lesson plans centered around the science behind the experience of Olympic athletes (e.g., the loads placed on a skier's legs as she swerves around a slalom gate).
One concern SVEF had was whether or not Lessonopoly could handle the likely application load increase. There were only a few days before the start of the Olympics, which would initiate heavy use of these lesson plans. The group had migrated the application to Amazon Web Services a few months earlier, and they were able to quickly shut down the small machine Lessonopoly was running on and bring it back up on a larger instance with three times the computing capacity of the original.

It's a cliché to say that business is changing at an ever-increasing pace, but one of the facts about clichés is they often contain truth. The deliberate pace of traditional IT is just not suited for today's hectic business environment. Cloud computing's agility is a much better match for constantly mutating business conditions. To evaluate whether your business opportunities could be well-served by leveraging the agility of cloud computing, download the HyperStratus Cloud Computing Agility Checklist, which outlines ten conditions that indicate a business case for taking advantage of the agility of cloud computing.

Bernard Golden is CEO of HyperStratus, a Silicon Valley-based cloud computing consultancy that works with clients in the US and throughout the world. Contact him at bernard.golden@hyperstratus.com

Winner: "Heads in the Cloud" from Anseo.net
This post shows how one school uses cloud computing through Google Apps as a communication tool for the staff and board of management.

Bob Jensen's threads on Tools and Tricks of the Trade ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm

Ten Highest and Ten Lowest States in Terms of Taxpayer Liability
A Lot of Taxpayers in the South Pay Zero Taxes (Non-Payers) Due to Credits, Deductions, and Poverty

Source: Scott A. Hodge, Tax Foundation, May 24, 2010 ---
http://www.taxfoundation.org/publications/show/26336.html
According to the latest IRS figures for 2008, a record 52 million filers—36 percent of the 143 million who filed a
tax return—had no tax liability because their credits and deductions reduced their liability to zero.
Indeed, tax credits such as the child tax credit and earned income tax credit have become so generous
that a family of four earning up to about $52,000 can expect to have their income tax liability erased entirely.

Jerry Trites pointed me to this interesting paper from Accenture on ERP
"A Smart Start to Strong Enterprise Resource Planning Requests for Proposals"

Summary --- Click Here
http://www.accenture.com/Global/Services/By_Industry/Government_and_Public_Service/PS_Global/R_and_I/Smart-Proposals.htm

Full Paper --- Click Here
http://www.accenture.com/NR/rdonlyres/839885D0-A344-4139-A26E-0393B463095B/0/ACC_SmartStartWP.pdf

Bob Jensen's sadly neglected threads on ERP ---
http://www.trinity.edu/rjensen/245glosap.htm

Citing a Study at the University of Washingon
"E-Book Readers Bomb on College Campuses," by Allison Damast, Business Week, June 10, 2010 ---
http://www.businessweek.com/bschools/content/jun2010/bs20100610_200335.htm?link_position=link1

June 17, 2010 reply from Les Livingstone [jlivingstone@UMUC.EDU]

Bob Jensen correctly points out that E-Book readers so far are a flop. But this does not mean that E-Books are a flop.

In our MBA accounting/economics/finance course all 3 of our required textbooks are E-Books - which do not use E-Book readers.

These 3 E-Books can be purchased in these formats: 1. Online versions with ads to read online: Free. 2. Online versions without ads to read online: Under $7 each. 3. Downloadable and printable pdf files: Under $10 each. 4. Hard copy paperbacks: Under $20 each for two and under $30 for the largest book. So their combined cost varies between a low of zero to a high of $70, and no E-Book readers are needed. Any computer will do. The range of $0 to $70 for 3 textbooks is great in these days of hardcover textbooks at prices of $100-$200 each.

Lest anyone thinks that these E-Books are of inferior quality, let me note that one is in its 5th edition, one is in its 2nd edition, and the third is presently being readied for its 2nd edition. Since most textbooks do not ever reach a 2nd edition, this is an indicator of good quality.

Student evaluations frequently express joy and happiness at the quality and low cost of these 3 textbooks.

Best wishes, Les Livingstone
http://leslivingstone.com/

June 17, 2010 reply from Bob Jensen

Thank you Les,

I hope you won’t mind if I post your reply in various documents on my Website.

Keep in mind that, because I drive a Subaru, does not mean that I prefer it to a Mercedes. Hard copy, in some ways, is priced like luxury cars relative to Subaru models. However, unlike automobiles, inexpensive e-Books have some advantages over the luxury (higher priced hard copy) versions, including such things as text search, free book replacement for lost readers, portability (think of trying to get 100 printed books into a backpack), etc.

Many of us luddites still board airplanes with paperback books in our carry-on luggage. And I was one of the early adopters with my Rocket eBook that I now cannot even find ---
http://www.trinity.edu/rjensen/ebooks.htm
I did find this technology useful on a couple of trips to China and long flights to other parts of the world. But it just did not stick with me. Perhaps when iPad eventually sells a version with a USB/firewire port I will change my mind.

Bob Jensen

Bob Jensen's threads on electronic book readers ---
http://www.trinity.edu/rjensen/ebooks.htm

"The Auditors And Financial Regulatory Reform: That Dog Don’t Hunt," by Francine McKenna, re: The Auditors, May 31, 2010 ---
http://retheauditors.com/2010/05/31/the-auditors-and-financial-regulatory-reform-that-dog-dont-hunt/

It’s not every day that a regular girl from Chicago has a chance to talk with a sitting US Senator about the subject most important to her.

No… I’m not talking about Rosie, my Rottweiler.

I’m talking about the auditors’ role in the financial crisis and their place in the regulatory reform bills now being considered. Through a series of wonderful and kind acts, namely the efforts of one particular journalist, I was invited to talk with Delaware Senator Ted Kaufman (D) and his staff about accounting industry reform.

The conversation was wide ranging and opinions expressed off-the-record. The meeting happened on the same day as Representative Barney Frank’s speech to the Compliance Week conference and we talked about his remarks. I expressed my disappointment with several things especially Rep. Frank’s capitulation on a Sarbanes-Oxley exception for smaller companies and his rambling response to the question about a Department of Justice implied “too few to fail” policy.

The Kaufman team is led with mucho gusto by the Senator. It was great to have a chance to meet them, but I realize it’s probably too late to get anything that addresses audit industry reform in this bill. There’s a lot of compromise going on with what’s already there.

Health care reform took some of the fight out of more than a few on both sides of the aisle and in both legislative bodies. Rep. Frank mentioned it a few times during his speech. He described advantages and disadvantages from a legislative perspective of the pure focus on financial regulatory reform now that health care is “a done deal.” It makes it both easier for media to spotlight an individual politician’s positions without the clutter of other major legislation and harder for that politician to hide behind multiple major initiatives when it comes to supporting or voting for controversial or dramatic change.

I came to the meeting with a few points to make. I think I did that but, as usual, a discussion of the issues facing the audit industry can get a little depressing, even for me.

However, this meeting, as well as the ones at the PCAOB, made me realize the time has come to make proposals and suggestions for industry change instead of just pointing out the issues, problems and need for change.

Most regulators and legislators avoid talking about wholesale change to the structure of the accounting/audit industry. It seems too big a task and untenable. The refrain I hear most often both when attending conferences and events and on this site is, “We can’t get rid of the audit opinion. It’s required.” I’ve also written about the strong and steady political contributions the accounting industry makes, party-agnostic, dictated primarily by the politician’s position and influence over the audit firms’ interests.

Lack of vision and loads of cash. These are the fundamental obstacles to serving investors and other stakeholders with financial reporting that can be trusted.

But it’s also true that Big Oil has spent years deluding itself and others into thinking that this kind of spill was impossible and that preparing for one wasn’t necessary. Indeed, BP once called a blowout disaster “inconceivable.” Certainly, if you can’t conceive of a disaster, you’ll become more and more lax, more and more reckless, until one happens. You’ll cut corners on backup systems and testing. And you certainly won’t pre-build and pre-position any relevant equipment for staunching the flow. Since a disaster can’t happen, you and your allies in Congress will block all serious safeguards and demagogue all efforts to oversee the industry as “Big Government interference in the marketplace that will raise the price of gasoline for average Americans.”

This quote comes from Salon and refers to the oil spill disaster. But it could have just as easily been said about the litigation threats against the largest global accounting firms and doubts about their viability and credibility post-financial crisis. If legislators and regulators can’t imagine a world without the audit firms and the audit report in their current form, then they can’t work towards something better for investors and the capitalist system.

The firms are broken and their basic product is worthless. The auditors were completely impotent to warn investors of over-leverage and risky business models, to prevent erroneous and potentially fraudulent financial reporting and to mitigate the impact on everyone of these errors, misstatements, obfuscations and subterfuge by executives of the failed, bailed out and nationalized financial institutions.

It wasn’t such an intellectual leap for media, regulators and legislators to see the inherent conflicts in the ratings agencies’ business model post-crisis and to essentially, with the stroke of a pen, destroy that business model.

New York Times, The Caucus Blog,
May 13, 2010: One amendment, sponsored by Senators George LeMieux, Republican of Florida and Maria Cantwell, Democrat of Washington, would remove references to the credit agencies in major financial services laws, including the Securities Exchange Act of 1934, the Investment Company Act of 1940 and the Federal Deposit Insurance Act. It was approved by a vote of 61 to 38.

Additional reform legislation sponsored by Senator Al Franken – I kid you not – puts the government in the middle between ratings agencies and the securities issuers. The ideas is to take the “pleaser” part out of how the credit raters make their living.

The Atlantic,
May 13, 2010: “The new legislation calls for every new ABS bond issue to have a rating by one agency assigned by a new board, instead of being chosen by the investment bank creating the security. The board will consist of mostly investors along with a few other industry participants. Although the underwriter can solicit additional ratings, it cannot escape the verdict of the assigned agency, so it cannot shop around for whichever agency has the most favorable view.”

Wouldn’t it be funny if the audit firms took advantage of the credit ratings agencies’ weakness and swooped in to do that business? After all, the auditors have the trust and integrity thing down pat. But there’s no way the audit firms would have the nerve to even float that idea post-EY/Lehman…

Nobody disagrees when I remind them that audit firms have the same inherent conflict of interest as ratings agencies. The audit firms have a business relationship with Audit Committees who are selected by the corporations’ executives. Audit partners are “pleasers.” The audit fees for the largest financial institutions are in the $100,000,000 annually range but it’s been a challenge to grow that business in the current economic environment. The Sarbanes-Oxley gravy train has pretty much derailed.

Is it such a stretch to think about taking the control over appointment and renewal of auditors away from the corporations – the corporate executives are the true corrupting influence on the poor, innocent auditors – and give it to the SEC or PCAOB? Corporations could be required to pay the auditor regardless of the audit opinion or how many exceptions are found or hard the auditor has to push back on aggressive accounting. All this can happen under the watchful eye of their regulator who can put the firms on a “good list” and can effect limited or general “debarment” type actions if an audit firm or audit partner rolls over and plays dead too often.

Continued in article

Bob Jensen's threads on the survival threats of large auditing firms ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Auditors

Here's a question for our FIN 48 expert, Amy Dunbar
"FIN 48 - Did Anyone Consider Compliance Costs for the Average Client?" AccountingWeb, June 13. 2010 ---
http://www.accountingweb.com/blogs/ann-callari/tax-chick/fin-48-did-anyone-consider-compliance-costs-average-client

"What is the XBRL Cloud Report?" Rivet Blog, No Date ---
http://blog.rivetsoftware.com/2010/03/03/xbrl-cloud-report/

The Cloud Report is a validation tool created by a third party to assist with the XBRL filing process. In fact, some printers use this tool as their validation tool for their XBRL clients. Rivet currently uses its own proprietary tool to perform this function and does not rely on a third party for its validation. In addition, Rivet’s validation rules are based on official SEC guidelines, as are documented in the EDGAR manual. We work very closely with the SEC to ensure our interpretation of the SEC guidelines adhere to the EDGAR manual appropriately.
It is important to note that all filings submitted to the SEC pass EDGAR validations otherwise they would not have been accepted by the SEC. The Cloud is a third party’s interpretation of the SEC guidelines as are all the validation tools on the market. It is not an official validation tool of the SEC. When the Cloud was first created, there were concerns that the terminology used, specifically error, was interpreted as not being accepted by the SEC for filing. This was not the case. The Cloud’s term error includes both SEC Rule violations and SEC Warnings. For example, the Cloud lists Error LC3. This Cloud error is actually an SEC warning related to the fact that no numbers can be listed in the element name label. Yet the SEC Rule requires that the element name label exactly match the financial statement label including the numbers. The filer must meet the SEC Rule as they will not be able to submit through Edgar without following it. Yet because the filer is following the SEC Rule, they will get a SEC warning because the label includes numbers and therefore, an error LC3 in the Cloud.

The Cloud has always meant to be used as a collaborative tool to help vendors and filers interpret the SEC EDGAR Rules. If you have ever looked at these rules, you will agree that it is very difficult for a non-technical person to interpret. We have worked with the Cloud’s founder to offer guidance on how we interpret the rules and he has provided us with valuable feedback in our interpretation. This has led to conversations with the SEC and has helped everyone in interpreting the SEC Rules more accurately.

In summary,

The Cloud Report is not an SEC endorsed tool. It is a third party interpretation of the guidelines.

All filings run through the Cloud Report were successfully filed with the SEC. The Cloud errors do not mean SEC errors.

The Cloud Report was meant to be used as a validation tool, not to evaluate XBRL vendors.

The Cloud should not be used as a tool to rank XBRL vendors for several reasons:

First, all filers have passed the SEC Rules during the filing process otherwise they would not have been able to file. The errors listed on the Cloud Report are SEC warnings.

Second, XBRL vendors cannot necessarily control what the filer decides to do with regard to the SEC warnings. For example, if Rivet is providing our full service solution to a client, we change the terse element label to reflect the element name so that there is no SEC warning produced. If our client has taken the filing process in house, we cannot control if they make this change or not. Either way is accepted by the SEC, but without updating the terse element label, a warning is produced and on the Cloud, an error is produced. Since this has no bearing on their filing, they usually pass on performing this step.

Third, the Cloud was meant to be a collaborative tool to be used in the filing process to ensure accuracy. All XBRL vendors have Cloud errors. The Cloud is an interpretation of the SEC guidelines and is not an official SEC validation tool.

If you find that this tactic is being used by a XBRL vendor vying for your business, you may want to ask the following:

Please show me your percentage of overall errors compared to the other XBRL vendors for all filings to date. All vendors have some Cloud errors because Cloud errors are the same as SEC warnings and are accepted by the SEC for filing.

Drilldown into a particular filing and have the XBRL vendor show you the actual Cloud error and have them explain in detail how this error impacted the filing.

Please let me know if I can be of any assistance during your evaluation phase. I would be more than happy to work with you in evaluating your XBRL needs.

Bob Jensen's badly neglected threads on XBRL are at
http://www.trinity.edu/rjensen/XBRLandOLAP.htm
This site is better on history than current updates.

A good site for current XBRL updates --- http://www.computercpa.com/

June 3, 2010 message from Ira Kawaller [kawaller@kawaller.com]

I've just posted an article that was just published in the May issue of the AFP Exchange. It deals with cross hedging -- i.e., hedging in the face of basis risk. This is an issue that is nearly universal for those with commodity exposures, but it may also arise from time to time with financial hedges, as well.

The thrust of the article is that these imperfections may work to the benefit of the hedging entity, and anticipating when these imperfections are likely to be beneficial can help contribute to the bottom line.

Please feel free to contact me if you have any questions or care to discuss.

Ira Kawaller

View the Article

Kawaller & Co. Services

the Kawaller Fund

"Institutional Research Roundup," by Doug Lederman, Inside Higher Ed, June 1, 2010 ---
http://www.insidehighered.com/news/2010/06/01/air

Institutional researchers are higher education's version of a utility infielder. That doesn't mean they lack expertise: They specialize in bringing data to bear on issues and problems, and explaining and interpreting those data to campus constituents who often come at the information from widely varying viewpoints. Their versatility comes, though, in the wide range of subjects they touch and of decisions over which they have some influence.

Given that eclectic role, the annual forum of the Association for Institutional Research typically covers a plethora of topics, and this year's meeting, the organization's 50th, is no exception. But it is also true that examining the forum's agenda usually offers a sense of which issues are keeping institutional leaders up at night, since those are often the topics that presidents and provosts and other campus officials have asked their data gurus to dive into.

Not surprisingly, given the emphasis that policy makers are placing on college completion and the fiscal realities that make every lost student a liability, retention and student success were all over the AIR agenda. Roughly a third of the 375 sessions related to institutional efforts to measure or improve students’ academic progress in higher education.

In one such session, Roger Mourad, director of institutional research at Michigan’s Washtenaw Community College, compared the characteristics of students who transferred from his institution and then graduated from a four-year college to those who transferred and did not earn a bachelor’s degree.

The study would help to shed light, Mourad said, on what he said remains a “very viable debate nowadays”: “Whether community colleges are democratic institutions operating as gateways to four-year institutions, or do they end up diverting students away from four-year bachelor’s institutions?”

Mourad’s study, which examined students who entered Washtenaw for the first time in 2000 and followed for eight years those who transferred to a four-year institution, found that about 44 percent of all transferring students graduated (with significantly higher proportions of transfers graduating from the University of Michigan than from Eastern Michigan University and other institutions).

Students were more likely to complete their bachelor’s degrees if they earned more credits and had higher grade point averages at the two-year college before transferring, as one might expect, Mourad said. But every additional semester they spent at Washtenaw actually reduced their odds of earning a bachelor’s degree, he said. “Students who were more immersed academically at the community college over a shorter period of time were better prepared to succeed at four-year institutions,” he said.

Why might staying longer at the community college actually reduce their likelihood of completion at the four-year institution? Mourad and the audience offered several theories, including that students “become too comfortable with the small class size, the easier access to faculty members,” and other nurturing elements of the two-year environment, or that they get used to the “less competitive” environment (marked by “easier grading”) that they may find at two-year institutions. “When they hit the four-year institutions, do they have transfer shock?” he wondered.

Diane Dean, an assistant professor of higher education policy at Illinois State University, came at the question of bachelor’s degree completion from another angle.

Amid growing interest among state policy makers in trying to limit fast-rising tuition rates, she examined whether state guaranteed tuition programs affected retention and completion rates.

Looking at comparable students and institutions in Illinois (which has a guaranteed tuition program) and those in surrounding Great Lakes states, which do not, Dean found that Illinois’s program had had insignificant effects on the success of its students at public universities. That may be, she speculated, because guaranteeing students a tuition rate may improve predictability of what students pay, but it doesn’t, by itself, make college more affordable for those students.

A Search for a Better Way

Many if not most sessions at the institutional researchers’ meeting involved campus IR officials presenting the results of studies they’ve conducted, with the goal of shedding light on local issues or problems.

One session Monday had a very different purpose: providing a forum for a group of college officials grappling with a common problem: the failure of the federal graduation rate to capture what’s happening on campuses filled with adult students.

Chris Davis, vice provost of institutional effectiveness at Chicago’s National-Louis University, said that many campuses like his were trying to find their own alternatives to the federal rate, which by focusing exclusively on full-time, first-time students captures a tiny fraction of the students at many adult-serving institutions. National-Louis has begun contemplating a series of indicators to measure its own students' success, such as looking separately at the graduation rates of students who transfer into the university with 15 or more credits and those who enter the university with 45 or more credits.

Continued in article

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

From The Wall Street Journal Accounting Weekly Review on June 4, 2010

ECB Warns Write-Downs Could Reach $239 Billion
by: David Enrich and Stephen Fidler
Jun 02, 2010
Click here to view the full article on WSJ.com

TOPICS: Bad Debts, Banking, Treasury Department

SUMMARY: "...The European Central Bank warned late Monday that euro-zone banks face ?195 billion ($239.26 billion) in write-downs this year and the next due to an economic outlook that remained 'clouded by uncertainty.' ...The ECB in May launched a series of initiatives to help banks, including the purchases of government debt from banks and the renewal of a program to give cheap six-month loans to banks....The moves helped provide some stability to the banks, but Europe's intertwined banking system remains stressed." Factors leading to this predicament stem from heavy exposure for real estate loans in Spain, Portugal, and Greece. Another contributing point is the fact that Europe did not replenish their banks' capital in 2008 and 2009 as did the U.S. and U.K., partly with taxpayer funds.

CLASSROOM APPLICATION: The article is useful in discussing bank balance sheets and loan losses as they relate to an overall economy.

QUESTIONS:
1. (Introductory) What is the underlying problem that began leading to concerns about the overall health of European banks?

2. (Introductory) What bank write-downs may reach ?195 billion ($239.26 billion) this year and next? How does an economic slow down lead to this situation?

3. (Advanced) Explain why "some European banks have less capital and more leverage than their U.S. counterparts"? In your answer, define the terms capital and leverage. Comment on the formula for leverage used in the chart entitled "In Deeper" sourced from the Organization for Economic Cooperation and Development (OECD).

4. (Advanced) What is the European banks' "stress test" that was begun in 2009 and is now being prepared for the second time?

5. (Introductory) Describe factors on both sides of the argument as to whether to disclose these stress test results that were not disclosed last year and that the European Central Bank (ECB) may not disclose this year as well.

Reviewed By: Judy Beckman, University of Rhode Island

"ECB Warns Write-Downs Could Reach $239 Billion," by David Enrich and Stephen Fidler, The Wall Street Journal, June 1. 2010 ---
http://online.wsj.com/article/SB10001424052748703406604575278620471963334.html?mod=djem_jiewr_AC_domainid

In the latest indication that European banks are in ill health, the European Central Bank warned late Monday that euro-zone banks face €195 billion ($239.26 billion) in write-downs this year and the next due to an economic outlook that remained "clouded by uncertainty."

The ECB news, part of its semiannual financial-stability report, comes on the heels of a campaign by governments and central banks to ease sovereign-debt problems in southern Europe. The efforts have failed to calm worries that a banking crisis may be forming on the Continent. That has led to escalating pressure on regulators and governments to do more.

European governments already have cobbled together a €110 billion bailout for Greece and a €750 billion rescue for other weak economies of the euro zone. The ECB in May launched a series of initiatives to help banks, including the purchases of government debt from banks and the renewal of a program to give cheap six-month loans to banks, while the U.S. Federal Reserve reactivated a swap line to provide European banks with dollars.

The moves helped provide some stability to the banks, but Europe's intertwined banking system remains stressed. Investors have hammered the sector, banks are stashing near-record amounts of deposits at the ECB—€305 billion as of Friday—instead of lending the funds to other institutions, risk-wary U.S. financial institutions are reducing their exposure to euro-zone banks, and U.S. government officials are pushing their case for Europe to disclose publicly the results of stress tests for euro-zone banks.

ECB Vice President Lucas Papademos defended the central bank's response to the banking crisis and said results of European Union-wide stress tests of banks should be completed in July, providing further details on the capacity of the region's banks to withstand shocks. The results of stress tests last year of individual banks weren't released publicly. Some European countries are opposed to the public release of results.

. . .

Like the financial crisis two years ago that was sparked by the unraveling of the U.S. subprime-mortgage industry, Europe's banking problems originated in a tiny patch of the global economy: Greece.

But the problems run deeper than the highly publicized fiscal woes facing Greece, prompting similar concerns about Portugal, Ireland and Spain. Credit-ratings firms have reduced these countries' rankings and have warned about possible future downgrades, with Fitch reducing Spain's triple-A rating by one notch on Friday.

All told, more than €2 trillion of public and private debt from Greece, Spain and Portugal is sitting on the balance sheets of financial institutions outside the three countries, according to a Royal Bank of Scotland report last week. Investors, bankers and government officials are worried that as that debt loses value, banks across Europe could be saddled with losses.

"Make no mistake: This is big," said Jacques Cailloux, RBS's chief European economist and the report's author. "We're talking about systemic risk [and] the potential for contagion."

Concerns also are mounting about how European banks will finance themselves in coming years. The banks have hundreds of billions of euros in debt maturing by 2012, analysts and bankers say. Replacing those funds could be difficult and costly, given fierce competition for deposits and skittishness among bond investors. The situation has alarmed bankers and government officials, and it helped fuel last week's selloff in bank stocks.

With funding scarce, some banks are becoming more dependent on the ECB. The central bank has doled out more than €800 billion in loans to banks, nearing its all-time high, according to UBS analysts. The ECB warned Monday that the "continued reliance" of some midsize banks on credit from the central bank remains "a cause for concern."

The U.S. and U.K. moved aggressively in 2008 and 2009 to replenish their banks' capital buffers, sometimes with taxpayer funds.

Most of Europe didn't follow suit, because their banking systems were largely spared the carnage of their Anglo-American counterparts. But as a result, most European banks today have thinner capital cushions and heavier debt loads than their U.S. and U.K. rivals, leaving them vulnerable to an economic slowdown.

"Some European banks have less capital and more leverage than their U.S. counterparts and…the crisis in Europe seems to have lagged behind that in the U.S. in both the writing off of losses and in the speed of raising more capital," said Angel Gurria, secretary-general of the Organization for Economic Cooperation and Development, in a speech in May.

OECD figures show that a selection of major U.S. banks are operating with leverage ratios—the ratio of assets to common equity—of between 12 and 17. By comparison, the same ratio for a group of major European banks ranged from 21 to 49, according to the OECD.

European policy makers have been trying to address that disparity by working on a global overhaul of banking regulations, to be enacted in 2012, that would require banks to hold more capital and liquidity. "But the regulatory fixes aren't going to solve the problem right now," said Michael Ben-Gad, an economics professor at City University London.

European governments and central bankers had hoped bailing out Greece and launching a liquidity program would relieve immediate pressure on other governments and the banking sector. But that hasn't happened, and new pressures could arise soon. The ECB last summer doled out €442 billion in one-year loans to euro-zone banks. Those loans come due June 30, potentially causing banks to scramble for a fresh source of cash this month.

European officials face calls from the banking industry, the investment community and foreign government leaders, including U.S. Treasury Secretary Timothy Geithner, to redouble efforts to stabilize the banking system through new initiatives.

RBS's Mr. Cailloux argues that the ECB should expand its recently launched program to buy government bonds and should broaden the effort to include private-sector debt as well.

That could ease concerns that banks will suffer heavy losses, potentially blowing holes in their balance sheets, on their portfolios of sovereign and corporate bonds tied to some European economies. But such a move also could expose the central bank to potential losses.

Citigroup Inc. last week circulated a paper calling on the ECB to launch a sort of insurance program to allow holders of government bonds—a group largely consisting of European banks—to sell the securities to the ECB in case of default. "Time is now of the essence and the authorities should continue to be bold and innovative in working to accelerate the impact of the available lines of support," Nazareth Festekjian, a Citigroup managing director, wrote in the paper.

The ECB had no comment on calls to increase the size of the bond-buying program or on the Citigroup recommendations.

Others want local European bank regulators to play a more proactive role monitoring their banks' exposures to troubled countries.

In the U.K., the Financial Services Authority has been conducting repeated stress tests of major British banks' exposures to southern Europe. Similarly intense efforts don't appear to be under way elsewhere in Europe, said Pat Newberry, chairman of the U.K. financial-services regulatory practice at PricewaterhouseCoopers LLP.

Mr. Newberry said conducting such tests would help European governments and banks get a better handle on their individual and collective vulnerabilities and to understand "how a series of unfortunate events can aggregate to turn a problem into a catastrophe."

U.S. authorities believe that stress tests can help restore market confidence. The tests the U.S. conducted last year helped inject greater transparency and confidence in the banking system, U.S. officials have said.

Banks are notorious for underestimating loan loss reserves and auditors are notorious for letting them get away with it ---
http://www.trinity.edu/rjensen/2008bailout.htm#AuditFirms

On May 26, 2010 the FASB issued an exposure draft that would make it more difficult to enormously underestimate load losses. International standards are expected to be changed accordingly.

On May 26, 2010, the FASB issued a proposed Accounting Standards Update, Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities, setting out its proposed comprehensive approach to financial instrument classification and measurement, and impairment, and revisions to hedge accounting. Also, extensive new presentation and disclosure requirements are proposed.

Here’s a “brief” from PwC on the new May 26 ED from the FASB --- Click Here
http://cfodirect.pwc.com/CFODirectWeb/Controller.jpf?ContentCode=THUG-85UVWW&SecNavCode=MSRA-84YH44&ContentType=Content

PwC points out some of the major differences between these proposed FASB revisions versus the IASB provisions.

Click Here to download the ED http://snipurl.com/fasb5-26-2010

June 1, 2010 message from Orenstein, Edith [eorenstein@FINANCIALEXECUTIVES.ORG]

AECM - I thought you would find this of interest, and thank you to Gary Previts & Teri Yohn for supporting this expanded outreach by Financial Executives International (FEI) to academics. Regards, Edith Orenstein, FEI FEI Expands Outreach To Academics

http://www.financialexecutives.org/eweb/upload/FEI/academicpromoMay2010.pdf

June 1, 2010 reply from Bob Jensen

I was a long-time academic member of FEI and even served as the President of the South Texas Chapter.

Although I benefitted from the various publications of the FEI, what I found most rewarding was the monthly meetings and other outings where I had face-to-face encounters with top financial officers in the South Texas Chapter (that included the headquarters of AT&T, Valero, USAA, and a number of other very large corporations). Among other things, local contacts might provide your students with internships. There were also free CPE opportunities that were presented by the Big Four.

What is not clear in Edith’s message are the local chapter dues policies. These cover such things as receptions and meals. Although the South Texas Chapter charged regular members for all meals and receptions whether or not they attended each meeting, an exception was made for academic members who only had to pay for events that they attended. I suspect this policy varies among local chapters.

Thanks Edith!

Bob Jensen

"A Place to See and Be Seen (and Learn a Little, Too): $109-million renovation of Ohio State's library reinforces its role in connecting the campus," by Scott Carlson, Chronicle of Higher Education, May 30, 2010 ---
http://chronicle.com/article/Do-Libraries-Still-Matter-/65708/?sid=wb&utm_source=wb&utm_medium=en

The Shocking Future of Higher Education and Education Technology ---
http://www.trinity.edu/rjensen/000aaa/updateee.htm

"Preventing Plagiarism," by Amy Cavender, Chronicle of Higher Education, June 11, 2010 ---
http://chronicle.com/blogPost/Preventing-Plagiarism/24695/?sid=wc&utm_source=wc&utm_medium=en

In the ideal world, none of us would ever have to write a note on a student's paper like the one in this photo. Since this isn't the ideal world, we're likely to have to deal with plagiarism every now and again. Dealing with instances of plagiarism will be the topic of my post for next week.

This week, I'd like to float a few ideas on preventing plagiarism.

The way we approach writing assignments can certainly make a difference. Most faculty are well aware that reusing the same essay prompts from one year to another is a bad idea, and asking students to submit longer papers in stages is useful for catching potential problems before they get a student into real trouble. (Incremental due dates may also reduce the temptation for students to plagiarize, since they force students to get started earlier.)

There are some good suggestions for instructors at pages maintained by the The University of Texas and The University of Alberta Libraries.

Further, I'm convinced that a lot (certainly not all) of the plagiarism committed by undergraduates is less than fully intentional, and that much of it stems from poor information-management practices.

That conviction has persuaded me that I need to change my approach to teaching students how to use Zotero. Some time ago, I wrote a post on teaching tech in Political Science. In that post, I mentioned introducing students to Zotero in order to emphasize the collaborative nature of scholarship and to make it easy for students to format their citations properly.

But Zotero is also a marvelous information-management system, and is therefore well-suited to avoiding the accidental plagiarism that results from not keeping good track of one's sources. If students get into the habit of keeping both their sources and their notes in Zotero, they're much less likely to inadvertently neglect to cite a source, or to accidentally cite something as a paraphrase or summary when it's really a direct quote.

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

June 12, 2010 message from Keith Weidkamp

From: Keith Weidkamp [mailto:weidkamp@surewest.net]
Sent: Saturday, June 12, 2010 7:26 PM
To: Jensen, Robert
Subject:

Hello Professor Jensen

I have followed ACEM and the many daily contributions for over two years. On two occasions I have commented back to individual professors. My name is Keith Weidkamp and I am a retired Professor of Accounting at Sierra College in Rocklin California. For over 20 years I have worked with Professor Leland Mansuetti, and for the past five years also with Professor Perry Edwards, developing, testing, and also publishing web-based practice sets, homework problems, study and review packets for Principles, Financial, Managerial, and Intermediate Accounting. We have with limited advertising and a few conference presentations added many schools to our adoption list. Texas A & M, Clemson, Trinity, Chicago, Mary Harden Baylor, Wisconsin, Minnesota, and many other smaller colleges and universities currently use one or more of our software products

As recently as yesterday and quite often over the last few months there have been comments and information regarding cheating and plagiarism. Over the past two years we have been working on and have developed and tested two web-based systems for Accounting practice sets and for Accounting homework that virtually eliminates the copying of work, and answers to questions and project examinations.   In our first presentation a month ago at the National TACTYC Convention in Phoenix, as the word got out regarding our new algorithmic products and software, we had over 50 Four-year and Two-year schools, from across the country ask for more information and an on-line demonstration.

Our new web-based software has added new opportunity to control a problem that has been an unfortunate issue to deal with for many years. While realizing that AECM is not a place to advertise, since the focus of AECM is Accounting Education and Multi-Media, I am asking you what you would recommend I do to get this information out to our large group professors as an informational item.

Attached you will find two information documents that outline our two new Algorithmic products. We have now two algorithmic practice sets and a full set of algorithmic topical problems (25 topics). Both of these products have the same key features.

On all practice sets each student starts with a different set of beginning balances. A unique set of check figures is available for each student user. Answers to key questions at the mid-point and at the end of the project, are different for each student.    With a single click an Instructor can view the work file of any student. With two clicks an instructor can print a copy of the student's graded examination showing their answers and the correct answers for that student.

On the Accounting Coach homework and/or study software, there are 25 topics for a student to choose from. Students are provided unlimited practice and Teacher Help screens for every topic and sub-topic. Every homework assignment ends with a short 5-8 minute algorithmic examination. This exam is scored and the grade automatically entered into the instructor grade book.   A well-prepared student can complete a topic assignment in 15-20 minutes. A student needing more assistance can continue the algorithmic practice and retake the algorithmic examination as many times as necessary to achieve a satisfactory score.

Special Features of this Software:

1. Cheating and copying others work is eliminated.

2. All student work is automatically graded and the score recorded into the instructor

    grade book.

3. Each practice set and problem has unlimited opportunity for practice, assistance,

      reinforcement and learning.

4. Student clerical time as well as homework and practice time is significantly

     reduced.

5. Instructor grading and recording time is almost completely eliminated.

6. Direct on-line support is provided from the Professor Authors!

The three authors of this software have a combined classroom experience of over 75 years. They use this software daily in their classes. Over 500 students use this software each semester at their school.

The new web-based software, with all of the special improvements not possible in a CD version, has eliminated all publishing, shipping, and markup costs.   All products can be purchased via PayPal for just $19.95 per student copy.

June 13, 2010 reply from Bob Jensen

Hi Keith,

I am forwarding your message to the AECM, because I think what you’ve accomplished is probably valuable to some instructors although not to the extent that I buy into your claim that “cheating and copying others’ work is eliminated.”

Your pedagogy is very limited in that it does not allow for creative solutions that differ from your templates. This is why some instructors assign term papers rather than practice sets. But term papers both increases and decreases opportunities to cheat.

And you’ve not eliminated advanced forms of cheating.

For one thing, students have very clever ways of communicating with one another and with answer files ---
http://www.trinity.edu/rjensen/Plagiarism.htm#NewKindOfCheating

In very large classes, it is often possible for surrogate students to pretend to be somebody else.

Adopters of Your Practice Sets May Have a False Sense of Security
You’re assuming that clever students (possibly advanced students) will not write answer templates such as Excel workbooks that are archived (e.g., in a fraternity’s database). Those templates may be just as efficient in finding solutions as your own answer templates that you use for grading purposes.

It has long been a practice of case-method teachers to recycle cases with changed numbers and sometimes even changed contexts and assumptions. However, students still find value added in having archives of the solutions answers of former versions of a case. This is one of the things that makes case method teaching very frustrating. It’s almost imperative to continually use new cases rather than recycled cases.

Seeking Creative Solutions Both Increase and Decrease Opportunities to Cheat
I defy anybody or any software from detecting all forms of plagiarism. Out of trillions upon trillions of pages of writings in history, a student can simply type in a sentence or a paragraph or an entire page of writing that has a 99% probability of being detected.

Unless somebody, like Tournitin, archives student term papers and problem solutions, plagiarism detection has more than a 99% chance of failing. For example, if a student writes an unpublished essay at Florida International that is never archived anywhere except in one professor’s brain, I defy you to detect its plagiarism in unpublished term papers elsewhere in the world.

Turnitin and other plagiarism services attempt to archive unpublished writings so that such works are not so easily plagiarized ---
http://www.trinity.edu/rjensen/Plagiarism.htm#Detection

Even Turnitin cannot archive more than a miniscule fraction of writings that have never been digitized.

The Best Way to Prevent Cheating
The real trick for professors is to assign unique projects where finding works or people to plagiarize will be an education in and of itself. For example, if I assign a project on accounting for contango swaps in Iceland I’ve eliminated 99.99999999999% of writings that can be safely plagiarized in a student term project at the University of Southern California. And I defy you to find a term paper writing service that will take this project on at reasonable prices. Of course there is an epsilon chance of finding something or somebody to plagiarize, but like I said doing this may be an education in and of itself. And I think cheating on this project will be more difficult than writing an Excel workbook for solution templates to your practice cses.

Bob Jensen

Bob Jensen's threads on cheating ---
http://www.trinity.edu/rjensen/Plagiarism.htm

IASB-FASB Convergence Efforts Hit IFRS Roadblocks and Delays

"IASB and FASB issue statement on their convergence work," IASB, June 2. 2010 --- Click Here
http://www.iasb.org/News/Announcements+and+Speeches/IASB+and+FASB+issue+statement+on+their+convergence+work.htm

The IASB and the FASB today announced their intention to prioritise the major convergence projects to permit a sharper focus on issues and projects that they believe will bring about significant improvement and convergence between IFRSs and US GAAP. Their joint statement is as follows:

In our November 2009 joint statement, we, the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) again reaffirmed our commitment to improving International Financial Reporting Standards (IFRSs) and US generally accepted accounting principles (GAAP) and achieving their convergence. That Statement affirmed June 2011 as the target date for completing the major projects in the 2006 Memorandum of Understanding (MoU), as updated in 2008, described project-specific milestone targets, and acknowledged the need to intensify our standards-setting efforts to meet those targets.

We committed to providing transparency and accountability regarding those plans by reporting periodically on our progress. Our first report, dated 31 March 2010, described the progress we had made to date, explained some of the challenges we face in improving and converging our standards in certain areas, and reported changes made to certain project-specific milestone targets.

As noted in our March 2010 progress report, we recognise the challenges that arise from seeking effective global stakeholder engagement on a large number of projects. Since publishing the March progress report, stakeholders have voiced concerns about their ability to provide high-quality input on the large number of major Exposure Drafts planned for publication in the second quarter of this year.

The IASB and the FASB are in the process of developing a modified strategy to take account of these concerns that would:

prioritise the major projects in the MoU to permit a sharper focus on issues and projects that we believe will bring about significant improvement and convergence between IFRS and US GAAP. stagger the publication of Exposure Drafts and related consultations (such as public round table meetings) to enable the broad-based and effective stakeholder participation in due process that is critically important to the quality of their standards. We are limiting to four the number of significant or complex Exposure Drafts issued in any one quarter. issue a separate consultation document seeking stakeholder input about effective dates and transition methods. The modified strategy retains the target completion date of June 2011 for many of the projects identified by the original MoU, including those projects, as well as other issues not in the MoU, where a converged solution is urgently required. The target completion dates for a few projects have extended into the second half of 2011. The nature of the comments received on the Exposure Drafts will determine the extent of the redeliberations necessary and the timeline required to arrive at high quality, converged standards.

The IASB and the FASB have begun discussions on this proposed strategy with their respective oversight bodies and regulators, including members of the IASC Foundation Monitoring Board.

It is expected that this action by the FASB and IASB will not negatively impact the Securities and Exchange Commission’s work plan, announced in February, to consider in 2011 whether and how to incorporate IFRS into the US financial system.

The boards expect to publish shortly a progress report that includes a revised work plan.

Bob Jensen's threads on accounting standards setting controversies are at
http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting

"Failed Convergence of R&D Accounting:: Only Politicians and Opportunists Would Have Downplayed the Implications," by Tom Selling, The Accounting Onion, June 5, 2010 --- Click Here
http://accountingonion.typepad.com/theaccountingonion/2010/06/failed-convergence-of-rd-accounting-only-politicians-and-opportunists-would-have-downplayed-the-implications.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+typepad%2Ftheaccountingonion+%28The+Accounting+Onion%29

Bob Jensen's threads on R&D accounting are at
http://www.trinity.edu/rjensen/Theory01.htm#FAS02

Bob Jensen's threads on IASB-FASB standards convergence ---
http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting

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

3. (Advanced) Focusing on accounting issues, state why cutting R&D operations quickly impact any company's financial performance in a current accounting period. In you answer, first address the question considering U.S. accounting standards.

4. (Advanced) Does your answer to the question above change when considering reporting practices under IFRS?

Pfizer Shuts Six R&D Sites After Takeover
by Jonathan D. Rockoff
Nov 10, 2009
Click here to view the full article on WSJ.com

TOPICS: Consolidation, GAAP, International Accounting, Mergers and Acquisitions, Research & Development

SUMMARY: "Pfizer Inc., digesting its $68 billion takeover of rival Wyeth last month, said Monday it will close six of its 20 research sites, in the latest round of cost cutting by retrenching drug makers....Pfizer executives wanted to cut costs quickly so the integration didn't stall research....'When we acquired Warner-Lambert, it took us almost two years to get into the position we will be in 30 to 60 days' after closing the Wyeth deal, Martin Mackay, one of Pfizer's two R&D chiefs, said in an interview."

CLASSROOM APPLICATION: Questions relate to understanding the immediate implications of reducing R&D expenditures for current period profit under both U.S. GAAP and IFRS as well as to understanding pharmaceutical industry consolidation and restructuring.

QUESTIONS:
1. (Introductory) What are the business issues within the pharmaceuticals industry in particular that are driving the need to reduce costs rapidly? In your answer, comment on industry consolidations and restructuring, including definitions of each of these terms.

2. (Introductory) What business reasons specific to Pfizer did their executives offer as reasons to cut R&D costs quickly?

3. (Advanced) Focusing on accounting issues, state why cutting R&D operations quickly impact any company's financial performance in a current accounting period. In you answer, first address the question considering U.S. accounting standards.

4. (Advanced) Does your answer to the question above change when considering reporting practices under IFRS?

Reviewed By: Judy Beckman, University of Rhode Island

RELATED ARTICLES:
Pfizer to Pay $68 Billion for Wyeth
by Matthew Karnitschnig
Jan 26, 2009
Page: A1

The Wall Street Journal, November 10, 2009 ---
http://online.wsj.com/article/SB10001424052748703808904574525644154101608.html?mod=djem_jiewr_AC

Pfizer Inc., digesting its $68 billion takeover of rival Wyeth last month, said Monday it will close six of its 20 research sites, in the latest round of cost cutting by retrenching drug makers.

Pfizer was expected to cut costs as part of its consolidation with Wyeth, and research and development was considered a prime target because the two companies' combined R&D budgets totaled $11 billion. In announcing the laboratory shutdowns Monday, Pfizer didn't say how many R&D jobs it would cut or how much it hoped to save from the shutdowns.

For much of this decade, pharmaceutical companies have been closing labs, laying off researchers and outsourcing more work from their once-sacrosanct R&D units. Pfizer previously closed several labs, including the Ann Arbor, Mich., facility where its blockbuster cholesterol fighter Lipitor was developed. In January, before the Wyeth deal was announced, Pfizer said it would lay off as many as 800 researchers.

But analysts say Pfizer Chief Executive Jeffrey Kindler and other industry leaders haven't done enough. A major reason for the industry consolidation this year is the opportunity to slash spending further.

Pfizer previously said it expects $4 billion in savings from its combination with Wyeth. It plans to eliminate about 19,500 jobs, or 15% of the combined company's total.

Merck & Co., which completed its $41.1 billion acquisition of Schering-Plough last week, is expected to cut 15,930 jobs, or about 15% of its work force. In September, Eli Lilly & Co. said it will eliminate 5,500 jobs, or nearly 14% of its total. Johnson & Johnson said last week that it will pare as many as 8,200 jobs, or 7%.

Drug makers are restructuring in anticipation of losing tens of billions of dollars in revenues as blockbuster products, such as Lipitor, start facing competition from generic versions. Setbacks developing new treatments have made the need to reduce spending all the more urgent, analysts say, and have reduced resistance to closing labs. The economic slump has only worsened the pharmaceutical industry's plight, pressuring sales.

The sites Pfizer is set to close include Wyeth's facility in Princeton, N.J., which has been working on promising therapies for Alzheimer's disease, including one called bapineuzumab under development by several companies. The Alzheimer's work will move to Pfizer's lab in Groton, Conn., which will be the combined company's largest site. The consolidation of Alzheimer's work "allows us to fully focus on that, rather than have to coordinate activities," said Mikael Dolsten, a former Wyeth official and one of two R&D chiefs at the combined company.

Besides Princeton, Pfizer said research also is scheduled to end at R&D sites in Chazy, Rouses Point and Plattsburgh, N.Y.; Gosport, Slough and Taplow in the U.K.; and Sanford and Research Triangle Park, N.C. Pfizer is counting as a single site labs close to each other, such as the facilities in Rouses Point and Plattsburgh, Slough and Taplow, and Sanford and Research Triangle Park. Along with the Princeton facility, those in Chazy, Rouses Point and Sanford had belonged to Wyeth.

The company is also planning to move work from its Collegeville, Pa.; Pearl River, N.Y., and St. Louis sites to other locations.

Pfizer executives wanted to cut costs quickly after the Wyeth deal's completion so the integration doesn't stall research. That was a problem with Pfizer's acquisition of Warner-Lambert in 2000 and its merger with Pharmacia in 2003. As a result, critics say the deals destroyed billions of dollars in shareholder value. Pfizer says it has learned from its past acquisitions.

"When we acquired Warner-Lambert, it took us almost two years to get into the position we will be in 30 to 60 days" after closing the Wyeth deal, Martin Mackay, one of Pfizer's two R&D chiefs, said in an interview. Up next, he said, the newly combined company will prioritize its R&D work and decide which potential therapies to abandon.

Differences between FASB and IASB standards ---
http://www.deloitte.com/dtt/cda/doc/content/pocketiasus.pdf

"Countrywide (now part of Bank of America) Pays $108 Million to Settle Fees Complaint." by Edward Wyatt, The New York Times, June 7, 2010 ---
http://www.nytimes.com/2010/06/08/business/08ftc.html?hp

The Federal Trade Commission announced Monday that two Countrywide mortgage servicing companies had agreed to pay $108 million to settle charges that they collected excessive fees from financially troubled homeowners.

The $108 million payment is one of the largest overall judgments in the commission’s history and resolves its largest mortgage servicing case. The money will go to more than 200,000 homeowners whose loans were serviced by Countrywide before July 2008, when it was acquired by Bank of America.

Jon Leibowitz, the chairman of the Federal Trade Commission, said that Countrywide’s loan servicing operation charged excessive fees to homeowners who were behind on their mortgage payments, in some cases asserting that customers were in default when they were not.

The fees, which were billed as the cost of services like property inspections and lawn mowing, were grossly inflated after Countrywide created subsidiaries to hire vendors to supply the services, increasing the cost several-fold in the process, the commission said.

In addition, the commission said that Countrywide at times imposed a new round of fees on homeowners who had recently emerged from bankruptcy protection, sometimes threatening the consumers with a new foreclosure.

“Countrywide profited from making risky loans to homeowners during the boom years, and then profited again when the loans failed,” Mr. Leibowitz said.

The $108 million settlement represents the agency’s estimate of consumer losses, but does not include a penalty, which the commission is not allowed to impose.

Clifford J. White III, the director of the executive office for the United States Trustees Program, which enforces bankruptcy laws for the Department of Justice, said that the commission’s settlement “will help prevent future harm to homeowners in dire financial straits who legitimately seek bankruptcy protection.”

The settlement bars Countrywide from making false representations about amounts owed by homeowners, from charging fees for services that are not authorized by loan agreements, and from charging unreasonable amounts for work.

In addition, the settlement requires Countrywide to establish internal procedures and an independent third party to verify that bills and claims filed in bankruptcy court are valid.

“Now more than ever, companies that service consumers’ mortgages need to do so in an honest and fair way,” Mr. Leibowitz said.

The F.T.C. has not yet established how much will be paid to each consumer, in part, Mr. Leibowitz said, because Countrywide’s record keeping was “abysmal.” About $35 million of the $108 million total was charged to homeowners already in bankruptcy proceedings, with the remainder charged to customers whom Countrywide said were in default on their mortgages.

Jensen Comment
I think Countrywide got off too easy. The evil Countrywide brokered mortgages to borrowers that had no hope of paying back the debt and then charged they excessive fees when they got behind in their payments.

Bob Jensen's threads on the sleaze of Countrywide are at
http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze

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

Won't Pledge to "Do No Evil"

"MBA Oath Loses Traction at Yale," Business Week, May 26, 2010 --- http://www.businessweek.com/bschools/blogs/mba_admissions/archives/2010/05/mba_oath_loses_traction_at_yale.html

It looks like the MBA Oath, a controversial attempt to give the business world its own version of the Hippocratic Oath, may be suffering its first major defeat. The Community Blog at the Yale School of Management (Yale Full-Time MBA Profile) is reporting that an SOM Town Hall meeting ended without an endorsement of the oath. According to the post, “We didn’t reach a consensus, so we won’t join, nor formally oppose the Business Oath. Future classes may decide to take a stance, but for now, the conversation has begun, and individuals can sign or not sign as they see fit.” Bottom line: an oath that has been enthusiastically embraced by virtually every top b-school is getting a noncommittal shrug from Yale.

Key takeaways from Sornette's forecasting method which he calls the Financial Bubble Experiment

There are good reasons to think that stock markets are fundamentally unpredictable. Many econophysicists believe for example, that the data from these markets bear a startling resemblance to other data from seemingly unconnected phenomena, such as the size of earthquakes, forest fires and avalanches, which defy all efforts of prediction.
Sornette says there are two parts to his forecasting method. First, he says bubbles are markets experiencing greater-then-exponential growth. That makes them straightforward to spot, something that surprisingly hasn't been possible before.

Second, he says these bubble markets display the tell signs of the human behaviour that drives them. In particular, people tend to follow each other and this result in a kind of herding behaviour that causes prices to fluctuate in a periodic fashion.
That's when Sornette announced an brave way of test his forecasting method which he calls the Financial Bubble Experiment. His idea is to make a forecast but keep it secret. He posts it in encrypted form to the arXiv which time stamps it and ensures that no changes can be made.
Then, six months later, he reveals the forecast and analyses how successful it has been. Today, we can finally see the analysis of his first set of predictions made 6 months ago.
It's tempting to imagine that this extra information would have a calming effect on otherwise volatile markets. But the real worry is that it could have exactly the opposite effect: that predictions of the imminent collapse whether accurate or not would lead to violent corrections. That will have big implications for econophysics and those who practice it.

"Econophysicist Accurately Forecasts Gold Price Collapse: The first results from the Financial Bubble Experiment will have huge implications for econophysics," MIT's Technology Review, June 2, 2010 ---
http://www.technologyreview.com/blog/arxiv/25269/?nlid=3065

There are good reasons to think that stock markets are fundamentally unpredictable. Many econophysicists believe for example, that the data from these markets bear a startling resemblance to other data from seemingly unconnected phenomena, such as the size of earthquakes, forest fires and avalanches, which defy all efforts of prediction.

Some go as far as to say that these phenomena are governed by the same fundamental laws so that if one is unpredictable, then they all are.

And yet financial markets may be different. Last year, this blog covered an extraordinary forecasts made by Didier Sornette at the Swiss Federal Institute of Technology in Zurich, who declared that the Shanghia Composite Index was a bubble market and that it would collapse within a certain specific period of time.

Much to this blog's surprise, his prediction turned out to be uncannily correct.

Sornette says there are two parts to his forecasting method. First, he says bubbles are markets experiencing greater-then-exponential growth. That makes them straightforward to spot, something that surprisingly hasn't been possible before.

Second, he says these bubble markets display the tell signs of the human behaviour that drives them. In particular, people tend to follow each other and this result in a kind of herding behaviour that causes prices to fluctuate in a periodic fashion.

However, the frequency of these fluctuations increases rapidly as the bubble comes closer to bursting. It's this signal that Sornette uses in predicting a change from superexponential growth to some other regime (which may not necessarily be a collapse).
While Sornette's success last year was remarkable it wasn't entirely convincing as this blog pointed out at the time

"The problem with this kind of forecast is that it is difficult interpret the results. Does it really back Sornette's hypothesis that crashes are predictable? How do we know that he doesn't make these predictions on a regular basis and only publicise the ones that come true? Or perhaps he modifies them as the due date gets closer so that they always seem to be right (as weather forecasters do). It's even possible that his predictions influence the markets: perhaps they trigger crashes Sornette believes he can spot."

That's when Sornette announced an brave way of test his forecasting method which he calls the Financial Bubble Experiment. His idea is to make a forecast but keep it secret. He posts it in encrypted form to the arXiv which time stamps it and ensures that no changes can be made.
Then, six months later, he reveals the forecast and analyses how successful it has been. Today, we can finally see the analysis of his first set of predictions made 6 months ago.

Back then, Sornette and his team identified four markets that seemed to be experiencing superexponential growth and the tell tale signs of an imminent bubble burst.

These were:the IBOVESPA Index of 50 brazillian stocks, a Merrill Lynch Corporate Bond Indexthe spot price of goldcotton futures

These predictions had mixed success. First let's look at the failures. Sornette says that it now turns out that the Merill Lynch Index was in the process of collapse when Sornette made the original prediction six months ago. So that bubble burst long before Sornette said it would. And cotton futures are still climbing in a bubble market that has yet to collapse. So much for those forecasts.

However, Sornette and his team were spot on with their other predictions. Both the IBOVESPA Index and the spot price of gold changed from superexponential growth to some other kind of regime in the time frame that Sornette predicted. That's an impressive result by anybody's standards.
And the team says it can do better. They point out that they learnt a substantial amount during the first six months of the experiment. They have used this experience to develop a tool called a "bubble index" which they can use to determine the probability that a market that looks like a bubble actually is one.

This should help to make future forecasts even more accurate. Had this tool been available six months ago, for example, it would have clearly showed that the Merrill Lynch index had already burst, they say. If Sornette continues with this type of success it's likely that others will want to copy his method. An interesting question is what will happen to the tell tale herding behaviour once large numbers of analysts start looking for and betting on it.
It's tempting to imagine that this extra information would have a calming effect on otherwise volatile markets. But the real worry is that it could have exactly the opposite effect: that predictions of the imminent collapse whether accurate or not would lead to violent corrections. That will have big implications for econophysics and those who practice it.

Either way, Sornette is continuing with the experiment. He has already sealed his set of predictions for the next six months and will reveal them on 1 November. We'll be watching.

Ref: http://arxiv.org/ftp/arxiv/papers/0911/0911.0454.pdf:
The Financial Bubble Experiment: Advanced Diagnostics and Forecasts of Bubble Terminations Volume I

Jensen Comment
If there is anything at all to Sornette's forecasting theory, it most likely cannot be extended to markets where insiders play a key role such as the price bubble of a particular company's common shares. Insiders can, and often do, manipulate markets. But in deep commodities markets such as the price of gold or stock index prices, Sornette may have something that is rooted in his herding behavior theory. The problem of course is in identifying false positives.

Great Nova Video: Can a market of irrational people be a "rational market?"
PBS Nova Videp: "Mind Over Money," http://video.pbs.org/video/1479100777

Jensen Question
This seems to beg the question of how accountants can contribute information to irrational people with an underlying goal of helping their markets themselves be more rational.

Of course many scholars argue that markets themselves are not " rational" ---
http://en.wikipedia.org/wiki/Justin_Fox

Behavioral Economics --- http://en.wikipedia.org/wiki/Behavioral_economics

Bounded Rationality --- http://en.wikipedia.org/wiki/Bounded_rationality

Bob Jensen's threads on the efficient market hypothesis ---
http://www.trinity.edu/rjensen/Theory01.htm#EMH

"Preparing Undergraduates as Business Professionals," Harvard Business Review, June 2, 2010 --- Click Here
http://blogs.hbr.org/imagining-the-future-of-leadership/2010/06/preparing-undergraduates-as-bu.html?cm_mmc=npv-_-DAILY_ALERT-_-AWEBER-_-DATE

Editor's note: This post is part of a six-week blog series on how leadership might look in the future. The conversations generated by these posts will help shape the agenda of a symposium on the topic in June 2010, hosted by HBS's Nitin Nohria, Rakesh Khurana, and Scott Snook. This week's focus: leadership development.)

Don't Get Gored
"For Richer or Poorer: Financial Planning for Newlyweds," Smartpros, May 27, 2010 ---
http://accounting.smartpros.com/x69612.xml

"FDIC Offers Money-Saving Tips in the New World of Credit Cards," Smartpros, May 27, 2010 ---
http://accounting.smartpros.com/x69598.xml

Bob Jensen's helpers for personal financial planning ---
http://www.trinity.edu/rjensen/Bookbob1.htm#InvestmentHelpers

"Are You a Teacher or Are You a Mentor?" by Joe Hoyle, Teaching Financial Accounting Blog, May 30, 2010 ---
http://joehoyle-teaching.blogspot.com/2010/05/are-you-teacher-or-are-you-mentor.html

"How Do You Radically Improve Education?" by Joe Hoyle, Teaching Financial Accounting Blog, May 30, 2010 ---
http://joehoyle-teaching.blogspot.com/2010/05/how-do-you-radically-improve-education.html
Really about what's wrong with textbooks.

The above site provides a link to Joe's updated and free financial accounting textbook.
Joe also makes his examinations free to educators.

Question
Can you detect when Jeff Skilling lied just by studying his face?

"Guest Post: Fraud Girl – Can We Detect Lying From Nonverbal Cues?" Simoleon Sense, June 20, 2010 ---
http://www.simoleonsense.com/guest-post-fraud-girl-can-we-detect-lying-from-nonverbal-cues/
This includes a video of Jeff Skilling's testimony

“The greatest past users of deception…are highly individualistic and competitive; they would not easily fit into a large organization…and tend to work by themselves. They are often convinced of the superiority of their own opinions. They do in some ways fit the supposed character of the lonely, eccentric bohemian artist, only the art they practice is different. This is apparently the only common denominator for great practitioners of deception such as Churchill, Hitler, Dayan, and T.E. Lawrence”

-Michael I. Handel (58)

Welcome Back.

Last week we wrapped up Part II of the Fraud by Hindsight case. We noted that hindsight bias is a major concern in securities litigation & fraud cases. We explained how fraud by hindsight leads judges to misinterpret relevant facts and such let financial criminals off the hook.

This week we will analyze the work of Paul Ekman, a professor at the University of California who has spent approximately 50 years analyzing human emotions and nonverbal communication. Ekman’s work is featured in the television show “Lie to Me”. One of his most popular books, Telling Lies: Clues to Deceit in the Marketplace, Politics, and Marriage, describes “how lies vary in form and how they can differ from other types of misinformation that can reveal untruths”. He claims that although ‘professional lie hunters’ can learn how to recognize a lie, the so-called ‘natural liars’ can still fool them.

So the question is:

Can most financial felons be classified as ‘natural liars’? If so, is it at all possible to catch them via their body language, voice, and facial expressions?

To test this, I examined (a clip from) the February 2002 testimony of former Enron CEO Jeff Skilling to see if I could spot any deception clues. In his testimony, Skilling pleads that his resignation from Enron was solely for personal reasons and that he had no knowledge that Enron was on the brink of collapse. In order to not be misled by Skilling’s words, I watched the testimony without sound and focused solely on his facial expressions and body movements. Ekman noted, “most people pay most attention to the least trustworthy sources – words and facial expressions – and so are easily misled” (81). In trying to be coherent with Ekman’s beliefs, this is what I found on Jeff Skilling:

Video of Jeff Skilling's testimony

Continued in article
http://www.simoleonsense.com/guest-post-fraud-girl-can-we-detect-lying-from-nonverbal-cues/

Other Related Posts From Simoleon Sense:

Related References from Bob Jensen's Archives

Question
What new technology reads emotions in faces?

A demonstration version of the face detection and analysis software package is available for download at: http://www.iis.fraunhofer.de/EN/bf/bv/kognitiv/biom/dd.jsp

"Happy, sad, angry or astonished?" PhysOrg, July 3, 2007 ---

An advertisement for a new perfume is hanging in the departure lounge of an airport. Thousands of people walk past it every day. Some stop and stare in astonishment, others walk by, clearly amused. And then there are those who seem puzzled when they look at the poster.

With the help of a small video camera, the system automatically localizes the faces of everyone who walks past the advertisement. And nothing escapes its watchful eye: Does the passerby look happy, surprised, sad or even angry?

The system for rapid facial analysis is being developed by researchers at the Fraunhofer Institute for Integrated Circuits IIS in Erlangen. Highly complex algorithms immediately localize human faces in the image, differentiate between men and women and analyze their expressions.

“The special feature of our facial analysis software is that it operates in real time,” says Dr. Christian Küblbeck, project manager at the IIS. “What’s more, it is able to localize and analyze a large number of faces simultaneously.” The most important facial characteristics used by the system are the contours of the face, the eyes, the eyebrows and the nose. First of all, the system has to go through a training phase in which it is presented with huge quantities of data containing images of faces. In normal operation, the computer compares 30,000 facial characteristics with the information that it has previously learned.

“On a standard PC, the calculations are carried out so quickly that mood changes can be tracked live,” explains Küblbeck. However, we do not need to worry about an invasion of our privacy, as the software analyzes the data on a purely statistical basis.

The software package is not only of interest to advertising psychologists; there are numerous potential applications for the system. It can be used, for example, to test the user-friendliness of computer software programs. The system monitors the facial expressions of the user in order to determine which aspects of the program arouse a particularly strong reaction. Alternatively, it can assess the reactions of the users of learning software, in order to establish the extent to which they are put under stress or challenged by the task they are performing. The system could also be used to check the levels of concentration of car drivers.

A demonstration version of the face detection and analysis software package is available for download at: http://www.iis.fraunhofer.de/EN/bf/bv/kognitiv/biom/dd.jsp

Question
What new technology reads emotions in faces?

A demonstration version of the face detection and analysis software package is available for download at: http://www.iis.fraunhofer.de/EN/bf/bv/kognitiv/biom/dd.jsp

"Happy, sad, angry or astonished?" PhysOrg, July 3, 2007 ---

An advertisement for a new perfume is hanging in the departure lounge of an airport. Thousands of people walk past it every day. Some stop and stare in astonishment, others walk by, clearly amused. And then there are those who seem puzzled when they look at the poster.

With the help of a small video camera, the system automatically localizes the faces of everyone who walks past the advertisement. And nothing escapes its watchful eye: Does the passerby look happy, surprised, sad or even angry?

The system for rapid facial analysis is being developed by researchers at the Fraunhofer Institute for Integrated Circuits IIS in Erlangen. Highly complex algorithms immediately localize human faces in the image, differentiate between men and women and analyze their expressions.

“The special feature of our facial analysis software is that it operates in real time,” says Dr. Christian Küblbeck, project manager at the IIS. “What’s more, it is able to localize and analyze a large number of faces simultaneously.” The most important facial characteristics used by the system are the contours of the face, the eyes, the eyebrows and the nose. First of all, the system has to go through a training phase in which it is presented with huge quantities of data containing images of faces. In normal operation, the computer compares 30,000 facial characteristics with the information that it has previously learned.

“On a standard PC, the calculations are carried out so quickly that mood changes can be tracked live,” explains Küblbeck. However, we do not need to worry about an invasion of our privacy, as the software analyzes the data on a purely statistical basis.

The software package is not only of interest to advertising psychologists; there are numerous potential applications for the system. It can be used, for example, to test the user-friendliness of computer software programs. The system monitors the facial expressions of the user in order to determine which aspects of the program arouse a particularly strong reaction. Alternatively, it can assess the reactions of the users of learning software, in order to establish the extent to which they are put under stress or challenged by the task they are performing. The system could also be used to check the levels of concentration of car drivers.

A demonstration version of the face detection and analysis software package is available for download at: http://www.iis.fraunhofer.de/EN/bf/bv/kognitiv/biom/dd.jsp

Questions
Has the art and science of reading faces ever been part of an auditing curriculum?
Have there been any accountics studies of Ekman's theories as applied to auditing behavioral experiments?
(I can imagine that some accounting doctoral students have not experimented along these lines?)

Paul Ekman video on how to read faces and detect lying --- http://www.youtube.com/watch?v=IA8nYZg4VnI
This video runs for nearly one hour

Paul Ekman --- http://en.wikipedia.org/wiki/Paul_Ekman

Ekman's work on facial expressions had its starting point in the work of psychologist Silvan Tomkins.^[Ekman showed that contrary to the belief of some anthropologists including Margaret Mead, facial expressions of emotion are not culturally determined, but universal across human cultures and thus biological in origin. Expressions he found to be universal included those indicating anger, disgust, fear, joy, sadness, and surprise. Findings on contempt are less clear, though there is at least some preliminary evidence that this emotion and its expression are universally recognized.^]

In a research project along with Dr. Maureen O'Sullivan, called the Wizards Project (previously named the Diogenes Project), Ekman reported on facial "microexpressions" which could be used to assist in lie detection. After testing a total of 15,000 [EDIT: This value conflicts with the 20,000 figure given in the article on Microexpressions] people from all walks of life, he found only 50 people that had the ability to spot deception without any formal training. These naturals are also known as "Truth Wizards", or wizards of deception detection from demeanor.

He developed the Facial Action Coding System (FACS) to taxonomize every conceivable human facial expression. Ekman conducted and published research on a wide variety of topics in the general area of non-verbal behavior. His work on lying, for example, was not limited to the face, but also to observation of the rest of the body.

In his profession he also uses verbal signs of lying. When interviewed about the Monica Lewinsky scandal, he mentioned that he could detect that former President Bill Clinton was lying because he used distancing language.

Ekman has contributed much to the study of social aspects of lying, why we lie, and why we are often unconcerned with detecting lies. He is currently on the Editorial Board of Greater Good magazine, published by the Greater Good Science Center of the University of California, Berkeley. His contributions include the interpretation of scientific research into the roots of compassion, altruism, and peaceful human relationships. Ekman is also working with Computer Vision researcher Dimitris Metaxas on designing a visual lie-detector.

Research Papers Worth Reading On Deceit, Body Language, Influence etc.. (with links to pdfs)

Sixteen Enjoyable Emotions. – (2003) Emotion Researcher, 18, 6-7. by Ekman, P

“Become Versed in Reading Faces”. Entrepreneur, 26 March 2009. Ekman, P. (2009)
Intoduction: Expression Of Emotion - In RJ Davidson, KR Scherer, & H.H. Goldsmith (Eds.) Handbook of Afective Sciences. Pp. 411-414.Keltner, D. & Ekman, P (2003)

Facial Expression Of Emotion. – In M.Lewis and J Haviland-Jones (eds) Handbook of emotions, 2nd edition. Pp. 236-249. New York: Guilford Publications, Inc. Keltner, D. & Ekman, P. (2000)

Emotional And Conversational Nonverbal Signals. – In L.Messing & R. Campbell (eds.) Gesture, Speech and Sign. Pp. 45-55. London: Oxford University Press.

A Few Can Catch A Liar. - Psychological Science, 10, 263-266. Ekman, P., O’Sullivan, M., Frank, M. (1999)
Deception, Lying And Demeanor.- In States of Mind: American and Post-Soviet Perspectives on Contemporary Issues in Psychology . D.F. Halpern and A.E.Voiskounsky (Eds.) Pp. 93-105. New York: Oxford University Press.

Lying And Deception. – In N.L. Stein, P.A. Ornstein, B. Tversky & C. Brainerd (Eds.) Memory for everyday and emotional events. Hillsdale, NJ: Lawrence Erlbaum Associates, 333-347.

Lies That Fail.- In M. Lewis & C. Saarni (Eds.) Lying and deception in everyday life. Pp. 184-200. New York: Guilford Press.

Who Can Catch A Liar. -American Psychologist, 1991, 46, 913-120.
Hazards In Detecting Deceit. In D. Raskin, (Ed.) Psychological Methods for Investigation and Evidence. New York: Springer. 1989. (pp 297-332)

Self-Deception And Detection Of Misinformation. In J.S. Lockhard & D. L. Paulhus (Eds.) Self-Deception: An Adaptive Mechanism?. Englewood Cliffs, NJ: Prentice-Hall, 1988. Pp. 229- 257.

Smiles When Lying. – Journal of Personality and Social Psychology, 1988, 54, 414-420.
Felt- False- And Miserable Smiles.Ekman, P. & Friesen, W.V.

Mistakes When Deceiving. Annals of the New York Academy of Sciences. 1981, 364, 269-278.

Nonverbal Leakage And Clues To Deception Psychiatry, 1969, 32, 88-105.

"You Can't Hide Your Lying Brain (or Can You?), by Tom Bartlett, Chronicle of Higher Education, May 6, 2010 ---
http://chronicle.com/blogPost/You-Cant-Hide-Your-Lying/23780/

Earlier this week Wired reported that a Brooklyn lawyer wanted to use fMRI brain scans to prove that his client was telling the truth. The case itself is an average employer-employee dispute, but using brains scans to tell whether someone is lying—which a few, small studies have suggested might be useful—would set a precedent for neuroscience in the courtroom. Plus, I'm pretty sure they did something like this on Star Trek once.

But why go to all the trouble of scanning someone's brain when you can just count how many times the person blinks? A study published this month in Psychology, Crime & Law found that when people were lying they blinked significantly less than when they were telling the truth. The authors suggest that lying requires more thinking and that this increased cognitive load could account for the reduction in blinking.

For the study, 13 participants "stole" an exam paper while 13 others did not. All 26 were questioned and the ones who had committed the mock theft blinked less when questioned about it than when questioned about other, unrelated issues. The innocent 13 didn't blink any more or less. Incidentally, the blinking was measured by electrodes, not observation.

But the authors aren't arguing that the blink method should be used in the courtroom. In fact, they think it might not work. Because the stakes in the study were low--no one was going to get into any trouble--it's unclear whether the results would translate to, say, a murder investigation. Maybe you blink less when being questioned about a murder even if you're innocent, just because you would naturally be nervous. Or maybe you're guilty but your contacts are bothering you. Who knows?

By the way, the lawyer's request to introduce the brain scanning evidence in court was rejected, but lawyers in another case plan to give it a shot later this month.

(The abstract of the study, conducted by Sharon Leal and Aldert Vrij, can be found here. The company that administers the lie-detection brain scans is called Cephos and their confident slogan is "The Science Behind the Truth.")

"The New Face of Emoticons: Warping photos could help text-based communications become more expressive," by Duncan Graham-Rowe, MIT's Technology Review, March 27, 2007 --- http://www.technologyreview.com/Infotech/18438/

Computer scientists at the University of Pittsburgh have developed a way to make e-mails, instant messaging, and texts just a bit more personalized. Their software will allow people to use images of their own faces instead of the more traditional emoticons to communicate their mood. By automatically warping their facial features, people can use a photo to depict any one of a range of different animated emotional expressions, such as happy, sad, angry, or surprised.

All that is needed is a single photo of the person, preferably with a neutral expression, says Xin Li, who developed the system, called Face Alive Icons. "The user can upload the image from their camera phone," he says. Then, by keying in familiar text symbols, such as ":)" for a smile, the user automatically contorts the face to reflect his or her desired expression.

"Already, people use avatars on message boards and in other settings," says Sheryl Brahnam, an assistant professor of computer information systems at MissouriStateUniversity, in Springfield. In many respects, she says, this system bridges the gap between emoticons and avatars.

This is not the first time that someone has tried to use photos in this way, says Li, who now works for Google in New York City. "But the traditional approach is to just send the image itself," he says. "The problem is, the size will be too big, particularly for low-bandwidth applications like PDAs and cell phones." Other approaches involve having to capture a different photo of the person for each unique emoticon, which only further increases the demand for bandwidth.

Li's solution is not to send the picture each time it is used, but to store a profile of the face on the recipient device. This profile consists of a decomposition of the original photo. Every time the user sends an emoticon, the face is reassembled on the recipient's device in such a way as to show the appropriate expression.

To make this possible, Li first created generic computational models for each type of expression. Working with Shi-Kuo Chang, a professor of computer science at the University of Pittsburgh, and Chieh-Chih Chang, at the Industrial Technology Research Institute, in Taiwan, Li created the models using a learning program to analyze the expressions in a database of facial expressions and extract features unique to each expression. Each of the resulting models acts like a set of instructions telling the program how to warp, or animate, a neutral face into each particular expression.

Once the photo has been captured, the user has to click on key areas to help the program identify key features of the face. The program can then decompose the image into sets of features that change and those that will remain unaffected by the warping process.

Finally, these "pieces" make up a profile that, although it has to be sent to each of a user's contacts, must only be sent once. This approach means that an unlimited number of expressions can be added to the system without increasing the file size or requiring any additional pictures to be taken.

Li says that preliminary evaluations carried out on eight subjects viewing hundreds of faces showed that the warped expressions are easily identifiable. The results of the evaluations are published in the current edition of the Journal of Visual Languages and Computing.

Continued in article

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

Question
Do big bonuses lead to worse performance?

"Does Bigger Bonus Equal Worse Performance?Around the turn of every year, bankers can think of only one thing: the size of their bonuses," by Dan Ariely, Wall Street Technology, June 18, 2010 ---
http://wallstreetandtech.com/career-management/showArticle.jhtml?articleID=225700612&cid=nl_wallstreettech_daily
Thanks Jagdish!

Around the turn of every year, bankers can think of only one thing: the size of their bonuses.

Even beyond bonus season, they run different scenarios and assumptions, trying to calculate their number.

This distracts them so much that the bigger the bonus at stake, the worse the performance, according to behavioral economist Dan Ariely, who lays out his theory in his new book "The Upside of Irrationality" (HarperCollins, $27.99).

"For a long time we trained bankers to think they are the masters of the universe, have unique skills and deserve to be paid these amounts," said Ariely, who also wrote the New York Times bestseller "Predictably Irrational."

"It is going to be hard to convince them that they don't really have unique skills and that the amount they've been paid for the past years is too much."

Ariely's findings come as regulators try to rein in Wall Street's bonus culture after the 2008 financial collapse. The financial industry argues it needs to pay large bonuses to attract and motivate its top employees.

In an experiment in India, Ariely measured the impact of different bonuses on how participants did in a number of tasks that required creativity, concentration and problem-solving.

One of the tasks was Labyrinth, where the participants had to move a small steel ball through a maze avoiding holes. Ariely describes a man he identified as Anoopum, who stood to win the biggest bonus, staring at the steel ball as if it were prey.

"This is very, very important," Anoopum mumbled to himself. "I must succeed." But under the gun, Anoopum's hands trembled uncontrollably, and he failed time after time.

A large bonus was equal to five months of their regular pay, a medium-sized bonus was equivalent to about two weeks pay and a small bonus was a day's pay.

There was little difference in the performance of those receiving the small and medium-sized bonuses, while recipients of large bonuses performed worst.

SHOCK TREATMENT

More than a century ago, an experiment with rats in a maze rigged with electric shocks came to a similar conclusion. Every day, the rats had to learn how to navigate a new maze safely.

When the electric shocks were low, the rats had little incentive to avoid them. At medium intensity they learned their environment more quickly.

But when the shock intensity was very high, it seemed the rats could not focus on anything other than the fear of the shock.

This may provide lessons for regulators who want to change Wall Street's bonus culture, Ariely said. Paying no bonus or smaller bonuses could help fix skewed incentives without loss of talent.

"The reality is, a lot of places are able to attract great quality people without paying them what bankers are paid," Ariely said. "Do you think bankers are inherently smarter than other people? I don't." (Reporting by Kristina Cooke; Editing by Daniel Trotta)

"Dan Ariely: The Mind's Grey Areas: By controlling situations that create conflicts of interest, we can combat frauds and scandals better," Forbes, June 2010 --- Click Here
http://www.forbes.com/2010/06/15/forbes-india-dan-ariely-the-minds-grey-areas-opinions-ideas-10-ariely.html?boxes=Homepagelighttop

My interest in the irrationality of human behavior started many years ago in hospital after I had been badly burned. If you spend three years in a hospital with 70% of your body covered in burns, you are bound to notice several irrationalities. The one that bothered me in particular was the way my nurses would remove the bandage that wrapped my body. Now, there are two ways to remove a bandage. You can rip it off quickly, causing intense but short-term pain. Or you can remove it slowly, causing less intense pain but for a longer time.

My nurses believed in the quick method. It was incredibly painful, and I dreaded the moment of ripping with remarkable intensity. I begged them to find a better way to do this, but they told me that this was the best approach and that they knew the best way for removing bandages. It was their intuition against mine, and they chose theirs. Moreover, they thought it unnecessary to test what appeared (to them) to be intuitively right.

After leaving the hospital, I started doing experiments that simulated these two ripping methods. And I found that the nurses were wrong: Quick ripping turned out to be more painful than slow ripping. In my experiments, I discovered a collection of tricks that could have been used to lessen the pain or manage it more effectively. For instance, they could have started from the most painful part of the treatment and moved to less painful areas to give me a sense of improvement; they could have given me breaks in between to recover. There are great lessons to be learned from such experiments, lessons that apply to economics, markets, policymaking and even our personal lives.

Is there an idea you believe can change the world? Describe it in the comments section at the bottom of this story, and Forbes could publish your idea.

As it turns out, it is not that useful, and sometime even costly, to base our decisions on our intuitions. Instead, we need to inject some science in the way we go about everyday life because if one merely keeps following his instincts, he will continue making the same (preventable) mistakes.

Over the years, I have examined many topics related to the mistakes we all make when we make decisions, and one topic that I have explored in some depth is that of cheating behavior, and I would like to describe this in a bit more depth.

Bob Jensen's threads on rationality and behavioral economics are at
http://www.trinity.edu/rjensen/Theory01.htm#EMH

Bob Jensen's threads on outrageous compensation are at
http://www.trinity.edu/rjensen/FraudConclusion.htm#OutrageousCompensation

Better to watch porn at the SEC (you might get fired, however, for doing your job)

"SEC Settles Firing Claim For $755,000," by Kara Scannell, The Wall Street Journal, June 30, 2010 ---
http://online.wsj.com/article/SB20001424052748704103904575336813522797370.html#mod=todays_us_money_and_investing

The Securities and Exchange Commission agreed to pay $755,000 to an enforcement lawyer who said he was fired for aggressively pursuing an insider-trading case involving the hedge fund Pequot Capital Management.

The settlement, approved Tuesday by a judge with the U.S. Merit Systems Protection Board, ends the wrongful termination claim brought by Gary Aguirre. The dispute had triggered a congressional investigation into the agency's handling of the matter and brought a black eye to the federal securities regulator.

Mr. Aguirre said he was fired after seeking permission to interview a senior Wall Street executive in connection with the Pequot probe. Mr. Aguirre said the executive, John Mack, received special treatment because of his powerful position and high-profile attorney. Mr. Mack at the time was under consideration to become CEO of Morgan Stanley, a job he ultimately took. The SEC denied the allegation and a review by the agency's inspector general said it conducted a thorough investigation. Mr. Mack was never alleged to have engaged in any wrongdoing.

In May, after new information surfaced in a divorce case, Pequot founder Arthur Samberg agreed, without admitting or denying wrongdoing, to pay $28 million to settle allegations he engaged in insider trading of Microsoft stock.

The SEC also sued former Microsoft Corp. employee David Zilkha, who worked a short time at Pequot. He is contesting the allegations. Mr. Aguirre expressed regret that his firing prevented him from staying on the Pequot case. "Had we not been stopped in 2005, we may have been able to enforce the law in a way that would have told Wall Street that the SEC also was looking at big fish, which was a message it needed to hear at that time," he said. Mr. Aguirre added that his lawsuit "wasn't about money really. I felt more vindication really from the SEC's decision to file against Pequot and their willingness to pay $28 million."

Mr. Aguirre said he didn't seek to return to the SEC and that he will re-enter private practice after a two-month vacation.

The settlement equals Mr. Aguirre's pay for the years since his termination in September 2005 plus attorneys' fees, said the Government Accountability Project, a whistle-blower organization. Mr. Aguirre also agreed to drop two related cases against the SEC.

SEC spokesman John Nester said, "The settlement resolves all outstanding litigation between the parties and reflects the agency's determination to focus on its core mission of protecting investors."

Money as a Motivator

June 18, 2010 message from Bill Ellis [bill.ellis@furman.edu]

Daniel Pink - Drive
http://www.youtube.com/watch?v=u6XAPnuFjJc

Bob,

Here’s Daniel Pink’s latest book. This time he presents theories on motivation. This clever YouTube clip is a great animation explaining a point made in the book.

Bill Ellis, CPA, MPAcc
Furman University
Accounting UES
864-908-4743

June 19, 2010 reply from Bob Jensen

Hi Bill,

What a great animation video that makes such good points about compensation.

By the way, this animated video reminds me of why BYU’s variable-speed videos are so successful for teaching basic accounting --- http://www.trinity.edu/rjensen/000aaa/thetools.htm#BYUvideo

Bob Jensen

Bob Jensen's threads on outrageous compensation are at
http://www.trinity.edu/rjensen/FraudConclusion.htm#OutrageousCompensation

KPMG Caught Up in Diebold's Bill and Hold Fraud

"Diebold Restatement Calls Its Integrity Into Question," by: George Gutowski, Seeking Alpha, October 3, 2007 ---
http://seekingalpha.com/article/48871-diebold-restatement-calls-its-integrity-into-question

Diebold (DBD) will change the way revenue is reported after its accounting practices came under SEC scrutiny, the company said in a press release issued Oct 2. Diebold may now record sales only after its products are delivered or installed, said spokesman Mike Jacobsen.

A quick scan of their financial statements includes this note to financial statements that defines revenue recognition.

Revenue Recognition The company's revenue recognition policy is consistent with the requirements of Statement of Position [SOP] 97-2, Software Revenue Recognition and Staff Accounting Bulletin 104 (SAB 104). In general, the company records revenue when it is realized, or realizable and earned. The company considers revenue to be realized or realizable and earned when the following revenue recognition requirements are met: persuasive evidence of an arrangement exists, which is a customer contract; the products or services have been provided to the customer; the sales price is fixed or determinable within the contract; and collectibility is probable. The sales of the company's products do not require production, modification or customization of the hardware or software after it is shipped.

Kudos to the SEC for finally protecting the investor. The corporate press release makes mention that while they are still figuring it out, they will have to restate previous financial reports, but do not believe that the cash position will be affected. This is universal corporate baffle gab. Investors are supposed to be quiet if the cash position does not change, everything else is not so important.

Essentially Diebold was not following its publicly stated policies. Diebold was not following accounting standards that investors should be able to rely on. KPMG the auditors in this case certified the statements when they should not have. The Board OK'ed everything. Governance! Governance! Governance!

What consequences will Diebold executives have for this inadequacy? Many in the political arena contend that their voting machines cannot count correctly. The SEC has definitively determined that the corporate accounting was not counting correctly.

Does Diebold have a corporate culture problem?

"SEC CHARGES DIEBOLD AND FORMER EXECUTIVES WITH ACCOUNTING FRAUD," AccountingEducation.com, June 2, 2010 ---
http://accountingeducation.com/index.cfm?page=newsdetails&id=151150

The Securities and Exchange Commission today charged Diebold, Inc. and three former financial executives for engaging in a fraudulent accounting scheme to inflate the company's earnings. The SEC separately filed an enforcement action against Diebold's former CEO seeking reimbursement of certain financial benefits that he received while Diebold was committing accounting fraud.

The SEC alleges that Diebold's financial management received "flash reports" sometimes on a daily basis comparing the company's actual earnings to analyst earnings forecasts. Diebold's financial management prepared "opportunity lists" of ways to close the gap between the company's actual financial results and analyst forecasts. Many of the opportunities on these lists were fraudulent accounting transactions designed to improperly recognize revenue or otherwise inflate Diebold's financial performance.

Diebold an Ohio-based company that manufactures and sells ATMs, bank security systems and electronic voting machines agreed to pay a $25 million penalty to settle the SEC's charges. Diebold's former CEO Walden O'Dell agreed to reimburse cash bonuses, stock, and stock options under the "clawback" provision of the Sarbanes-Oxley Act.

The SEC's case against Diebold's former CFO Gregory Geswein, former Controller and later CFO Kevin Krakora, and former Director of Corporate Accounting Sandra Miller is ongoing.

"Diebold's financial executives borrowed from many different chapters of the deceptive accounting playbook to fraudulently boost the company's bottom line," said Robert Khuzami, Director of the SEC's Division of Enforcement. "When executives disregard their professional obligations to investors, both they and their companies face significant legal consequences."

Scott W. Friestad, Associate Director of the SEC's Division of Enforcement, added, "Section 304 of Sarbanes-Oxley is an important investor protection provision because it encourages senior management to proactively take steps to prevent fraudulent schemes from happening on their watch. We will continue to seek reimbursement of bonuses and other incentive compensation from CEOs and CFOs in appropriate cases."

Section 304 of the Sarbanes-Oxley Act deprives corporate executives of certain compensation received while their companies were misleading investors, even in cases where that executive is not alleged to have violated the securities laws personally. The SEC has not alleged that O'Dell engaged in the fraud. Under the settlement, O'Dell has agreed to reimburse the company $470,016 in cash bonuses, 30,000 shares of Diebold stock, and stock options for 85,000 shares of Diebold stock.

According to the SEC's complaint against Diebold, filed in U.S. District Court for the District of Columbia, the company manipulated its earnings from at least 2002 through 2007 to meet financial performance forecasts, and made material misstatements and omissions to investors in dozens of SEC filings and press releases. Diebold's improper accounting practices misstated the company's reported pre-tax earnings by at least $127 million. Among the fraudulent accounting practices used to inflate earnings and meet forecasts were: Improper use of "bill and hold" accounting.

Recognition of revenue on a lease agreement subject to a side buy-back agreement.

Manipulating reserves and accruals.

Improperly delaying and capitalizing expenses.

Writing up the value of used inventory.

Without admitting or denying the SEC's charges, Diebold consented to a final judgment ordering payment of the $25 million penalty and permanently enjoining the company from future violations of the antifraud, reporting, books and records, and internal control provisions of the federal securities laws.

The SEC charged Geswein, Krakora, and Miller, in a complaint filed in U.S. District Court for the Northern District of Ohio, with violating Section 17(a) of the Securities Act of 1933, Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934, and Exchange Act Rules 10b 5 and 13b2-1; and aiding and abetting Diebold's violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, 13a-11, and 13a-13. In addition, the SEC charged Geswein and Krakora with violating Exchange Act Rules 13a-14 and 13b2-2 and Section 304 of the Sarbanes-Oxley Act. The Commission seeks permanent injunctive relief, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties. The SEC also seeks officer-and-director bars against Geswein and Krakora as well as their reimbursement of bonuses and other incentive and equity compensation.

Scott Friestad, Robert Kaplan, Brian Quinn, Christopher Swart, Pierron Leef, and Kristen Dieter conducted the SEC's investigation in this matter. Litigation efforts in the ongoing case will be led by David Gottesman and Robyn Bender. The SEC acknowledges the assistance of the U.S. Attorney's Office for the Northern District of Ohio and the Federal Bureau of Investigation.

For more details see http://www.thehighroad.us/showthread.php?t=204185

Bob Jensen's threads on Bill and Hold Fraud are at
http://www.trinity.edu/rjensen/ecommerce/eitf01.htm#BillAndHold

Teaching Case
From The Wall Street Journal Weekly Accounting Review on June 25, 2010

Legal Fights Loom over Ratings-Firm Liability Rule
by: Jeannette Neumann
Jun 18, 2010
Click here to view the full article on WSJ.com

TOPICS: Corporate Governance, Disclosure, Disclosure Requirements, Financial Reporting, Legal Liability, Securitization

SUMMARY: "A panel of Senate and House lawmakers negotiating final details of a financial-overhaul bill agreed this week to allow investors to bring legal action against credit-rating firms that 'knowingly or recklessly' fail to 'conduct a reasonable investigation of the rated security.'" At least one legal analyst comments that the questions of "recklessly" and "reasonable" are likely to be the subjects of a string of lawsuits before their definitions are settled.

CLASSROOM APPLICATION: The three articles in this week's review all cover issues in disclosure and other corporate governance matters. All three articles are useful in any financial accounting or ethics course covering corporate social responsibility and governance issues. This article in particular continues coverage of the financial reform legislation stemming from the U.S. financial crisis.

QUESTIONS:
1. (Introductory) What is the purpose of credit-rating firms such as McGraw-Hill Cos. Standard & Poor's Corp. and Moody Corp.'s Moody's Investors Service?

2. (Introductory) What is the role that these entities are considered to have played in the financial crisis? (Hint: see the related article to answer this question.)

3. (Advanced) What will be the implication of allowing "investors to bring legal action against credit-rating firms..."?

4. (Advanced) Why would "ratings firms 'fear litigation more than they fear regulation'"?

Reviewed By: Judy Beckman, University of Rhode Island

RELATED ARTICLES:
Buffett to Testify to Crisis Panel on Moody's
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Online Exclusive

"Legal Fights Loom over Ratings-Firm Liability Rule," by: Jeannette Neumann, The Wall Street Journal, Jun 18, 2010 ---
http://online.wsj.com/article/SB10001424052748703650604575313153186936336.html?mod=djem_jiewr_AC_domainid

Credit-rating firms are a big step closer to facing a harsher liability standard on their work. But it could take years for courts to decide what the planned rules mean.

A panel of Senate and House lawmakers negotiating final details of a financial-overhaul bill agreed this week to allow investors to bring legal action against credit-rating firms that "knowingly or recklessly" fail to "conduct a reasonable investigation of the rated security."

The new standard, if passed into law, likely would make it easier for investors to sue the ratings companies, such as McGraw-Hill Cos.' Standard & Poor's and Moody's Corp.'s Moody's Investors Service, which for long have enjoyed near immunity from liability for ratings gone awry.

But "what an 'investigation' is in this context is not an easy question," said Jonathan Macey, a professor of corporate governance and securities regulation at Yale Law School. "You're going to spend tons of time litigating that question."

Ratings firms and others studying the industry have maintained a tougher legal standard will come at a price. For one, companies may increase the cost of rating debt to balance the risk of litigation, said Joseph Mason, a professor of finance at Louisiana State University.

Ratings firms "fear litigation more than they fear regulation" because past regulation efforts haven't "been that draconian," said Scott McCleskey, a former Moody's compliance officer who has testified before Congress about the industry. He is now working at Complinet Inc. as managing editor, North America.

The new liability standard "strikes the right balance," Mr. McCleskey said, because it makes it easier for investors to sue credit-rating agencies, but it doesn't open the floodgates for a slew of lawsuits.

Representatives of the three major credit-rating firms, including Fitch Ratings, a unit of Fimalac SA, didn't immediately comment.

The news comes as the industry had a win in the Capitol Hill negotiations—a proposed delay in implementation of a quasigovernment board that would assign initial ratings for structured-finance bonds.

Rating firms had resisted the idea, and members of a conference committee on Wednesday agreed that the Securities and Exchange Commission should study whether to establish the entity, which would be designed to address potential conflicts of interest in the credit-ratings business.

Under the new plan, the SEC would be required to implement the proposed new board unless it determines that an alternate mechanism is more appropriate.

As for the higher liability standard, industry critics say it is high time the credit rating firms faced one. Raters were blamed for catalyzing the housing bubble by assigning their highest ratings to billions of dollars of financial products that later turned out to be worthless.

The credit rating agencies have invoked the First Amendment, largely with success, when faced with claims that their ratings were too high or too low. The First Amendment cannot protect the ratings companies from claims of fraud, lawyers say. But plaintiffs have a high legal hurdle to establish that a firm issued a fraudulent rating.

The credit rating agencies are "essentially liability proof and it's not because they're infallible," said Columbia Law School professor John Coffee, who helped craft the liability standard for the Senate bill, the version that was eventually chosen this week by the conference committee.

The goal of the new standard is to "make litigation a credible deterrent" by creating an incentive for the firms to step up due diligence measures, said Mr. Coffee. While some maintain that the phrase a "reasonable investigation" is unclear, Mr. Coffee says that if a rating company hires a due diligence firm to vet the data they are using for their rating, that should stand up in court as a "reasonable investigation."

Would the new standard have helped prevent the credit crisis? Not necessarily, said Mr. Macey, the Yale professor. "I don't think it would have significantly altered the probability of having this debacle" because the firms are still so tightly-knit into the financial system, he said. "It fails that litmus test."

The agreement on the liability standard is set to be included in a conference report to be sent to the House and the Senate for final approval. The provision could still be altered before a final compromise.

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

"Notes from day 3 of June 2010 IASB-FASB meeting," IAS Plus, June 18. 2010 ---
http://www.iasplus.com/index.htm

Lessor accounting – Accounting models

In May 2010, the IASB expressed an interest in using a hybrid lessor accounting model. Under a hybrid model, a lessor would use a performance obligation approach to lessor accounting in some situations and a partial derecognition approach in others. The FASB have tentatively decided to adopt a performance obligation approach for all leases. The Boards debated whether the hybrid approach should be adopted for lessors' accounting.

Two possible variants of the hybrid approach were discussed (known as 'D' and 'F'):

Approach D would use the performance obligation approach for leases for which the lessor's exposure to the risks associated with the underlying asset is significant. (The IASB staff commented that this approach was similar to the existing requirement to classify leases as finance leases or operating leases. The performance obligation approach would apply to leases where the lessor's exposure to the underlying asset is significant (operating leases). The partial derecognition approach would apply to all other leases (finance leases).)

Approach F would use the partial derecognition approach for all leases except short term leases and leases of certain real estate (including but not limited to investment property as defined in IAS 40). (The IASB staff commented that this approach would avoid the problems associated with short-term leases and investment property leases and would result in the partial derecognition approach for most leases.)

Both approaches had their supporters, and the debate was heated at times. Those supporting the performance obligation approach usually would not accept the partial derecognition approach at all. However, some Board members did not think that either approach advanced lessor accounting significantly.

One Board member thought the approaches were looking at the wrong issue: to him the key issue was accounting for the underlying asset; the right to use that asset was a separate item to be accounted for under revenue recognition. However, this view did not receive support.

Ultimately, the session chairman determined that Approach D (performance obligation) had majority support among both Boards. However, the Boards then seemed to second-guess themselves as they were concerned that Approach D would challenge their decisions on leases with inseparable service elements on the previous day. A discussion ensued in which it became apparent that the IASB actually preferred a different lessor model in some cases – for example in leases involving real estate (both investment property and other real estate leases). This approach would bifurcate the lease payments: the lease element would be accounted for using the leasing standard; the service element using revenue recognition.

The Boards ended in two different places on this issue: the FASB were firmly (4 in favour) in the performance obligation (Approach D) approach. The IASB was firmly (11 in favour) in the bifurcation approach.

The session chairman asked the staff to develop realistic examples of both approaches to lessor accounting using a lease that included inseparable service elements. Those examples would be discussed in July.

One IASB member noted that he would not sign a ballot on the revenue recognition ballot draft while the lease accounting issue remain unresolved. This would mean that he would be unable to sign the ballot as the lease issue would not be resolved until after his term as a Board member expired.

Accounting for purchase options

The staff invited the Boards to reconsider their tentative decisions on accounting for purchase options. They proposed that the Boards adopt one of two fundamental approaches – as the staff was split, they were unable to make a definitive recommendation. Approach A would account for purchase options consistently with the accounting for options to extend or terminate a lease; Approach B would account for purchase options only upon exercise.

Some Board members who supported Approach B wanted bifurcate the option from the lease and account for the renewal option as any other kind of option. Purchase options were seen as fundamentally different from renewal options - a renewal option provided an additional period of a right to use; a purchase option gave access to the underlying asset. These are different in substance and deserved different accounting.

After another vigorous debate, a majority of both Boards (IASB: 10 in favour; FASB: 3 in favour) voted for Approach B. In follow-up votes, both Boards agreed that the option should not be bifurcated (that is, a 'do nothing with it' approach).

Insurance Contracts

Alternative views in the Exposure Draft

The IASB members who had indicated an intention to present an Alternative View in the forthcoming Insurance Contracts Exposure Draft outlined the likely reasons for their dissents.

John T Smith

Mr Smith would dissent for many of the reasons he dissented to the issue of IFRS 4 Insurance Contracts. In addition, he objects to the treatment of the risk adjustment, the treatment of renewal options, and the accounting for investment contracts with a discretionary participation feature issued by an insurance company. He summarised his reasons by saying that he does not think the package of decisions in the ED advanced financial reporting. He thought that IFRS users knew that IFRS 4 was imperfect; he did not want to convey the message that the ED was a better answer.

Jan Engstrom

Mr Engstrom noted that he was still assessing whether he would dissent.

He is concerned that the scope was too broad. He agreed that health, life and catastrophe (high severity, low risk) contracts should have 'insurance accounting'. However, he saw many general insurance contracts (fire, auto, etc) as being no different in substance to service contracts and to force them into the proposed insurance accounting model would not help the insurance companies or their investors.

He disagrees with the treatment of acquisition costs. He noted that other types of business incur substantial costs when securing a contract (he used a defence supply contract as an example). Payments to agents and other experts were expensed in the period incurred; he did not see these 'contract acquisition costs' as any different in substance to insurance contract acquisition costs and asked why they should get different accounting.

Finally, he is not convinced that he understands (and therefore can accept) the overall model to be proposed in the ED.

Patricia McConnell

Mrs McConnell had not yet confirmed her intention to dissent.

However, she was particularly concerned about the treatment of acquisition costs and issues of display and disclosure.

James Leisenring

Mr Leisenring noted that his dissent was moot, since the ED would not be balloted until after his term as a Board member expired. However, he would have dissented for a number of reasons.

Fundamentally, he believes that the approach to insurance accounting to be proposed in the ED is inconsistent with the IASB Framework in that it recognises things as assets and liabilities that demonstratively do not meet the definitions of assets and liabilities in the Framework.

He does not believe that the scope is operational, especially with respect to health care and investment contracts. He does not see the logic for not recording the cash surrender value of an insurance policy as a liability when it is, in substance, the same as the demand deposit floor, which is recorded as a liability.

He would also object to a number of the display issues highlighted by other Board members.

Bob Jensen's threads on accounting theory and standard setting ---
http://www.trinity.edu/rjensen/Theory01.htm

Ketz Me If You Can
"CPA Firms and Credit Rating Agencies," by J. Edward Ketz, Smartpros, June 2010 ---
http://accounting.smartpros.com/x69608.xml

My father-in-law tells the story about when he was a young lad the cows wandered into the garlic patch; he drank the milk and gagged. While milk and garlic are great, they weren't meant to be combined. In the same way, I wonder why some are thinking about combining accounting firms and credit rating agencies.

The Financial Times ran the story on May 16. In particular, the reporters claimed that KPMG and PwC were evaluating whether to enter the world of credit rating, even quoting John Griffith Jones from KPMG that the firm was in fact “passively considering it.” PwC’s Richard Sexton added that CPA firms were always looking for ways to grow their business.

My first reaction was obvious—wouldn’t this relationship create a conflict of interest? The auditor examines the accounting reports and attests the assertions by management contained in those reports. A credit rating agency takes the quantitative and qualitative disclosures in the accounting reports—and other information—and evaluates the entity’s ability to repay the credit obligations on a timely basis. An enterprise that engaged in both tasks might be pulled to give a thumbs up for some accounting shenanigan to assure it received the fees of both audit and credit rating activities, rationalizing that it could always downgrade the firm’s rating.

If you think such rationalization is impossible, consider the strategic decisions made by Arthur Andersen in their Waste Management audit, as well as some of the others. To his credit, Mr. Jones acknowledged these conflicts of interest.

Let’s also review the structure of the audit process and the credit rating evaluation process. The audit firm is paid by the firm it audits. In today’s world, the credit rater is paid by the company it evaluates. Before the 1970s, this was not true; in fact, today’s conflicts of interest were avoided when rating agencies made their money by selling the information to investors. (See my essays on the performance of credit raters and on the SEC study of credit rating agencies.)

Notice that both business models are the same: revenues come from the party being evaluated. While neither structure is ideal, the audit process works as well as it does because securities laws allow aggrieved investors to sue auditors if it appears the auditor did not perform an adequate job. It isn’t perfect, but at least these disincentives help align the interests of auditors with the interests of the investment community.

Continued in article

Credit Rating Agencies ---- http://en.wikipedia.org/wiki/Credit_rating_agency

A credit rating agency (CRA) is a company that assigns credit ratings for issuers of certain types of debt obligations as well as the debt instruments themselves. In some cases, the servicers of the underlying debt are also given ratings. In most cases, the issuers of securities are companies, special purpose entities, state and local governments, non-profit organizations, or national governments issuing debt-like securities (i.e., bonds) that can be traded on a secondary market. A credit rating for an issuer takes into consideration the issuer's credit worthiness (i.e., its ability to pay back a loan), and affects the interest rate applied to the particular security being issued. (In contrast to CRAs, a company that issues credit scores for individual credit-worthiness is generally called a credit bureau or consumer credit reporting agency.) The value of such ratings has been widely questioned after the 2008 financial crisis. In 2003 the Securities and Exchange Commission submitted a report to Congress detailing plans to launch an investigation into the anti-competitive practices of credit rating agencies and issues including conflicts of interest.

Agencies that assign credit ratings for corporations include:

A. M. Best (U.S.)

Baycorp Advantage (Australia)

Dominion Bond Rating Service (Canada)

Dun & Bradstreet

China Credit Information Service (China)

Fitch Ratings (U.S.)

Japan Credit Rating Agency (Japan)

Moody's Investors Service (U.S.)

Standard & Poor's (U.S.)

Rating Agency Malaysia (Malaysia)

Egan-Jones Rating Company (U.S.)

Brickwork Rating (India)

The Pakistan Credit Rating Agency Limited (Pakistan)

How to Get AAA Ratings on Junk Bonds

Pay cash under the table to credit rating agencies
Promise a particular credit rating agency future multi-million contracts for rating future issues of bonds
Hire away top-level credit rating agency employees with insider information and great networks inside the credit rating agencies

"Rating Agency Data Aided Wall Street in Deals," The New York Times, April 24, 2010 ---
http://dealbook.blogs.nytimes.com/2010/04/24/rating-agency-data-aided-wall-street-in-deals/#more-214847

One of the mysteries of the financial crisis is how mortgage investments that turned out to be so bad earned credit ratings that made them look so good, The New York Times’s Gretchen Morgenson and Louise Story report. One answer is that Wall Street was given access to the formulas behind those magic ratings — and hired away some of the very people who had devised them.

In essence, banks started with the answers and worked backward, reverse-engineering top-flight ratings for investments that were, in some cases, riskier than ratings suggested, according to former agency employees. Read More »

Bob Jensen's threads on credit rating agency scandals ---
http://www.trinity.edu/rjensen/FraudRotten.htm#CreditRatingAgencies

1996 Case Loses after 14 Years:
"PwC loses ruling on big Pa. healthcare bankruptcy," by Jonathan Stempe, Reuters, May 28, 2010 ---
http://www.reuters.com/article/idUSN2821575820100528

PricewaterhouseCoopers LLP suffered a defeat on Friday when a federal appeals court ordered an inquiry into whether the auditor dealt in good faith with a large Pennsylvania hospital system that went bankrupt.

The Third Circuit Court of Appeals in Philadelphia threw out a January 2007 ruling dismissing claims against PwC by a committee of unsecured creditors of behalf of the now defunct Allegheny Health, Education and Research Foundation.

These creditors accused Coopers & Lybrand LLP, one of PwC's predecessor companies, of conspiring with AHERF officials in the 1996 and 1997 fiscal years to hide the increasingly dire financial health of the Pittsburgh-based system.

AHERF ultimately sought Chapter 11 protection in July 1998, with about $1.3 billion of debt, in the largest U.S. nonprofit healthcare collapse. The system once ran 14 hospitals and two medical schools and employed an estimated 31,000 people.

It is not clear whether Friday's ruling will result in more litigation or prompt the parties to pursue a settlement.

PwC spokesman Steven Silber said company officials could not be reached for comment. James Jones, a Pittsburgh-based lawyer for the creditors, declined immediate comment.

In his 2007 ruling, U.S. District Judge David Cercone said the creditors could not recover on AHERF's behalf under a legal doctrine governing cases of equal fault, concluding AHERF was at least as much at fault as PwC.

But the Third Circuit asked the Pennsylvania Supreme Court for guidance on that state's law, including whether an auditor such as PwC could be held liable for breach of contract, negligence or aiding and abetting a breach of fiduciary duty.

Writing for a unanimous three-judge panel of the Third Circuit, Judge Thomas Ambro adopted the Pennsylvania court's conclusion that an auditor could be held liable if it had "not dealt materially in good faith with the client-principal."

This effectively barred the equal fault defense in cases of "secretive collusion between officers and auditors to misstate corporate finances to the corporation's ultimate detriment."

Ambro also directed the district court to reconsider its finding that misstated financials could have been a short-term "benefit" to AHERF.

He said that, as a matter of law, "a knowing, secretive, fraudulent misstatement of corporate financial information" cannot benefit a company.

The AHERF bankruptcy generated much litigation and regulatory activity. In 2007, the bond insurer MBIA Inc (MBI.N) agreed to pay $75 million to settle regulatory fraud charges over a reinsurance transaction involving defaulted AHERF debt.

The case is Official Committee of Unsecured Creditors of Allegheny Health, Education and Research Foundation v. PricewaterhouseCoopers LLP, U.S. Third Circuit Court of Appeals, No. 07-1397. (Reporting by Jonathan Stempel; editing by Steve Orlofsky and Andre Grenon)

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

A Two-Part Teaching Case: The Cost of Quality Versus the Cost of Poor Quality
Two decades ago, managerial and cost accounting textbooks and courses began to run modules on the "cost of quality" or to be more accurate the cost of poor quality. The following case fits into these types of modules.

From The Wall Street Journal Accounting Weekly Review on May 21, 2010

FDA Widens Probe of J&J's McNeil Unit
by: Jonathan D. Rockoff
May 18, 2010
Click here to view the full article on WSJ.com

TOPICS: Cost Management, Product Recall, Quality Costs

SUMMARY: On April 30, 2010, Johnson & Johnson "...recalled a number of over-the-counter medicines for children and infants after receiving complaints from consumers and discovering manufacturing problems. The company also closed the plant in Fort Washington, PA, that made the recalled products until it fixes the issues and can assure quality production....The FDA conducted a routine inspection of the Fort Washington plant last month. Agency inspectors found that the J&J unit received 46 complaints from consumers between June 2009 and April 2010 regarding 'foreign materials, black or dark specks' in certain medicines.'" The FDA has now widened its investigation and the J&J McNeil Consumer Healthcare unit that makes these products is conducting a comprehensive quality assessment over all its manufacturing operations. "Some parents say the recall has weakened J&J's sterling reputation for quality. The recall has also prompted a congressional investigation of the company's handling of consumer complaints and the adequacy of the FDA's inspections."

CLASSROOM APPLICATION: Questions focus on concepts in the cost of quality.

QUESTIONS:
1. (Introductory) How crucial is the concept of quality to Johnson & Johnson operations and profitability?

2. (Advanced) Define the terms "cost of quality" or "quality cost" and related concepts of 'prevention costs" and "appraisal costs."

3. (Advanced) Which of the categories of quality costs-prevention or appraisal-is about to increase significantly at J&J? Explain your answer.

4. (Advanced) Define the concepts of "internal failure costs" and "external failure costs."

5. (Advanced) The FDA and congress may investigate J&J's handling of consumer complaint. Under what part of the quality control process does handling these complaints fall under?

Reviewed By: Judy Beckman, University of Rhode Island

"FDA Widens Probe of J&J's McNeil Unit," by: Jonathan D. Rockoff, The Wall Street Journal, May 18, 2010

The Food and Drug Administration has widened its investigation into the recent recall of certain Johnson & Johnson children's medicines and is now inquiring into manufacturing across the company's consumer health-care unit.

J&J's McNeil Consumer Healthcare makes a range of products for adults and kids, notably Benadryl, St. Joseph aspirin, Motrin, Tylenol and Zyrtec.

On April 30, the company recalled a number of over-the-counter medicines for children and infants after receiving complaints from consumers and discovering manufacturing problems. The company also closed the plant in Fort Washington, Pa., that made the recalled products until it fixes the issues and can assure quality production.

The recall of the liquid children's medicines was the third by the J&J unit since last September. An FDA spokeswoman said there had been no specific complaints about products from other McNeil facilities. But given the history of recent recalls, the FDA wanted to make sure there weren't any similar manufacturing problems and to identify any steps the agency must take to prevent the problems from recurring.

Besides Fort Washington, J&J's McNeil unit has plants in Lancaster, Pa., and Las Piedras, Puerto Rico.

"We're doing our due diligence," said FDA spokeswoman Elaine Gansz Bobo.

The J&J unit "is conducting a comprehensive quality assessment across its manufacturing operations and continues to cooperate with the FDA," a company spokeswoman said.

Some parents say the recall has weakened J&J's reputation for quality. The recall has also prompted a congressional investigation of the company's handling of consumer complaints and the adequacy of the FDA's inspections. The House Committee on Oversight and Government Reform has asked J&J Chief Executive William Weldon to testify at a hearing on May 27.

The FDA and J&J have told the committee they will cooperate and are in the process of answering its questions, and the committee expects that Mr. Weldon will attend, said Kurt Bardella, a spokesman for Rep. Darrell Issa (R., Calif.), the panel's ranking Republican.

A J&J spokesman said the company is communicating with the committee and will respond appropriately to the panel's request but declined to say if Mr. Weldon will appear.

The recall last month involved more than 40 different Tylenol, Benadryl, Motrin and Zyrtec products for children and infants. Some of the medicines had higher concentrations of active ingredient than specified, and some products may contain tiny metallic particles left as a residue from the manufacturing process, according to J&J's McNeil unit.

The FDA conducted a routine inspection of the Fort Washington plant last month. Agency inspectors found that the J&J unit received 46 complaints from consumers between June 2009 and April 2010 regarding "foreign materials, black or dark specks" in certain medicines. The FDA also said bacteria contaminated raw materials to be used to make several lots of Tylenol products for children.

FDA has begun to review all complaints it has received to determine whether the recalled products caused any serious side effects. The agency has said the chances that the recalled products could cause harm were remote, but warned parents not to use the products as a precaution.

Update on June 3, 2010
From The Wall Street Journal Accounting Weekly Review on June 3, 2010

J&J Recall Probe Expands to Others
by: Jonathan D. Rockoff
Jun 03, 2010
Click here to view the full article on WSJ.com

TOPICS: Cost Accounting, Managerial Accounting, Product Recall

SUMMARY: "A Congressional probe of a Johnson & Johnson unit's manufacturing problems is spreading beyond the company's recent recall of its children's medicines to withdrawals of other over-the-counter products." The House Committee on Oversight and Government Reform also contacted Blacksmith Brands about its recall of PediaCare cough and cold medicines. The company purchased the Pedia line from J&J's McNeil Consumer Healthcare unit in 2009 and those products also were made in the same facility in which the other problem products were made.

CLASSROOM APPLICATION: This review follows on initial coverage of this issue on 5/20/2010. Questions focus on concepts in the cost of quality for management accounting classes and on implications for financial accounting and reporting for product recalls for financial accounting classes.

QUESTIONS:
1. (Advanced) Define the terms "cost of quality" or "quality cost" and related concepts of 'prevention costs" and "appraisal costs."

2. (Introductory) Which of the categories of quality costs-prevention or appraisal-are occurring at Johnson &Johnson's McNeil unit and at Blacksmith Brands, who bought J&J's PediaCare medicines, in response to manufacturing defects in over the counter medicines?

3. (Advanced) Define the concepts of "internal failure costs" and "external failure costs."

4. (Introductory) The FDA and Congress also are investigating J&J's use of an outside contractor "after discovering in late 2008 that some Motrin wasn't dissolving correctly." Under what part of the quality control process does the cost of using such a contractor fall? Specifically comment in light of J&J's statements about the purpose of hiring the contractor.

5. (Advanced) Summarize the financial accounting and reporting implications of a product recall such the one that Blacksmith Brands has issued for PediaCare cough and cold medicines.

Reviewed By: Judy Beckman, University of Rhode Island

RELATED ARTICLES:
More Children's Medicine Made at J&J Facility Is Recalled
by Jonathan D. Rockoff
May 29, 2010
Online Exclusive

"J&J Probe Expands to Other Products," by: Jonathan D. Rockoff, The Wall Street Journal, June 2, 2010 ---
http://online.wsj.com/article/SB10001424052748704515704575283103714261396.html?mod=djem_jiewr_AC_domainid

A Congressional probe of a Johnson & Johnson unit's manufacturing problems is spreading beyond the company's recent recall of its children's medicines to withdrawals of other over-the-counter products.

The House Committee on Oversight and Government Reform asked Blacksmith Brands on Tuesday for further information about its recall last week of PediaCare cough and cold medicines. Those products were made by J&J at the same Fort Washington, Pa., plant that produced children's Tylenol and other recalled kids drugs.

J&J's McNeil Consumer Healthcare unit had recalled certain Benadryl, Motrin, Tylenol and Zyrtec pain and cold medicines for children on April 30 because of manufacturing problems including the potential for metal particles in the products. J&J has temporarily shut the plant.

A spokesman for Blacksmith Brands, of Tarrytown, N.Y., called the committee's request standard in the event of recalls and said the company would cooperate. Blacksmith Brands bought the four recalled PediaCare products from J&J's McNeil unit last year, and had arranged prior to the recall for other plants to make them starting in July.

The House committee sought information from WIS International, a merchandising consultant, as part of its examination of McNeil's handling of defective Motrin pain relief pills, according to a person familiar with the investigation.

In 2008, J&J's McNeil unit discovered that some of the pills weren't dissolving correctly. It hired a contractor to purchase the product from store shelves, according to documents released at the Congressional committee hearing last week.

The contractor advised its workers to buy up the Motrin packages, and to act like customers, making no reference to this being a recall, according to a memo released at the hearing.

In July 2009, McNeil issued a recall of the Motrin product.

Colleen Goggins, who oversees J&J's consumer group, told lawmakers last week that the company didn't have "any intent to mislead or hide anything" and that it had told the FDA it had hired a contractor to statistically sample the products. A J&J spokeswoman said it is looking into the contractor's work and would report back to the committee.

She wouldn't comment on whether WIS International was the contractor in the memo.

An entity called "WIS" is named in the contractor's memo.

Officials at the company did not return messages left Wednesday seeking comment. On Tuesday, Dave Haller, vice president of sales, account management and marketing, said: "We don't comment on activities for our clients, and Johnson & Johnson is not a client of ours." He would not say whether J&J or one of its units had been a client in the past.

WIS International, which has headquarters in San Diego, Calif., and Mississauga, Ontario, counts inventory on behalf of retailers, hospitals and other kinds of firms. It also helps manufacturers recall tainted products from retail store shelves.

The company's website says it has "worked on recalls and product purchases ranging from a few hundred stores to nearly 60,000."

May 21. 2010 reply from James R. Martin/University of South Florida [jmartin@MAAW.INFO]

Bob,

Using these cases is a good place to introduce and compare the various quality models including Juran's Zero defects, Taguchi's Loss function, and Deming's Robust quality philosophy.

(http://maaw.info/ConstrainoptTechs.htm#Quality Models Compared). It also leads to the Six Sigma approach to quality (http://maaw.info/SixSigmaSummary.htm), many other concepts and arguments related to quality (http://maaw.info/QualityRelatedMain.htm), and the controversy over constrained optimization concepts in general (http://maaw.info/ConstrOptMain.htm).

Bob Jensen's threads on managerial and cost accounting are at
http://www.trinity.edu/rjensen/Theory01.htm#ManagementAccounting

Tax and Tax Evasion Fraud Teaching Cases from The Wall Street Journal Accounting Weekly Review on June 11, 2010

Showdown on Fund Taxes
by: Peter Lattman and Laura Saunders
Jun 09, 2010
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com

TOPICS: REIT, Tax Laws, Tax Policy, Taxation

SUMMARY: A bill being co-sponsored by Rep. Sander Levin (D-Mich.) and Max Baucus (D-Mont.) proposed to increase taxes on gains by certain partnerships when selling assets, when partners sell out, and when an entire partnership is sold. Current law taxes these transactions at 15% capital gains rates; the proposal increases the rate to 30% in 2011 and 33% in 2013. Partnerships affected include those in venture capital, private equity, real estate and commodities.

CLASSROOM APPLICATION: The article is useful for partnership taxation courses.

QUESTIONS:
1. (Introductory) What types of entities might be impacted by a proposal for tax law changes recently proposed by Democrat Senators?

2. (Advanced) What is 'carried-interest' income to fund managers? How is this item part of a fund manager's basic compensation, like wages? How is this item like a capital gain?

3. (Advanced) What is the difference between taxation of capital gains and taxation of wages? Why are these differences part of the tax law?

4. (Advanced) What is the "enterprise-value tax" that is also proposed as part of the bill being co-sponsored by Rep. Sander Levin (D-Mich.) and Max Baucus (D-Mont.)?

Reviewed By: Judy Beckman, University of Rhode Island

Swiss Lower House Rejects UBS Pact
by: Deborah Ball
Jun 09, 2010
Click here to view the full article on WSJ.com

TOPICS: IRS, Tax Avoidance, Tax Evasion, Tax Havens, Taxation

SUMMARY: "Last August, the U.S. and Switzerland reached a deal to settle a case involving hidden offshore accounts at the banking giant. The U.S. accused UBS of having helped thousands of Americans avoid paying taxes at home by setting up the offshore accounts. UBS admitted wrongdoing and agreed to hand over the names of 4,450 American account holders to the U.S. Internal Revenue Service by August." Switzerland's lower house has now rejected "..a bill that would have allowed the government to provide the U.S. with the names of UBS account holders allegedly dodging American taxes." Previously, the Swiss Senate approved such a bill. The original agreement with UBS arose after a former UBS executive, Bradley Birkenfeld, told U.S. officials that the bank allegedly began telling American customers in 2002 it wasn't required to disclose their identities to the Internal Revenue Service, as described in the second related article.

CLASSROOM APPLICATION: The article is useful in tax classes to discuss tax avoidance versus tax evasion and offshore tax havens.

QUESTIONS:
1. (Advanced) What is the difference between tax avoidance and tax evasion?

2. (Introductory) What is the nature of the Swiss banking industry that makes the U.S. IRS want to access names of U.S. citizens with Swiss bank accounts in a search for tax evaders?

3. (Advanced) How are this IRS investigation and the agreement between UBS and the IRS likely to impact the Swiss banking industry?

4. (Advanced) Why do you think that the Swiss legislature voted as it did during the week of June 7, 2010?

5. (Introductory) What options are left for the IRS if the proposed law does not pass the Swiss legislative authority?

Reviewed By: Judy Beckman, University of Rhode Island

RELATED ARTICLES:
Related: Swiss Report Slams Government Over UBS Crisis
by Katharina Bart
Jun 01, 2010
Online Exclusive

Swiss Bank to Give Up Depositors' Names to Prosecutors
by Evan Perez and Carrick Mollenkamp
Feb 19, 2009
Page: A1

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

Humor Between June 1 and June 30, 2010

Ray Stevens - Illegal Immigrants Assistance Program ---
http://www.youtube.com/watch?v=WgOHOHKBEqE

Jagdish Gangolly clued me in on this link
Tom Lehrer on the great Russian mathgematician Lobachevsky:
http://www.youtube.com/watch?v=RNC-aj76zI4&feature=related

Forwarded by Gene and Joan

A SpanishTeacher was explaining to her class that in Spanish, unlike English, nouns are designated as either masculine or feminine.

'House' for instance, is feminine: 'la casa.' 'Pencil,' however, is masculine: 'el lapiz.'

A student asked, 'What gender is 'computer'?'

Instead of giving the answer, the teacher split the class into two groups, male and female, and asked them to decide for themselves whether computer' should be a masculine or a feminine noun. Each group was asked to give four reasons for its recommendation.

The men's group decided that 'computer' should definitely be of the feminine gender ('la computadora'), because:

1. No one but their creator understands their internal logic;

2. The native language they use to communicate with other computers is incomprehensible to everyone else;

3. Even the smallest mistakes are stored in long term memory for possible later retrieval; and

4. As soon as you make a commitment to one, you find yourself spending half your paycheck on accessories for it.

(THIS GETS BETTER!)

The women's group, however, concluded that computers should be Masculine ('el computador'), because:

1. In order to do anything with them, you have to turn them on;

2. They have a lot of data but still can't think for themselves;

3. They are supposed to help you solve problems, but half the time they ARE the problem; and

4. As soon as you commit to one, you realize that if you had waited a little longer, you could have gotten a better model.

The women won.

Send this to all the smart women you know...and all the men that have a sense of humor.

Comedy Video on Financial Crises
I'm beginning to think these are not perfect storms. I'm beginning to think these are regular storms and we just have a sh**ty boat.
Jon Stewart --- http://financeprofessorblog.blogspot.com/2010/05/jon-stewart-takes-on-perfect-storms.html

Groups of free riders on the Paris Metro have created informal insurance pools that pay the fine when riders get caught. The groups call themselves mutuelles des fraudeurs -- fraudster mutuals.
NPR --- http://www.npr.org/blogs/money/2010/05/dont_pay_your_fare_on_the_subw.html
Jensen Comment
One issue not considered in the above article is how many misdemeanors it takes for the sum to become a felony.

Also could these frauds affect credit scores?

Forwarded by Auntie Bev

Awful Puns For the Educated

1. King Ozymandias of Assyria was running low on cash after years of war with the Hittites. His last great possession was the Star of the Euphrates, the most valuable diamond in the ancient world. Desperate, he went to Croesus, the pawnbroker, to ask for a loan.

Croesus said, "I'll give you 100,000 dinars for it."

"But I paid a million dinars for it," the King protested. "Don't you know who I am? I am the king!"

Croesus replied, "When you wish to pawn a Star, makes no difference who you are."

2. Evidence has been found that William Tell and his family were avid bowlers. Unfortunately, all the Swiss league records were destroyed in a fire, ...and so we'll never know for whom the Tells bowled.

3. A man rushed into a busy doctor's office and shouted, "Doctor! I think I'm shrinking!" The doctor calmly responded, "Now, settle down. You'll just have to be a little patient."

4. A marine biologist developed a race of genetically engineered dolphins that could live forever if they were fed a steady diet of seagulls. One day, his supply of the birds ran out so he had to go out and trap some more. On the way back, he spied two lions asleep on the road. Afraid to wake them, he gingerly stepped over them. Immediately, he was arrested and charged with-- transporting gulls across sedate lions for immortal porpoises.

5. Back in the 1800's the Tate's Watch Company of Massachusetts wanted to produce other products, and since they already made the cases for watches, they used them to produce compasses. The new compasses were so bad that people often ended up in Canada or Mexico rather than California. This, of course, is the origin of the expression -- "He who has a Tate's is lost!"

6. A thief broke into the local police station and stole all the toilets and urinals, leaving no clues. A spokesperson was quoted as saying, "We have absolutely nothing to go on."

7. An Indian chief was feeling very sick, so he summoned the medicine man. After a brief examination, the medicine man took out a long, thin strip of elk rawhide and gave it to the chief, telling him to bite off, chew, and swallow one inch of the leather every day. After a month, the medicine man returned to see how the chief was feeling. The chief shrugged and said, "The thong is ended, but the malady lingers on."

8. A famous Viking explorer returned home from a voyage and found his name missing from the town register. His wife insisted on complaining to the local civic official who apologized profusely saying, "I must have taken Leif off my census."

9. There were three Indian squaws. One slept on a deer skin, one slept on an elk skin, and the third slept on a hippopotamus skin. All three became pregnant. The first two each had a baby boy. The one who slept on the hippopotamus skin had twin boys. This just goes to prove that... the squaw of the hippopotamus is equal to the sons of the squaws of the other two hides. (Some of you may need help with this one).

10. A skeptical anthropologist was cataloging South American folk remedies with the assistance of a tribal Brujo who indicated that the leaves of a particular fern were a sure cure for any case of constipation. When the anthropologist expressed his doubts, the Brujo looked him in the eye and said, "Let me tell you, with fronds like these, you don't need enemas."

Digital Comic Museum --- http://digitalcomicmuseum.com/

Forwarded from Romania by Dan Gheorghe Somnea [dan_somnea@yahoo.com]

AMAZING ANAGRAMS
Someone out there
Must be "deadly" at Scrabble..
(Wait till you see the last one)!

PRESBYTERIAN:
When you rearrange the letters:
BEST IN PRAYER

ASTRONOMER:
When you rearrange the letters:
MOON STARER

DESPERATION:
When you rearrange the letters:
A ROPE ENDS IT

THE EYES:
When you rearrange the letters:
THEY SEE

GEORGE BUSH:
When you rearrange the letters:
HE BUGS GORE

THE MORSE CODE:
When you rearrange the letters:
HERE COME DOTS

DORMITORY:
When you rearrange the letters:
DIRTY ROOM

SLOT MACHINES:
When you rearrange the letters:
CASH LOST IN ME

ANIMOSITY:
When you rearrange the letters:
IS NO AMITY

ELECTION RESULTS:
When you rearrange the letters:
LIES - LET'S RECOUNT

SNOOZE ALARMS:
When you rearrange the letters:
ALAS! NO MORE Z 'S

A DECIMAL POINT:
When you rearrange the letters:
I'M A DOT IN PLACE

THE EARTHQUAKES:
When you rearrange the letters:
THAT QUEER SHAKE

ELEVEN PLUS TWO:
When you rearrange the letters:
TWELVE PLUS ONE

AND FOR THE GRAND FINALE:

MOTHER-IN-LAW:
When you rearrange the letters:
WOMAN HITLER
======

Forwarded by Auntie Bev

More Reasons to have a bottle or two in the house! ! ! !

Who Knew???

1. To remove a bandage painlessly, Saturate the bandage with vodka. The stuff dissolves adhesive.

________________________________________

2. To clean the caulking around bathtubs and showers, Fill a trigger-spray bottle with vodka, spray the caulking, Let set five minutes and wash clean. The alcohol in the vodka kills mold and mildew.

________________________________________

3. To clean your eyeglasses, Simply wipe the lenses with a soft, Clean cloth dampened with vodka. The alcohol in the vodka cleans the glass and kills germs.

________________________________________

4. Prolong the life of razors by filling a cup with vodka And letting your safety razor blade Soak in the alcohol after shaving. The vodka disinfects the blade and prevents rusting.

________________________________________

5. Spray vodka on wine stains, Scrub with a brush, and then blot dry.

________________________________________

6. Using a cotton ball, apply vodka to your face As an astringent to cleanse the skin and tighten pores.

________________________________________

7. Add a jigger of vodka to a 12-ounce bottle of shampoo. The alcohol cleanses the scalp,removes toxins from hair, And stimulates the growth of healthy hair.

________________________________________

8. Fill a sixteen-ounce trigger-spray bottle with vodka And spray bees or wasps to kill them.

________________________________________

9 Pour one-half cup vodka And one-half cup water into a Ziploc freezer bag And freeze for a slushy, refreshing ice pack for aches, Pain or black eyes.

________________________________________

10. Fill a clean, used mayonnaise jar With freshly packed lavender flowers, Fill the jar with vodka, seal the lid tightly And set in the sun for three days. Strain liquid through a coffee filter, Then apply the tincture to aches and pains.

________________________________________

11. To relieve a fever, use a washcloth To rub vodka on your chest and back as a liniment.

________________________________________

12. To cure foot odor, Wash your feet with vodka.

________________________________________

13 Vodka will disinfect And alleviate a jellyfish sting.

________________________________________

14. Pour vodka over an area affected with poison ivy To remove the POISON IVY oil from your skin.

________________________________________

15. Swish a shot of vodka over an aching tooth. Allow your gums to absorb some of the alcohol to numb the pain.

________________________________________

And silly me! I used to just drink it !

Forwarded by Auntie Bev

Senior personal ads from Florida newspaper

Who says seniors don't have a sense of humour?

FOXY LADY: Sexy, fashion-conscious blue-haired beauty, 80's, slim, 5'4" (used to be 5'6"), Searching for sharp-looking, Sharp-dressing companion. Matching white shoes and belt a plus.

LONG-TERM COMMITMENT: Recent widow who has just buried fourth husband, And am looking for someone to Round out a six-unit plot. Dizziness, fainting, shortness of breath Not a problem.

SERENITY NOW: I am into solitude, long walks, Sunrises, the ocean, yoga and meditation. If you are the silent type, let's get together, Take our hearing aids out and enjoy quiet times.. BEATLES OR STONES? I still like to rock, Still like to cruise in my Camaro on Saturday nights And still like to play the guitar. If you were a groovy chick, Or are now a groovy hen, let's get together And listen to my eight-track tapes.

WINNING SMILE: Active grandmother with original teeth Seeking a dedicated flosser to share rare steaks, Corn on the cob and caramel candy

MEMORIES: I can usually remember Monday through Thursday. If you can remember Friday, Saturday and Sunday, let's put our two heads together.

MINT CONDITION: Male, 1932, high mileage, Good condition, some hair, Many new parts including hip, knee, cornea, valves. Isn't in running condition, but walks well.

Forwarded by Maureen

A little boy got on the bus, sat next to a man reading a book, and noticed he had his collar on backwards. The little boy asked why he wore his collar backwards.

The man, who was a priest, said, 'I am a Father.'

The little boy replied, 'My Daddy doesn't wear his collar like that.'

The priest looked up from his book and answered, ''I am the Father of many.'

The boy said, ''My Dad has 4 boys, 4 girls and two grandchildren and he doesn't wear his collar that way!'

The priest, getting impatient, said. 'I am the Father of hundreds', and went back to reading his book.

The little boy sat quietly thinking for a while, then leaned over and said, 'Maybe you should wear a condom and put your pants on backwards instead of your collar.'

"GMAT will replace an essay with sets of problems requiring different forms of analysis. Will this fend off competition from the GRE?" by Scott Jaschick, Inside Higher Ed, June 25, 2010 --- http://www.insidehighered.com/news/2010/06/25/gmat

Jensen Comment
GMAT testing officials were among the first to adopt computer grading rather than human grading of essays. I guess that will no longer be the case since the essay will disappear on the GMAT. However, perhaps the GMAT will still have some shorter essay questions.
http://www.trinity.edu/rjensen/assess.htm#ComputerBasedAssessment

"BP spoof video is runaway hit for UCB website," MIT's Technology Review, June 25, 2010 ---
http://www.technologyreview.com/wire/25663/?nlid=3166&a=f

The most memorable comedic take on the oil spill disaster in the Gulf of Mexico hasn't come from "Saturday Night Live," ''The Daily Show" or a late-night monologue.

Instead, a cheaply made video by an unlikely New York improv troupe has created the only commentary that has truly resonated online: a three-minute spoof that shows BP executives pathetically trying to clean up a coffee spill.

In the video, BP execs are in the middle of a meeting when someone overturns a coffee cup. The liquid oozes across the conference table. One exec says it will "destroy all the fish" (his sushi lunch); another says it's encroaching on his map of Louisiana. They try to contain the coffee spill by wrapping their arms around the perimeter, dumping garbage on top to absorb the liquid, clipping hair over it and other stupid human tricks.

Three hours later, the spill remains with all the mess left from attempts to contain it: paper, hair, soil, plants, etc. Finally, they get Kevin Costner on the phone.

"He'll know what to do for sure," an exec says with great hope.

"Do you have a golf ball?" Costner asks. No. A pingpong ball? Yes. Costner tells them to throw it at the spill. They do. Nothing happens. Then: 47 days later. The spill and the mess are still there with BP execs no closer to a solution.

In the last two weeks, the video has been watched by nearly 7 million people on YouTube. By the count of Viral Video Chart, it's been shared some 300,000 times on blogs, Facebook pages and Twitter feeds.

The video was dreamed up by the writers for the sketch show "Beneath Gristedes," a monthly stage show at the Upright Citizens Brigade Theatre in New York. While meeting to work on the show, a germ of the concept came to Erik Tanouye, who worked out the script with fellow writers John Frusciante, Gavin Spieller and Eric Scott.

They shot it two days later and within a week, it was up on UCBComedy.com. The site has had some viral hits -- a parody of a Google ad, a spoof of the "David After the Dentist" video -- but nothing on this level. UCBComedy.com's servers immediately crashed under the traffic.

"I couldn't do my day job," said Tanouye, 32, who is the director of student affairs for the UCB training center.

It's been the biggest hit yet for UCBComedy.com, which was founded in 2007 to give its performers an online outlet. The Upright Citizens Brigade Theatre, which has popular theaters in New York and Los Angeles, was co-founded by Amy Poehler.

For more than a decade, it has regularly churned out exciting young comic talent, including "SNL" players Bobby Moynihan and Jenny Slate, and "Office" regular Zach Woods. Young audiences line up on a nightly basis to pack the 300-seat New York theater, which has a youthful, collegiate vibe.

"What we're trying to do with videos is get out there to the general public the talent that we have," says Todd Bieber, 30, the website's director of content and production. "We can reach New York and L.A. audiences pretty easily, but there's a whole world out there that we can't reach through the theaters."

The boost in visitors to the site has been considerable. From May 21-June 21 last year, the site drew just under 43,000; the same period this year has attracted more than 450,000.

But Bieber, who formerly worked at the Onion News Network, is the only one being paid to work full time on the site. Videos don't have anything like the budgets of the Onion News Network, which shoots in the style of real news broadcasts.

UCBComedy.com includes a lot of footage of improv performances, which typically have much more energy in person, where the thrill of instant creation is immediate. But the dozens of UCB performers -- who are graduates of the theater's improv training classes -- have learned to fashion their comedy to the Web.

"Beta teams" -- performers dedicated to producing content for the site -- were formed in January. Original series have been created, including one called "Blackouts," which are short 30-second bites, one punch line at a time.

Bieber says that a viral sensation such as "BP Spills Coffee" can "energize the UCB community" in creating video for the website. Having so much talent at the ready makes UCBComedy.com a little like an amateur version of FunnyOrDie.com, the comedy site co-founded by Will Ferrell and Adam McKay, which pulls contributions from famous comedians.

"That's the hope," says Bieber. "There are so many terribly ridiculous things going on in the world that there's plenty of room for commentary. If we can be looked in the same way as FunnyOrDie, that would be terrific. We'd love to get the hits that they do."

There's plenty of competition when it comes to topical humor, though, and the oil spill has been a common topic. The slow-motion horror of the spill is utterly serious, but people have long turned to comics to give voice to rage. BP, which is said to have mismanaged the spill, has been an easy target.

David Letterman, Jay Leno and other late-night hosts have made BP jokes practically a nightly feature. Conan O'Brien, perhaps feeling like he was missing out, recently tweeted: "The past 2 months I've been on tour and haven't followed the news. What's with all the photos of chocolate pelicans?"

"The Colbert Report" and "The Daily Show" have battered the subject relentlessly. Mixing comedy with activism, Colbert Nation has launched a "Gulf of America Fund" to raise donations for the recovery efforts. "SNL" is off for the summer and so has missed the opportunity to lampoon BP.

One of the more interesting Internet-based parodies has been a mock Twitter feed, purporting to be from BP's public relations department: http://twitter.com/BPGlobalPR. It has more than 175,000 followers. One example: "Investing a lot of time & money into cleaning up our image, but the beaches are next on the to-do list for sure."

But the success of the UCB's video could well be a firm foothold in the world of online comedy, and boost the troupe's national presence.

"People can see these amazing talents come up," says Bieber. "As awesome as the theater is, at the end of the day, that sketch would have killed for 200 or 300 people, not 6 or 7 million."

Jensen Links to Some Other BP Videos

http://www.youtube.com/watch?v=2AAa0gd7ClM

http://www.youtube.com/watch?v=aPbZe43pTC8

http://www.youtube.com/watch?v=40kYQd7ybRA

http://www.youtube.com/watch?v=MLdAJn7YxeE
After the June 23 loss of the containment cap, 60,000 barrels per day are gushing out
This is no joking matter

David Albrecht has some YouTube recommendations at
http://profalbrecht.wordpress.com/2010/06/25/bp-in-social-commentary/

Bob Jensen's threads on Enron humor ---
http://www.trinity.edu/rjensen/FraudEnron.htm#Humor

Humor Between June 1 and June 30, 2010 --- http://www.trinity.edu/rjensen/book10q2.htm#Humor063010

Humor Between May 1 and May 31, 2010 --- http://www.trinity.edu/rjensen/book10q2.htm#Humor053110

Humor Between April 1 and April 30, 2010 --- http://www.trinity.edu/rjensen/book10q2.htm#Humor043010

Humor Between March 1 and March 31, 2010 --- http://www.trinity.edu/rjensen/book10q1.htm#Humor033110

Humor Between February 1 and February 28, 2010 --- http://www.trinity.edu/rjensen/book10q1.htm#Humor022810

Humor Between January 1 and January 31, 2010 --- http://www.trinity.edu/rjensen/book09q1.htm#Humor013110

And that's the way it was on June 30, 2010 with a little help from my friends.

Bob Jensen's gateway to millions of other blogs and social/professional networks ---
http://www.trinity.edu/rjensen/ListservRoles.htm

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

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

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

Bob Jensen's Homepage --- http://www.trinity.edu/rjensen/

Concerns That Academic Accounting Research is Out of Touch With Reality

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

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

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

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

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

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

Avoiding applied research for practitioners and failure to attract practitioner interest in academic research journals ---
"Why business ignores the business schools," by Michael Skapinker
Some ideas for applied research ---
http://www.trinity.edu/rjensen/theory01.htm#AcademicsVersusProfession
Clinging to Myths in Academe and Failure to Replicate and Authenticate Research Findings
http://www.trinity.edu/rjensen/theory01.htm#Myths
Poorly designed and executed experiments that are rarely, I mean very, very rarely, authenticated
http://www.trinity.edu/rjensen/theory01.htm#PoorDesigns
Discouragement of case method research by leading journals (TAR, JAR, JAE, etc.) by turning back most submitted cases --- http://www.trinity.edu/rjensen/000aaa/thetools.htm#Cases
Economic Theory Errors
Where analytical mathematics in accountics research made a huge mistake relying on flawed economic theory and interval/ratio scaling
http://www.trinity.edu/rjensen/theory01.htm#EconomicTheoryErrors
Accentuate the Obvious and Avoid the Tough Problems (like fraud) for Which Data and Models are Lacking
http://www.trinity.edu/rjensen/theory01.htm#AccentuateTheObvious
Financial Theory Errors
Where capital market research in accounting made a huge mistake by relying on CAPM
http://www.trinity.edu/rjensen/theory01.htm#AccentuateTheObvious
Philosophy of Science is a Dying Discipline
Most scientific papers are probably wrong
http://www.trinity.edu/rjensen/theory01.htm#PhilosophyScienceDying

Accountancy, Tax, IFRS, XBRL, and Accounting History News Sites --- http://www.trinity.edu/rjensen/AccountingNews.htm

Accounting Professors Who Blog --- http://www.trinity.edu/rjensen/ListservRoles.htm

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

Free (updated) Basic Accounting Textbook --- search for Hoyle at
http://www.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks

CPA Examination --- http://en.wikipedia.org/wiki/Cpa_examination
Free CPA Examination Review Course Courtesy of Joe Hoyle --- http://cpareviewforfree.com/

Bob Jensen's Personal History in Pictures --- http://www.cs.trinity.edu/~rjensen/PictureHistory/

Bob Jensen's Homepage --- http://www.trinity.edu/rjensen/

May 31, 2010

Bob Jensen's New Bookmarks on May 31, 2010
Bob Jensen at Trinity University

Accountancy, Tax, IFRS, XBRL, and Accounting History News Sites --- http://www.trinity.edu/rjensen/AccountingNews.htm

Accounting Professors Who Blog --- http://www.trinity.edu/rjensen/ListservRoles.htm

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

How to author books and other materials for online delivery
http://www.trinity.edu/rjensen/000aaa/thetools.htm
How Web Pages Work --- http://computer.howstuffworks.com/web-page.htm

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

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

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

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

Pete Wilson provides some great videos on how to make accounting judgments ---
http://www.navigatingaccounting.com/

FEI Second Life Video (thank you Edith) ---
If I Were an Auditor --- http://www.youtube.com/user/feiblog#p/a/u/0/Q-FR_fkTFKY

Teaching History With Technology --- http://www.thwt.org/
Some these ideas apply to accounting history and accounting education in general

Bob Jensen's threads on accounting novels, plays, and movies ---
http://www.trinity.edu/rjensen/AccountingNovels.htm

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

Bob Jensen's threads on education technology --- http://www.trinity.edu/rjensen/000aaa/0000start.htm

Video on IOUSA Bipartisan Solutions to Saving the USA

Most of the problems are solvable except for the Number 1 entitlements problem --- Medicare.
Drastic measures must be taken to keep Medicare sustainable.

I thought the show was pretty balanced from a bipartisan standpoint and from the standpoint of possible solutions.

The big possible solutions to save the USA are as follows (you and I won’t particularly like these solutions):

Extend retirement age significantly (75 years maybe?).
When Social Security was enacted, life expectancy was slightly over 65 years of age.
Now it is well over 75 years of age.
Hit Medicare retirees like me with higher fees for physicians, hospital services, and Medicare D drug payments.
Perhaps this should be on a scale based upon wealth/income levels such that people, like me, who can afford to pay more must pay more.
Greatly curb the biggest cost of Medicare --- keeping dying people alive in expensive hospitals for a few weeks or maybe even a few months. Sometimes dying people must be kept alive in ICU units costing over $10,000 per day when there is no hope of recovery. There was not any hint of suggesting euthanasia as an alternative. But dying people can be allowed to die more naturally and pain free.
http://www.cbsnews.com/video/watch/?id=5737437n&tag=mncol;lst;3
(wait for the commercials to play out)
Limit the National Debt is some way. It’s now more common in Europe to limit national debt to 60% of GDP. Various other means of constraining our National Debt were discussed in the CNN longer version of the IOUSA Solutions video.

Watch for the other possible solutions in the 30-minute summary video ---
http://www.pgpf.org/newsroom/press/IOUSA-Solutions-Premiers-on-CNN/
(Scroll Down a bit)

Watch the World Premiere of I.O.U.S.A.: Solutions on CNN
Saturday, April 10, 1:00-3:00 p.m. EST or Sunday, April 11, 3:00-5:00 p.m. EST

Featured Panelists Include:

Peter G. Peterson, Founder and Chairman, Peter G. Peterson Foundation
David Walker, President & CEO, Peter G. Peterson Foundation
Sen. Bill Bradley
Maya MacGuineas, President of the Committee for a Responsible Federal Budget
Amy Holmes, political contributor for CNN
Joe Johns, CNN Congressional Correspondent
Diane Lim Rodgers, Chief Economist, Concord Coalition
Jeanne Sahadi, senior writer and columnist for CNNMoney.com

Watch for the other possible solutions in the 30-minute summary video ---
http://www.pgpf.org/newsroom/press/IOUSA-Solutions-Premiers-on-CNN/
(Scroll Down a bit)

Humor Between May 1 and May 31, 2010 --- http://www.trinity.edu/rjensen/book10q2.htm#Humor053110

Humor Between April 1 and April 30, 2010 --- http://www.trinity.edu/rjensen/book10q2.htm#Humor043010

Humor Between March 1 and March 31, 2010 --- http://www.trinity.edu/rjensen/book10q1.htm#Humor033110

Humor Between February 1 and February 28, 2010 --- http://www.trinity.edu/rjensen/book10q1.htm#Humor022810

Humor Between January 1 and January 31, 2010 --- http://www.trinity.edu/rjensen/book09q1.htm#Humor013110

Bob Jensen's threads on accounting humor ---
http://www.trinity.edu/rjensen/FraudEnron.htm#Humor

Fraud Updates have been posted up to December 31, 2009 ---
http://www.trinity.edu/rjensen/FraudUpdates.htm

Also see http://www.trinity.edu/rjensen/Fraud.htm

"So you want to get a Ph.D.?" by David Wood, BYU ---
http://www.byuaccounting.net/mediawiki/index.php?title=So_you_want_to_get_a_Ph.D.%3F

Do You Want to Teach? ---
http://financialexecutives.blogspot.com/2009/05/do-you-want-to-teach.html

Jensen Comment
Here are some added positives and negatives to consider, especially if you are currently a practicing accountant considering becoming a professor.

Accountancy Doctoral Program Information from Jim Hasselback ---
http://www.jrhasselback.com/AtgDoctInfo.html

Why must all accounting doctoral programs be social science (particularly econometrics) "accountics" doctoral programs?
http://www.trinity.edu/rjensen/theory01.htm#DoctoralPrograms

What went wrong in accounting/accountics research?
http://www.trinity.edu/rjensen/theory01.htm#WhatWentWrong

ABSTRACT:
The crisis in supply versus demand for doctorally qualified faculty members in accounting is well documented (Association to Advance Collegiate Schools of Business [AACSB] 2003a, 2003b; Plumlee et al. 2005; Leslie 2008). Little progress has been made in addressing this serious challenge facing the accounting academic community and the accounting profession. Faculty time, institutional incentives, the doctoral model itself, and research diversity are noted as major challenges to making progress on this issue. The authors propose six recommendations, including a new, extramurally funded research program aimed at supporting doctoral students that functions similar to research programs supported by such organizations as the National Science Foundation and other science-based funding sources. The goal is to create capacity, improve structures for doctoral programs, and provide incentives to enhance doctoral enrollments. This should lead to an increased supply of graduates while also enhancing and supporting broad-based research outcomes across the accounting landscape, including auditing and tax. ©2009 American Accounting Association

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

"Amazing Disgrace," by Scott McLemee, Inside Higher Ed, May 19, 2010 ---
http://www.insidehighered.com/views/mclemee/mclemee290

Accounting Jobs Information (free site) --- http://www.accountingjobshelp.com/
Thank you Kim Eaves for the heads up.

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

Adobe's Creative Suite 5 Ships (with educational discounts) --- http://thejournal.com/articles/2010/04/30/creative-suite-5-ships.aspx

Only a small percentage of college students are "very interested" in buying and iPad and the competition will soon heat up
"Minor Bumps for iPad," by Steve Kolowich, Inside Higher Ed, April 23, 2010 ---
http://www.insidehighered.com/news/2010/04/23/ipad

Bob Jensen's threads on electronic book readers are at
http://www.trinity.edu/rjensen/eBooks.htm
Of course the iPad is more than an electronic book reader, although this is one of its major features.

I filed this under "Things That Rankle Tax Professor Amy Dunbar at the University of Connecticut"
"Supreme Court Declines to Hear Textron Work Product Privilege Case," Journal of Accountancy, June 2006 ---
http://www.journalofaccountancy.com/Web/20102952.htm

Another item filed under "Things That Rankle Tax Professor Amy Dunbar at the University of Connecticut" is the announced retirement of Brooks and Dunn ---
http://www.associatedcontent.com/article/2047767/boot_scootin_boogie_hitmakers_brooks.html?cat=33

Boot Scootin' Boogie --- http://www.youtube.com/watch?v=d05tQrhNMkA

Tax Professor Amy Dunbar Loves Google Docs

May 31, 2010 message from Amy Dunbar [Amy.Dunbar@BUSINESS.UCONN.EDU]

I just finished the first week of a 12-week MSA online tax course at UConn. I put students in groups and I ask them to work fairly lengthy quizzes (homework) independently, putting their answers in an Excel spreadsheet, and then they meet in chats to discuss their differences. When they can’t resolve a question, they invite me into chat. This week a student introduced me to Google docs, and I was swept off my feet by the way this tool could be used in my class. I love it! I created a video on the fly on Thursday to illustrate how to create a spreadsheet and share it with other group members. I may be the last to the party on this tool, but in case some of you aren’t aware of it, I am posting the video.

http://users.business.uconn.edu/adunbar/videos/GoogleDocs/GoogleDocs.html

If anyone wants the “quiz” that the students worked, send me an email (not AECM), and I will send you the file.

Amy

Amy Dunbar University of Connecticut School of Business Department of Accounting 2100 Hillside Road Unit 1041 Storrs, CT 06269-1041

cell 860-208-2737
amy.dunbar@business.uconn.ed

Interactive (online or offline) Homework and Other Student-Friendly Features of Google Apps

Google Docs has added an equation editor so students can actually complete math problems within a document, allowing students to not only write papers that include numbers and equations but also take notes from quantitative classes using Google Docs. Google has also added the ability to insert superscripts and subscripts, which can be useful for writing out chemical compounds or algebraic expressions.
"Google Docs Become More Student-Friendly," by Lena Rao, TechCrunch.com via The Washington Post, September 28, 2009 --- Click Here
http://www.washingtonpost.com/wp-dyn/content/article/2009/09/28/AR2009092802665.html?wpisrc=newsletter

Google has been aggressively marketing Google Apps to schools, recently launching a centralized site designed to recruit universities and colleges. Now, Google is tweaking Google Docs, which is a part of Google Apps' productivity suite, by adding a few student-friendly features.

Google Docs has added an equation editor so students can actually complete math problems within a document, allowing students to not only write papers that include numbers and equations but also take notes from quantitative classes using Google Docs. Google has also added the ability to insert superscripts and subscripts, which can be useful for writing out chemical compounds or algebraic expressions.

Google is also trying to make Docs appealing to those humanities majors out there by letting users to select from various bulleting styles for creating outlines and giving students ability to print footnotes as endnotes for term papers. And a few weeks ago, Google launched a translation feature in Google Docs.

As we've written in the past, Google is wise to recruit educational institutions because that's where many people get trained, start relying on, and form brand allegiances to productivity apps. Drawing from Apple's strategy, Google knows that brand loyalty is definitely forged at these schools and is steadily developing its products to become more appealing to students. Rival Microsoft is also launching web-based versions of its Office products aimed at the student audience. And startup Zoho offers a free web-based productivity suite.

May 31, 2010 reply from Rick Lillie [rlillie@CSUSB.EDU]

Hi Amy,

I use Google Docs and Spreadsheets with all of my courses. It's free, includes most of the Microsoft Office features, and makes it easy for students to collaborate on team projects. It also makes it easy to submit the final document in various formats (e.g., .pdf format).

My students use two communication tools in conjunction with Google Docs and Spreadsheets (i.e., TokBox and Skype). To use these tools, they need a headset/microphone and webcam.

TokBox (http://www.tokbox.com) is a free, hosted video messaging service. You can record up to a 10 minute video clip that can be shared by URL link. TokBox also includes a video chat feature that enables multiple people to video conference. This feature works great with study teams.

Skype (http://www.skype.com) includes chat, audio and video-conferencing. The chat feature works probably better than what you have been using. With a headset/microphone, you can have up to 10+ people in a audio conference call. Video-conferencing is 1:1 and includes a great screen sharing feature.

You can really change the nature of team collaboration when you combine Google Docs and Spreadsheets with TokBox and/or Skype. Following is an example of how to do this.

EXAMPLE

Students use Google Docs to create a shared workspace for writing a paper. One student sets up the workspace and invites team members into the space through an email link. Each team member is given editor rights.

Using a headset/microphone and webcam, students use TokBox to host a group video conference call. This enables students to brainstorm and get a project running.

During the work process, each team member adds/changes the paper in the common workspace in Google Docs.

When it is time to pull the paper together and do final editing, students use the audio conference call feature to talk with each other. While all are online in Skype, each team member logs into the Google Docs paper and views it on his/her computer screen. One or more students act as the editor. All see changes as they are made.

When editing is finished, one student exports the final assignment document in .pdf format to his/her hard drive. The student then submits the document for grading (e.g., student uploads the paper through the Digital Drop Box in Blackboard).

OUTCOME

By combining the features of Google Docs and Spreadsheets with communication tools like TokBox and Skype, students learn how to use technology to get things done. Major companies pay a fortune to do what your students can do for free. Purchasing a headset/microphone and webcam is relatively inexpensive. The experience students get is priceless.

I use this approach and technology tools with face-2-face, blended, and online classes. It works great. The approach changes the nature of how students and instructor interact in the teaching-learning experience.

Rick Lillie, MAS, Ed.D., CPA
Assistant Professor of Accounting
Coordinator, Master of Science in Accountancy
CSUSB, CBPA, Department of Accounting & Finance
5500 University Parkway, JB-547
San Bernardino, CA. 92407-2397
Email: rlillie@csusb.edu
Telephone: (909) 537-5726Skype (Username): ricklillie

On the last day of class, I would love to hear my students say:

“I never thought I could work so hard. I never thought I could learn so much. I never thought I could think so deeply. And, it was actually fun.” (Joe Hoyle)

Bob Jensen's threads on Tricks and Tools of the Trade are at
http://www.trinity.edu/rjensen/000aaa/thetools.htm

Innovation in Website Design
"Bucknell U. Wins Webby Award for Virtual Tour," by Andrea Fuller, Chronicle of Higher Education, May 6, 2010 ---
http://chronicle.com/blogPost/Bucknell-U-Wins-Webby-Award/23740/?sid=wc&utm_source=wc&utm_medium=en

What do Roger Ebert and Jim Carrey have in common with Bucknell University? They all just won Webby Awards from the International Academy of Digital Arts and Sciences, picked from over 10,000 entries.

Bucknell won in the category of best school or university Web site. The academy specifically praised Bucknell's virtual tour. Visitors to the site can click buttons to complete sentences that describe their interests and characteristics. The site then shows visitors a campus map, with arrows pointing to programs and areas at the university in which those interests might be developed. Visitors can then read related blurbs about Bucknell and click on mutimedia describing the Bucknell experience.

Bob Jensen's updates on education technology --- http://www.trinity.edu/rjensen/000aaa/0000start.htm

Nobel Laureate Gary Becker and Judge Richard Posner disagree over prospects of a VAT tax ---
Becker: http://uchicagolaw.typepad.com/beckerposner/2010/04/should-the-us-introduce-a-value-added-tax-becker.html
Posner: http://uchicagolaw.typepad.com/beckerposner/2010/04/should-the-united-states-institute-a-federal-valueadded-tax-posner.html
Jensen Comment
I'm will Posner on this!

"The Web Shatters Focus, Rewires Brains," by Nicholas Carr, Wired Magazine, June 2010 ---
http://www.wired.com/magazine/2010/05/ff_nicholas_carr/all/1

During the winter of 2007, a UCLA professor of psychiatry named Gary Small recruited six volunteers—three experienced Web surfers and three novices—for a study on brain activity. He gave each a pair of goggles onto which Web pages could be projected. Then he slid his subjects, one by one, into the cylinder of a whole-brain magnetic resonance imager and told them to start searching the Internet. As they used a handheld keypad to Google various preselected topics—the nutritional benefits of chocolate, vacationing in the Galapagos Islands, buying a new car—the MRI scanned their brains for areas of high activation, indicated by increases in blood flow.

The two groups showed marked differences. Brain activity of the experienced surfers was far more extensive than that of the newbies, particularly in areas of the prefrontal cortex associated with problem-solving and decisionmaking. Small then had his subjects read normal blocks of text projected onto their goggles; in this case, scans revealed no significant difference in areas of brain activation between the two groups. The evidence suggested, then, that the distinctive neural pathways of experienced Web users had developed because of their Internet use.

The most remarkable result of the experiment emerged when Small repeated the tests six days later. In the interim, the novices had agreed to spend an hour a day online, searching the Internet. The new scans revealed that their brain activity had changed dramatically; it now resembled that of the veteran surfers. “Five hours on the Internet and the naive subjects had already rewired their brains,” Small wrote. He later repeated all the tests with 18 more volunteers and got the same results.

When first publicized, the findings were greeted with cheers. By keeping lots of brain cells buzzing, Google seemed to be making people smarter. But as Small was careful to point out, more brain activity is not necessarily better brain activity. The real revelation was how quickly and extensively Internet use reroutes people’s neural pathways. “The current explosion of digital technology not only is changing the way we live and communicate,” Small concluded, “but is rapidly and profoundly altering our brains.”

What kind of brain is the Web giving us? That question will no doubt be the subject of a great deal of research in the years ahead. Already, though, there is much we know or can surmise—and the news is quite disturbing. Dozens of studies by psychologists, neurobiologists, and educators point to the same conclusion: When we go online, we enter an environment that promotes cursory reading, hurried and distracted thinking, and superficial learning. Even as the Internet grants us easy access to vast amounts of information, it is turning us into shallower thinkers, literally changing the structure of our brain.

Back in the 1980s, when schools began investing heavily in computers, there was much enthusiasm about the apparent advantages of digital documents over paper ones. Many educators were convinced that introducing hyperlinks into text displayed on monitors would be a boon to learning. Hypertext would strengthen critical thinking, the argument went, by enabling students to switch easily between different viewpoints. Freed from the lockstep reading demanded by printed pages, readers would make all sorts of new intellectual connections between diverse works. The hyperlink would be a technology of liberation.

By the end of the decade, the enthusiasm was turning to skepticism. Research was painting a fuller, very different picture of the cognitive effects of hypertext. Navigating linked documents, it turned out, entails a lot of mental calisthenics—evaluating hyperlinks, deciding whether to click, adjusting to different formats—that are extraneous to the process of reading. Because it disrupts concentration, such activity weakens comprehension. A 1989 study showed that readers tended just to click around aimlessly when reading something that included hypertext links to other selected pieces of information. A 1990 experiment revealed that some “could not remember what they had and had not read.”

Even though the World Wide Web has made hypertext ubiquitous and presumably less startling and unfamiliar, the cognitive problems remain. Research continues to show that people who read linear text comprehend more, remember more, and learn more than those who read text peppered with links. In a 2001 study, two scholars in Canada asked 70 people to read “The Demon Lover,” a short story by Elizabeth Bowen. One group read it in a traditional linear-text format; they’d read a passage and click the word next to move ahead. A second group read a version in which they had to click on highlighted words in the text to move ahead. It took the hypertext readers longer to read the document, and they were seven times more likely to say they found it confusing. Another researcher, Erping Zhu, had people read a passage of digital prose but varied the number of links appearing in it. She then gave the readers a multiple-choice quiz and had them write a summary of what they had read. She found that comprehension declined as the number of links increased—whether or not people clicked on them. After all, whenever a link appears, your brain has to at least make the choice not to click, which is itself distracting.

Continued in article (including hot links not provided above)

Why must we worry about the hiring-away pipeline?

Credit Rating Agencies ---- http://en.wikipedia.org/wiki/Credit_rating_agency

A credit rating agency (CRA) is a company that assigns credit ratings for issuers of certain types of debt obligations as well as the debt instruments themselves. In some cases, the servicers of the underlying debt are also given ratings. In most cases, the issuers of securities are companies, special purpose entities, state and local governments, non-profit organizations, or national governments issuing debt-like securities (i.e., bonds) that can be traded on a secondary market. A credit rating for an issuer takes into consideration the issuer's credit worthiness (i.e., its ability to pay back a loan), and affects the interest rate applied to the particular security being issued. (In contrast to CRAs, a company that issues credit scores for individual credit-worthiness is generally called a credit bureau or consumer credit reporting agency.) The value of such ratings has been widely questioned after the 2008 financial crisis. In 2003 the Securities and Exchange Commission submitted a report to Congress detailing plans to launch an investigation into the anti-competitive practices of credit rating agencies and issues including conflicts of interest.

Agencies that assign credit ratings for corporations include:

A. M. Best (U.S.)

Baycorp Advantage (Australia)

Dominion Bond Rating Service (Canada)

Dun & Bradstreet

China Credit Information Service (China)

Fitch Ratings (U.S.)

Japan Credit Rating Agency (Japan)

Moody's Investors Service (U.S.)

Standard & Poor's (U.S.)

Rating Agency Malaysia (Malaysia)

Egan-Jones Rating Company (U.S.)

Brickwork Rating (India)

The Pakistan Credit Rating Agency Limited (Pakistan)

How to Get AAA Ratings on Junk Bonds

Pay cash under the table to credit rating agencies
Promise a particular credit rating agency future multi-million contracts for rating future issues of bonds
Hire away top-level credit rating agency employees with insider information and great networks inside the credit rating agencies

"Rating Agency Data Aided Wall Street in Deals," The New York Times, April 24, 2010 ---
http://dealbook.blogs.nytimes.com/2010/04/24/rating-agency-data-aided-wall-street-in-deals/#more-214847

One of the mysteries of the financial crisis is how mortgage investments that turned out to be so bad earned credit ratings that made them look so good, The New York Times’s Gretchen Morgenson and Louise Story report. One answer is that Wall Street was given access to the formulas behind those magic ratings — and hired away some of the very people who had devised them.

In essence, banks started with the answers and worked backward, reverse-engineering top-flight ratings for investments that were, in some cases, riskier than ratings suggested, according to former agency employees. Read More »

"Credit rating agencies should not be dupes," Reuters, May 13, 2010 ---
http://www.reuters.com/article/idUSTRE64C4W320100513

THE PROFIT INCENTIVE

In fact, rating agencies sometimes discouraged analysts from asking too many questions, critics have said.

In testimony last month before a Senate subcommittee, Eric Kolchinsky, a former Moody's ratings analyst, claimed that he was fired by the rating agency for being too harsh on a series of deals and costing the company market share.

Rating agencies spent too much time looking for profit and market share, instead of monitoring credit quality, said David Reiss, a professor at Brooklyn Law School who has done extensive work on subprime mortgage lending.

"It was incestuous -- banks and rating agencies had a mutual profit motive, and if the agency didn't go along with a bank, it would be punished."

The Senate amendment passed on Thursday aims to prevent that dynamic in the future, by having a government clearinghouse that assigns issuers to rating agencies instead of allowing issuers to choose which agencies to work with.

For investigators to portray rating agencies as victims is "far fetched," and what needs to be fixed runs deeper than banks fooling ratings analysts, said Daniel Alpert, a banker at Westwood Capital.

"It's a structural problem," Alpert said.

Continued in article

Also see http://blogs.reuters.com/reuters-dealzone/

Jensen Comment
CPA auditing firms have much to worry about these investigations and pending new regulations of credit rating agencies.

"Calpers Sues Over Ratings of Securities," by Leslie Wayne, The New York Times, July 14, 2009 --- http://www.nytimes.com/2009/07/15/business/15calpers.html

"Prosecutors Ask if 8 Banks Duped Rating Agencies," by Louise Story, The New York Times, May 12, 2010 ---
http://www.nytimes.com/2010/05/13/business/13street.html

The New York attorney general has started an investigation of eight banks to determine whether they provided misleading information to rating agencies in order to inflate the grades of certain mortgage securities, according to two people with knowledge of the investigation.

The investigation parallels federal inquiries into the business practices of a broad range of financial companies in the years before the collapse of the housing market.

Where those investigations have focused on interactions between the banks and their clients who bought mortgage securities, this one expands the scope of scrutiny to the interplay between banks and the agencies that rate their securities.

The agencies themselves have been widely criticized for overstating the quality of many mortgage securities that ended up losing money once the housing market collapsed. The inquiry by the attorney general of New York, Andrew M. Cuomo, suggests that he thinks the agencies may have been duped by one or more of the targets of his investigation.

Those targets are Goldman Sachs, Morgan Stanley, UBS, Citigroup, Credit Suisse, Deutsche Bank, Crédit Agricole and Merrill Lynch, which is now owned by Bank of America.

The companies that rated the mortgage deals are Standard & Poor’s, Fitch Ratings and Moody’s Investors Service. Investors used their ratings to decide whether to buy mortgage securities.

Mr. Cuomo’s investigation follows an article in The New York Times that described some of the techniques bankers used to get more positive evaluations from the rating agencies.

Mr. Cuomo is also interested in the revolving door of employees of the rating agencies who were hired by bank mortgage desks to help create mortgage deals that got better ratings than they deserved, said the people with knowledge of the investigation, who were not authorized to discuss it publicly.

Contacted after subpoenas were issued by Mr. Cuomo’s office notifying the banks of his investigation, representatives for Morgan Stanley, Credit Suisse, UBS and Deutsche Bank declined to comment. Other banks did not immediately respond to requests for comment.

In response to questions for the Times article in April, a Goldman Sachs spokesman, Samuel Robinson, said: “Any suggestion that Goldman Sachs improperly influenced rating agencies is without foundation. We relied on the independence of the ratings agencies’ processes and the ratings they assigned.”

Goldman, which is already under investigation by federal prosecutors, has been defending itself against civil fraud accusations made in a complaint last month by the Securities and Exchange Commission. The deal at the heart of that complaint — called Abacus 2007-AC1 — was devised in part by a former Fitch Ratings employee named Shin Yukawa, whom Goldman recruited in 2005.

At the height of the mortgage boom, companies like Goldman offered million-dollar pay packages to workers like Mr. Yukawa who had been working at much lower pay at the rating agencies, according to several former workers at the agencies.

Around the same time that Mr. Yukawa left Fitch, three other analysts in his unit also joined financial companies like Deutsche Bank.

In some cases, once these workers were at the banks, they had dealings with their former colleagues at the agencies. In the fall of 2007, when banks were hard-pressed to get mortgage deals done, the Fitch analyst on a Goldman deal was a friend of Mr. Yukawa, according to two people with knowledge of the situation.

Mr. Yukawa did not respond to requests for comment. A Fitch spokesman said Thursday that the firm would cooperate with Mr. Cuomo’s inquiry.

Wall Street played a crucial role in the mortgage market’s path to collapse. Investment banks bundled mortgage loans into securities and then often rebundled those securities one or two more times. Those securities were given high ratings and sold to investors, who have since lost billions of dollars on them.

. . .

At Goldman, there was even a phrase for the way bankers put together mortgage securities. The practice was known as “ratings arbitrage,” according to former workers. The idea was to find ways to put the very worst bonds into a deal for a given rating. The cheaper the bonds, the greater the profit to the bank.

The rating agencies may have facilitated the banks’ actions by publishing their rating models on their corporate Web sites. The agencies argued that being open about their models offered transparency to investors.

But several former agency workers said the practice put too much power in the bankers’ hands. “The models were posted for bankers who develop C.D.O.’s to be able to reverse engineer C.D.O.’s to a certain rating,” one former rating agency employee said in an interview, referring to collateralized debt obligations.

A central concern of investors in these securities was the diversification of the deals’ loans. If a C.D.O. was based on mostly similar bonds — like those holding mortgages from one region — investors would view it as riskier than an instrument made up of more diversified assets. Mr. Cuomo’s office plans to investigate whether the bankers accurately portrayed the diversification of the mortgage loans to the rating agencies.

Question
Can any of you identify the mystery "Fraud Girl" who will be writing a weekly (Sunday) column for Simoleon Sense?

Hint
She seems to have a Chicago connection and seems very well informed about the blog posts of Francine McKenna.
http://retheauditors.com/
But I really do know know who is the mystery "Fraud Girl."

I’m exceptionally proud to introduce you to Fraud Girl, our new Sunday columnist. She will write about all things corp governance, fraud, accounting, and business ethics. To give you some background (and although I can not reveal her identity). Fraud girl recently visited me in Chicago for the Harry Markopolos presentation to the local CFA. We were incredibly lucky to meet with Mr. Markopolos and enjoyed 3 hours of drinks and accounting talk. Needless to say Fraud Girl was leading the conversation and I was trying to keep up. After a brainstorm session I persuaded her to write for us and teach us about wall street screw-ups.

So watch out, shes smart, witty, and passionate about making the world a better place. I think Sundays just got a lot better…

Miguel Barbosa
Founder of SimoleonSense

P.S. For Questions or Comments: Reach fraud girl at: FraudGirl@simoleonsense.com

Regulators, Ignore the Masses — It’s Your Responsibility

Men in general judge more by the sense of sight than by the sense of touch, because everyone can see but only a few can test feeling. Everyone sees what you seem to be, few know what you really are; and those few do not dare take a stand against the general opinion, supported by the majesty of the government. In the actions of all men, and especially of princes who are not subject to a court of appeal, we must always look to the end. Let a prince, therefore, win victories and uphold his state; his methods will always be considered worthy, and everyone will praise them, because the masses are always impressed by the superficial appearance of things, and by the outcome of an enterprise. And the world consists of nothing but the masses; the few have no influence when the many feel secure.

-Niccolo Machiavelli, The Prince

Why are Machiavelli’s words so astonishingly prophetic? How does a 500 year old quote explain contagion, bubbles, and Ponzi schemes? Do financial decision makers consciously overlook reality or do they merely postpone due diligence? That is the purpose of this series — to analyze financial fraud(s) and question business ethics.

Recent accounting scandals i.e. Worldcom, Enron, Madoff, reveal a variety of methods for boosting short term performance at the expense of long run shareholder value. WorldCom recorded bogus revenue, Enron boosted their operating income through improper classifications, and Madoff ran the largest Ponzi scheme in history. Sure these scandals were unethical, deceived the public, and made a ton of money. But what is the most striking similarity? Each of these companies was seen as the golden goose egg; an indestructible force that could never fail. Of course, the key word is “seen”, regulators, attorneys, financial analysts, and auditors failed to see reality. But why?

Fiduciaries are entrusted with protecting the public and shareholders from crooks like Skilling, Pavlo, and Schrushy. An average shareholder lacks the knowledge and expertise of a prominent regulator, right? Shareholders don’t perform the company’s annual audit, review all legal documentation, or communicate with top executives. No, shareholders base their decisions off information that is “accurate” and “meticulously examined”.

Unfortunately in each of these instances regulators failed to take a stand against consensus and became another ignorant face in the crowd. “Everyone sees what you seem to be, few know what you really are; and those few do not dare take a stand against the general opinion”. Who are the few that really know who these companies are? The answer should be evident. What isn’t clear is why these cowardly few are in charge of overseeing our financial markets.

When Auditors Look The Other Way

A week ago, I came across this article: Ernst & Young defends its Lehman work in letter to clients. I chuckled as I was reading it, remembering Roxie Hart from the play Chicago shouting the words “Not Guilty” to anyone who would listen. Like Roxie, the audit team pleaded that the media was inaccurate. In recording Lehman’s Repo 105 transactions, they claimed compliance with GAAP and believed the financial statements were ‘fairly represented’. But, fair reporting is more than complying with GAAP. Often auditors are “compliant” while cooking the books (a mystery that still eludes me). In this case, the auditors blatantly covered their eyes and closed their ears to what they must have known was deliberate misrepresentation of Lehman Brother’s financial statements.

We will explore the Lehman Brothers fiasco in next week’s post…but here’s the condensed version. Days prior to quarter end, Lehman Brothers used “Repo 105” transactions, which allowed them to lend assets to others in exchange for short-term cash. They borrowed around $50 Billion; none of which appeared on their balance sheet. Lehman instead reported the debt as sales. They used the borrowed cash to pay down other debt. This reduced both their total liabilities and total assets, thereby lowering their leverage ratio.

This was allegedly in compliance with SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities that allowed Lehman to move the $50 Billion of assets from its balance sheet. As long as they followed the rules, auditors could stamp [the] financial statements with a “Fairly Represented” approval and issue an unqualified opinion.

Clearly in this case complying was unethical and probably illegal. Howard Schilit, the author of Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports, once said, “You [the auditor] work for the investor, even though you are paid by someone else”. He insists that auditors should look beyond the checklists and guidelines and should instead question everything. Auditors are the first line of defense against fraud and the shareholders are dependent upon the quality of their services. So I ask again, with respect to Lehman Brothers, were the auditors working for the investors or where they in the pockets of senior management?

What can we do?

An admired value investor believes in a similar tactic for confirming the honesty of companies. It’s known as “killing the company”, where in his words, “we think of all the ways the company can die, whether it’s stupid management or overleveraged balance sheets. If we can’t figure out a way to kill the company, then you have the beginning of a good investment”. Auditors must think like this, they must kill the company, and question everything. If you can’t kill a company, then (and only then) are the financial statements truly a fair representation of the firms operations.

There was no “killing” going on when the lead auditing partner said that his team did not approve Lehman’s Accounting Policy regarding Repo 105s but was in some way comfortable enough with them to audit their financial statements. This engagement team failed in looking beyond SFAS 140 and should have realized what every law firm (aside from one firm in London) was stating; that the accounting methods Lehman Brothers used to record Repo 105s were a deliberate attempt to defraud the public.

So I repeat: Ignoring reality is not an option. Ignoring the crowd, however, is an obligation.

See you next week….

-Fraud Girl

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

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

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

"Guest Post: Fraud Girl – When The Financial Industry’s “Astrologers” Fail Us… Who’s Left To Analyze Credit Risk?" Fraud Girl, Simoleon Sense, May 30, 2010 --- Click Here
http://www.simoleonsense.com/guest-post-fraud-girl-when-the-financial-industry%e2%80%99s-%e2%80%9castrologers%e2%80%9d-fail-us%e2%80%a6-whos-left-to-analyze-credit-risk/

In light of Buffet testifying before the Financial Crisis Inquiry Commission, it’s only fitting to discuss the credit rating agencies and how Congress is considering fixing their “moral hazards”.

The Start of It All: “Doing it for the Money”

At the peak of the housing boom, credit rating agencies began reevaluating their AAA debt ratings. In 2006, agencies like S&P and Moody’s were forced to redo their models but nothing was significantly changed. At the height of the crisis, it was apparent that these ratings were incorrect and as a result a “whopping 91% of AAA-rated mortgage securities were downgraded to junk status”. Because these credit agencies are so highly relied upon by Wall Street, a shock spread across the market. It wasn’t long before the entire financial system was in midst of a collapse.

The government began an inquiry on the credit agencies failure to properly assess credit risk. As noted in an article from CNN, emails began to surface that agencies knew that the crisis was forming but kept company’s ratings high anyway. In one email, and employee wrote:

“This is frightening. It wreaks of greed, unregulated brokers, and ‘not so prudent’ lenders”

Why weren’t the agencies doing their jobs? They had no incentive to. Agencies get paid from the company’s they rate. If an agency downgrades their reliability, the company will stop paying for the ratings.

Ideas on How to Fix the Problem

I found a post via The Baseline Scenario blog: Reforming Credit Rating Agencies. Former analyst and then managing director at Moody’s Investors Service, Gary Witt, discusses what Congress wants to implement to resolve the credit agency issues as well as his opinion on the matter.

The Financial Stability Act of 2010 addresses what Congress believes should be done… including making the SEC responsible for examining the agencies at least once a year and making key findings public. It will also give the SEC the power to fine agencies for any wrongdoing they find.

Witt addresses the same concerns I do. He believes that having the SEC oversee the credit agencies is necessary but is uncertain as to whether they have the right qualifications to take that responsibility. We have seen what damage can occur when employees not experienced in Wall Street attempt to regulate the market (i.e. Bernie Madoff). We have learned that regulators aren’t asking the right questions and until they are educated enough as to how to ask those questions, they should not be asked to hold responsibility for our financial markets. If the SEC is going to take over, they are going to need well-experienced rating agents and must provide them with an incentive to work there.

Witt first suggests that we eliminate AAA ratings. How could anyone be sure that an instrument is 100% riskless? Witt instead believes there should be five simple categories to rate credit risk:

“A for securities expected to lose under 0.1%, B for expected losses between 0.1% and 1%, C for expected losses from 1% to 5%, D for expected losses from 5% to 10% and F for securities expected losses between 10% and 20%.”

If a credit agency performs poorly (i.e. rates credit an A that ended up in a loss), then the SEC can fine them. Though the agencies are still being paid by the companies themselves, they have more of an incentive to make accurate predictions.

Another option is to get rid of the agencies. I find this option more appealing.

The financial industry has placed too much trust in these agencies. Credit agencies are simply financial astrologists attempting to predict the future. An agency telling you an instrument is AAA rated does not mean that you should believe it.

Always ask the right questions: Where did this information come from? How did they make their decisions? What types of models do they use to come to these conclusions? If these types of questions were asked prior to the collapse, many investors would have realized that these ratings made no sense.

Individuals must perform the necessary research in order to determine their own judgments of risk. The problem we are having is that we have too much confidence in the regulators, auditors, agencies, etc. when most are falling short of their responsibilities.

Have any ideas on how to resolve the credit agency problems? Send me an email at fraudgirl [at] simoleonsense.com.

See you next week.

- Fraud Girl

Bob Jensen's Rotten to the Core threads on banks and investment banks ---
http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking

Bob Jensen's Rotten to the Core threads on credit rating agencies ---
http://www.trinity.edu/rjensen/FraudRotten.htm#CreditRatingAgencies

Bad Role Models for Our Children
"How Many Times Did Sen. Levin Say 'Sh**ty Deal'? by Cindy Perman, CNBC, April 28. 2010 ---
How Many Times Did Sen. Levin Say 'Sh**ty Deal'?

Bob Jensen's threads on the latest Goldman scandal are at
http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking

"Keeping Fraud in the Cross Hairs," by Joseph T. Wells (Interviewed) , Journal of Accountancy, June 2010 ---
http://www.journalofaccountancy.com/Issues/2010/Jun/20102852.htm

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

Video: The Greek Economic Crisis Explained --- http://www.simoleonsense.com/video-the-greek-crisis-explained/

Video Lunch with a Laureate: Famous Financial Researcher Robert Merton ---
http://www.simoleonsense.com/lunch-with-a-laureate-famous-financial-researcher-robert-merton/

Phil McKinney: Hacking the Future (Fora TV) --- http://fora.tv/2010/05/22/Phil_McKinney_Hacking_the_Future

AICPA Hotline Questions and Answers on Ethics for Your Accounting Students
"Test Your Knowledge of Professional Ethics," by Jason Evans, Journal of Accountancy, June 2010 ---
http://www.journalofaccountancy.com/Issues/2010/Jun/20102778.htm

Bob Jensen's threads on professionalism in accountancy ---
http://www.trinity.edu/rjensen/Fraud001.htm#Professionalism

Inefficiencies in the Information Thicket
"Inefficiencies in the Information Thicket: A Case Study of Derivative Disclosures During the Financial Crisis," by Robert P. Bartlett III, Harvard Law School Forum, May 27, 2010 ---
http://blogs.law.harvard.edu/corpgov/2010/05/27/inefficiencies-in-the-information-thicket/

In the paper, Inefficiencies in the Information Thicket: A Case Study of Derivative Disclosures During the Financial Crisis, which was recently made publicly available on SSRN, I provide an empirical examination of the effect of enhanced derivative disclosures by examining the disclosure experience of the monoline insurance industry in 2008. Conventional wisdom concerning the causes of the Financial Crisis posits that insufficient disclosure concerning firms’ exposure to complex credit derivatives played a key role in creating the uncertainty that plagued the financial sector in the fall of 2008. To help avert future financial crises, regulatory proposals aimed at containing systemic risk have accordingly focused on enhanced derivative disclosures as a critical reform measure. A central challenge facing these proposals, however, has been understanding whether enhanced derivative disclosures can have any meaningful effect given the complexity of credit derivative transactions.

Like AIG Financial Products, monoline insurance companies wrote billions of dollars of credit default swaps on multi-sector CDOs tied to residential home mortgages, but unlike AIG, their unique status as financial guarantee companies subjected them to considerable disclosure obligations concerning their individual credit derivative exposures. As a result, the experience of the monoline industry during the Financial Crisis provides an ideal setting with which to test the efficacy of reforms aimed at promoting more elaborate derivative disclosures.

Overall, the results of this study indicate that investors in monoline insurers showed little evidence of using a firm’s derivative disclosures to efficiently resolve uncertainty about a monoline’s exposure to credit risk. In particular, analysis of the abnormal returns to Ambac Financial (one of the largest monoline insurers) surrounding a series of significant, multi-notch rating downgrades of its insured CDOs reveals no significant stock price reactions until Ambac itself announced the effect of these downgrades in its quarterly earnings announcements. Similar analyses of Ambac’s short-selling data and changes in the cost of insuring Ambac debt securities against default also confirm the absence of a market reaction following these downgrade announcements.

Based on a qualitative examination of how investors process derivative disclosures, to the extent the complexity of CDOs impeded informational efficiency, it was most likely due to the generally low salience of individual CDOs as well as the logistic (although not necessarily analytic) challenge of processing a CDO’s disclosures. Reform efforts aimed at enhancing derivative disclosures should accordingly focus on mechanisms to promote the rapid collection and compilation of disclosed information as well as the psychological processes by which information obtains salience.

The paper is available for download from
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1585953

Bob Jensen's tutorials on accounting for derivative financial instruments and hedging activities ---
http://www.trinity.edu/rjensen/caseans/000index.htm

PwC points out some of the major differences between these proposed FASB revisions versus the IASB provisions.

Click Here to download the ED http://snipurl.com/fasb5-26-2010

From: Jensen, Robert
Sent: Friday, May 28, 2010 6:39 AM
To: AECM@LISTSERV.LOYOLA.EDU
Subject: May 26 FASB ED Mush http://snipurl.com/fasb5-26-2010

Hi again Paul,

Subject the May 26 FASB ED http://snipurl.com/fasb5-26-2010

Thank you Paul for telling me this ED was finally released …. On second thought a “thank you” for this mush is being too polite.

It will be interesting to compare the comment letters sent to the FASB regarding this mush with the comment letters sent in on an earlier (2008) ED ---
http://www.fasb.org/jsp/FASB/CommentLetter_C/CommentLetterPage&cid=1218220137090&project_id=1590-100
Some comments might be carbon copies with new dates.
But watch for the comments that change between the 2008 ED versus the new 2010 ED.
For corporations that prefer mush to standards, I predict some glowing praise for going carte blanch on financial instruments standards.

It was late yesterday when I rushed out a reply to you that appears at the bottom of this current update message. I corrected a couple of bothersome typos.

Hedge accounting basically means that changes in the fair value of the hedging derivative get charged to AOCI rather than current earnings to eliminate earnings volatility due to hedging contracts that have not yet net settled. For example, firms that lock in future commodity prices or interest rates with a forward, futures, swap, or possibly an option contract will not see earnings fluctuate wildly because they hedged cash flows of forecasted transactions. But the AOCI can be charged only to the extent that the hedge is effective. Ineffectiveness must be charged to current earnings.

Those who want to see hedge effectiveness testing under the 80-125 bright line dollar offset guide (that was written into the original IAS 39) and implied in FAS 133 may do so at the following links:

Bob Jensen’s Amendment to the Teaching Note prepared by Smith and Kohlbeck for the following case: “Accounting for Derivatives and Hedging Activities Comparisons of Cash Flow Versus Fair Value Accounting,” by Pamela A. Smith and Mark J. Kohlbeck
Issues in Accounting Education, Volume 23, Number 1, February 2008, pp. 103-118
Bob Jensen's Amendment is at http://www.trinity.edu/rjensen/CaseAmendment.htm

Also scroll down to the term “Ineffectiveness” in my glossary at
http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm#I-Terms

Some hedges are likely to be more effective than others. These usually include forward, futures, and swap contracts. Purchased options are notoriously ineffective due, in large measure, to the conservatism of commodity traders vis-à-vis commodity options traders. Commodities contracts and commodities options contracts are traded in separate markets. Because options are so notoriously ineffective as hedges, most companies only charge intrinsic value portions of price changes of options (when the options are in-the-money) to AOCI and charge changes in time value to current earnings. Under the 80-125 dollar offset rule, purchased options would otherwise not generally be eligible for any hedge accounting relief. The Smith and Kohlbeck case cited above illustrates how options rarely meet the 80-125 test. Smith and Kohlbeck simplified their case to their peril by not testing for hedge effectiveness. Virtually all their hedges were in fact ineffective. The case now makes a good example of what can happen if hedge effectiveness testing is ignored.

Paragraph 146 of the original IAS 39 reads as follows:

146. A hedge is normally regarded as highly effective if, at inception and throughout the life of the hedge, the enterprise can expect changes in the fair value or cash flows of the hedged item to be almost fully offset by the changes in the fair value or cash flows of the hedging instrument, and actual results are within a range of 80 per cent to 125 per cent. For example, if the loss on the hedging instrument is 120 and the gain on the cash instrument is 100, offset can be measured by 120/100, which is 120 per cent, or by 100/120, which is 83 per cent. The enterprise will conclude that the hedge is highly effective.

Delta ratio D = (D option value)/ D hedged item value)
range [.80 < D < 1.25] or [80% < D% < 125%]
(FAS 133 Paragraph 85)
Delta-neutral strategies are discussed at various points (e.g., FAS 133 Paragraphs 85, 86, 87, and 89)

A hedge is normally regarded as highly effective if, at inception and throughout the life of the hedge, the enterprise can expect changes in the fair value or cash flows of the hedged item to be almost fully offset by the changes in the fair value or cash flows of the hedging instrument, and actual results are within a range of 80-125% (IAS 39 Paragraph 146). The FASB requires that an entity define at the time it designates a hedging relationship the method it will use to assess the hedge's effectiveness in achieving offsetting changes in fair value or offsetting cash flows attributable to the risk being hedged (FAS 133 Paragraph 62). In defining how hedge effectiveness will be assessed, an entity must specify whether it will include in that assessment all of the gain or loss on a hedging instrument. The Statement permits (but does not require) an entity to exclude all or a part of the hedging instrument's time value from the assessment of hedge effectiveness. (FAS 133 Paragraph 63).

Hedge ineffectiveness would result from the following circumstances, among others:

a) difference between the basis of the hedging instrument and the hedged item or hedged transaction, to the extent that those bases do not move in tandem.

b) differences in critical terms of the hedging instrument and hedged item or hedged transaction, such as differences in notional amounts, maturities, quantity, location, or delivery dates.

c) part of the change in the fair value of a derivative is attributable to a change in the counterparty's creditworthiness (FAS 133 Paragraph 66).

Because the dollar offset method is quite restrictive, many companies prefer accepted regression tests of hedge effectiveness. Regression, however, often does not bring hedge accounting relief for purchased options.
Hedge Effectiveness: The Wild Card in Accounting for Derivatives," by Ira C. Kawaller ---
http://www.kawaller.com/pdf/AFP-Hedge Effectiveness.pdf
Also see http://www.cs.trinity.edu/~rjensen/Calgary/CD/HedgeEffectiveness.pdf

I also have a hedge effectiveness testing tutorial (in PowerPoint) at
http://www.cs.trinity.edu/~rjensen/Calgary/CD/JensenPowerPoint/
(click on the 06effectiveness.ppt file)

Companies have a lot of trouble both in quantitative testing for hedge effectiveness and in meeting the guidelines for a hedge to be effective. With a magic wave of the wand (http://snipurl.com/fasb5-26-2010 ), the IASB and FASB now propose to allow “qualitative testing” which in my viewpoint is tantamount to qualitative mush. Companies will soon be able to declare most any hedge as effective when they say their prayers faithfully night.

The Smith and Kohlbeck case shows what might happen in the future if management simply declares the hedging contracts as qualitatively effective.

Boo on that idea in http://snipurl.com/fasb5-26-2010

I don’t mind elimination of the short-cut method, because that was limited only to interest rate swaps and was not allowed in general for other types of hedging contracts.

I still have not really poured over all parts of the ED at http://snipurl.com/fasb5-26-2010
But I will ask if turning “standards” into qualitative judgment mush is the way to go whenever the former standards were complicated.

Is this the magical wave of the wand for convergence of FASB and IASB standards?

At what point does qualitative judgment mush cease to be a “standard?”

Bob Jensen

From: AECM, Accounting Education using Computers and Multimedia [mailto:AECM@LISTSERV.LOYOLA.EDU] On Behalf Of Jensen, Robert
Sent: Thursday, May 27, 2010 7:04 PM
To: AECM@LISTSERV.LOYOLA.EDU
Subject: Re: The Accounting Onion

Hi Paul,

Thanks for the heads up!

I’ve really not had time yet to go through the complex May 26 ED at http://snipurl.com/edmay26-2010

Some things really confuse me in what I’ve seen so far. One bothersome feature is the asymmetry between reported fair values of financial assets versus liabilities. Suppose Company D sells 10% of a bond issue to Company B for $850 per bond. On December 31 Company B reports the December 31 trading price of the bond at $1,010 as the fair value of each investment bond. Company D, however, has had no change in credit rating for the year ended December 31. Hence, it reports a fair value of $850 for each bond indebtedness that Company B reports as an asset worth $1,010 per bond. Debtors must somehow factor in the change in fair value of credit rating, whereas the investor only looks at change in trading fair value.

There’s also an issue of timing. Presumably credit rating agencies are not going to normally change Company D’s credit rating until after Company D releases its audited financial statements. Hence, changes in credit rating might have an awfully long lag in terms of current fair value adjustments to bond liabilities. This all must be as clear as mud to investors and creditors reading financial statements.

Some other parts of the ED seem like even worse mush. Effectiveness testing for hedge accounting seems more subjective and ambiguous than most anything that I’ve ever seen proposed accounting standards. It’s pure mush at this point relative to the 80-125 (egads a bright line) guideline suggested in the original version of IAS 39. How we can expect any kind of consistency between companies or even consistency between different hedging contracts within the same company is a mystery to me without some bright line guides.

Hedge effectiveness testing will essentially become more subjective than a beauty contest. If auditors could not say no to Repo 105 debt masking, how in the world can they buck clients who rate the beauty of their hedging contracts?

Bob Jensen

From: AECM, Accounting Education using Computers and Multimedia [mailto:AECM@LISTSERV.LOYOLA.EDU] On Behalf Of Paul Polinski
Sent: Thursday, May 27, 2010 3:44 PM
To: AECM@LISTSERV.LOYOLA.EDU
Subject: Re: The Accounting Onion

Hi Bob. Late yesterday the FASB posted their financial instrument exposure draft to their web site.

Paul

From: "Jensen, Robert" <rjensen@TRINITY.EDU>
To: AECM@LISTSERV.LOYOLA.EDU
Sent: Thu, May 27, 2010 1:15:31 PM
Subject: Re: The Accounting Onion

The lame duck Superman zooms in to aid the SEC’s Superwoman!

"IASB Chairman Outlines Approach for Reconciling Financial Instrument Standards,"
by Matthew G. Lamoreaux, Journal of Accountancy, June 2010 ---
http://www.journalofaccountancy.com/Web/20102960.htm

Jensen Comment
What interests me is the ever-changing plans for revision of IAS 39. Hedging transactions are like staff infections that just will not go away no matter how much Sir David Tweedie wishes upon a star.

Bob Jensen's threads on FASB-IASB standards convergence are at
http://www.journalofaccountancy.com/Web/20102960.htm

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

Why FASB and IASB convergence will be "super."

The pictures of the SEC's Mary Shapiro and the FASB's (Lame Duck) leader Sir David Tweedie say it all regarding why convergence of IFRS and FASB standards is inevitable with the IASB grinding U.S. GAAP into oblivion:
I thank David Albrecht for sending Sir David's lame duck picture.

"IFRS Risk: Not What You Think," by Bruce Pounder, CFO.com, May 14, 2010 ---
http://www.cfo.com/article.cfm/14497802/c_14497718?f=home_todayinfinance

The switch from U.S. generally accepted accounting principles to international accounting standards is a hot topic. But CFOs of U.S. companies are wasting time and money managing imaginary risks while completely ignoring real ones.

Today's CFO is accustomed to managing risk. But few financial executives in the United States accurately perceive or understand the emerging risks that are associated with the global convergence of financial reporting standards (convergence). As a result, CFOs across America are wasting time and money managing imaginary risks while ignoring the real risks associated with convergence in general and International Financial Reporting Standards (IFRS) in particular.

To separate real from imagined risks, let's start by looking at some of the defining characteristics of the U.S. financial reporting environment. In the United States, as in most of the developed world, private companies outnumber public companies by a ratio of roughly 1,000 to 1. But in the United States—unlike most of the developed world—private companies have no statutory financial reporting obligations. No individual, organization, or governmental agency can unilaterally require private U.S. companies to use a particular set of financial reporting standards.

In practice, private U.S. companies frequently use U.S. generally accepted accounting principles (GAAP), and there are plenty of good reasons for doing so. But many private companies follow GAAP only up to a point, disclosing deviations in their financial statements. And other private companies use alternatives to GAAP, such as cash-basis accounting, tax-basis accounting, or some "other comprehensive basis of accounting" (OCBOA). So among private U.S. companies, diversity in financial reporting standards is the norm.

The relatively small number of public companies that exist in the United States operate in a very different environment. They are subject to statutory financial reporting obligations as determined by the Securities and Exchange Commission (SEC). The SEC has the legal authority to define the financial reporting standards that companies under its jurisdiction must or may use.

Since its inception, the SEC has relied on nongovernmental standard-setting organizations to set financial reporting standards for its regulants. Currently, the SEC looks to the Financial Accounting Standards Board (FASB) to set the financial reporting standards that the SEC requires public U.S. companies to adhere to. In some cases, the SEC has supplemented or overridden standards set by nongovernmental standard-setters, but for more than 70 years, public companies in the United States have had to use U.S. GAAP as set by the FASB and its predecessors for statutory financial reporting purposes.

IFRS and Convergence IFRS is a specific, existing set of financial reporting standards that are developed and maintained by the International Accounting Standards Board (IASB). At the standard level, IFRS and U.S. GAAP exhibit a number of similarities-and a far greater number of differences. There are significant similarities and differences in their conceptual underpinnings as well.

As a nongovernmental organization, the IASB has no authority to compel any country to require or permit the use of IFRS. Nor does the IASB have any authority to compel any individual company to use its standards. In short, only by developing and maintaining a set of standards that at least some countries and companies perceive as being superior to alternatives (such as U.S. GAAP) has the IASB achieved widespread adoption of IFRS throughout the world.

Set-level convergence occurs when countries and/or companies stop using country-specific financial reporting standards and start using the same set of country-neutral standards, as has been the case with the adoption of IFRS outside of the United States. But standard-level convergence has also occurred in parallel with set-level convergence. Since 2002, the FASB and IASB have been working together to converge U.S. GAAP and IFRS at the standard level, and the global financial crisis has brought even greater pressure on the Boards to make further progress.

For the most part, the boards are developing new, common standards designed to replace existing standards in U.S. GAAP and IFRS. And in most cases, the standards under development differ significantly from the standards in either U.S. GAAP or IFRS today.

Imagined Risks Many U.S. CFOs have been led to believe that their companies, at some point in the relatively near future, will be forced to switch from using U.S. GAAP, as we know it today, to using IFRS, as we know it today. On top of being concerned about the cost and effort that would likely accompany such a switch, U.S. CFOs have been bothered by the seeming uncertainty with regard to the timing of such a switch.

The responses of U.S. CFOs about their beliefs have been mixed. Some have invested time and money in voicing opposition to such a switch. Others have demanded more certainty in the timing, assuming that they'll commit resources to the switch once they get a "date certain." Still others, sensing both inevitability and imminence, have begun to study current IFRS and assess the impact of converting from current U.S. GAAP to current IFRS. But all of these represent responses to imagined risks, not real ones.

Bob Jensen's threads on accounting standard setting controversies are at
http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting

"Convergence talks accused of over-ambitious targets: IASB and FASB give "no guarantee" they will resolve all differences over international standards convergence," by Mario Christodoulou, Accountancy Age, April 22, 2010 ---
http://www.accountancyage.com/accountancyage/news/2261794/convergence-talks-accused

A progress report on international accounting convergence caused rumblings in the accounting world last week, with fears the world’s two chief standard setters were being overambitious in their quest to unite their two accounting codes by June next year.

Some even suggested the quality of international accounting rules may suffer as the international and US standard setters move towards a June 2011 deadline.

Jeremy Newman, chief executive officer of BDO International, was worried that too much was being compromised by the International Accounting Standards Board (IASB), headed by Sir David Tweedie, as it attempts to converge its standards with US rules. He fears a rush job may hurt the standards though a lack of thoroughness. “My fear at the moment is that in order for the IASB to say ‘we got there’ it will drop so much stuff that getting there just doesn’t mean a whole lot,” he said.

In a joint statement the IASB and its US counterpart the Financial Accounting Standards Board (FASB) said last week that while they were making good progress on the vast majority of accounting rules, there was “no guarantee” they would resolve “all, or any, of our differences” on its financial instruments project.

The two boards have been working towards a June 2011 deadline, imposed by G20 leaders last year, to converge US and international accounting rules. However fundamental differences remain on their approach to the measurement of financial instruments.

Nigel Sleigh-Johnson, head of the financial reporting faculty at the ICAEW, said he is worried the quality of international standards may suffer as respondents struggle to keep up with the number of proposals being released this year. “The concern is not that we have to work harder, it is that the risk of damaging the quality of the standards is magnified by having to address so many topics at one time,” he said.

FASB will next month release its full fair value proposal, which would result in all company assets valued at their market price. The IASB released its model in November 2008 incorporating a mixed-measurement approach which allows some bank loan books to be valued at amortized cost.

The US standard setter’s timing has raised questions about its “sense of urgency” to convergence. On key projects such as on financial instruments some suggest progress is needed soon to prevent rushing the standards at the deadline. They say the boards need to work together according to the same timetable, allowing constituents the best chance to understand then comment on them.

Newman said that FASB was travelling at a “slightly different pace” than the IASB. “However, those of us who would like to see adoption of a single set of high quality accounting standards will always say progress is going too slow.”

The IASB and FASB will issue a raft of joint reports on proposed converged standards in coming months. The IASB plans to release 11 exposure drafts for comment by June. Differences with FASB remain on their divergent treatment of financial instruments and insurance contracts, which, the boards warn, could alter their timetable.

Comment: In our view

Time is running out for the IASB and the issues being debated are matters of principle which cut to the heart of convergence. The US has a fundamental different point of view on some key headline standards. If these differences can’t be resolved, the question remains will the world accept almost-converged accounting rules. Is close enough, enough?

Jensen Comment
I don't understand claims that "time is running out." The convergence process should take as long as possible, maybe another decade, in order to deal with all the complicated accounting issues of the day. Why should the U.S. want to hurriedly give up its current leverage with regard to influencing the IASB? It will be much harder after convergence for the U.S. to get full IASB attention to its "ambitious projects.".

Slower convergence will also help the transition process in education and in transitioning the CPA examination.

May 6, 2010 reply from Patricia Walters [patricia@DISCLOSUREANALYTICS.COM]

Bob:

"Time is running out" comes from the commitment of the boards to the G20 and to the SEC by June 2011. In my view, no other pressures would be sufficient to warrant the work plan and timetable that the two boards are committed to.

Despite the focus of the article on the IASB (the publicition is UK Accountancy), this is a FASB issue, too.

Pat

Bob Jensen's threads on convergence issues are at
http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting

Question
How does fair IFRS value accounting differ for financial instruments versus derivative financial instruments?

The IASB is proposing an amendment to IAS 39 that will give the option to maintain financial instrument liabilities at fair value with gains and losses going to AOCI instead of current earnings. However, this does not make the fair value accounting totally consistent with fair value accounting for derivative financial instruments where changes in fair value go to current earnings except in qualified hedging transactions.

Whereas firms are increasingly pressured by the FASB and the IASB to maintain financial assets at fair value, maintaining financial liabilities at fair values is much more controversial since the future cash flows of fixed-rate debt may depart greatly from current fair value. For cash flows of a fixed rate mortgage are well defined whereas the fair value of those cash flows may fluctuate day-to-day with interest rates. Fair value adjustments of debt that the firm either cannot or does not intend to liquidate may be quite misleading regarding financial risk.

The same cannot be said for derivative financial instruments where FAS 133 and IAS 39 require maintaining the current reported balances at fair value.

However, the FASB is proposing an amendment to IAS 39 that will give the option to maintain financial instrument liabilities at fair value with gains and losses going to AOCI instead of current earnings. However, this does not make the fair value accounting totally consistent with fair value accounting for derivative financial instruments where changes in fair value go to current earnings except in qualified hedging transactions.

"Exposure Draft on measurement of financial liabilities," IAS Plus, May 11, 2010 --- http://www.iasplus.com/index.htm

The IASB has published for public comment an exposure draft (ED) of proposing to amend the way the fair value option in IAS 39 Financial Instruments: Recognition and Measurement is applied with respect to financial liabilities. Many investors and others have said that volatility in profit or loss resulting from changes in an entity's own credit risk is counter-intuitive and does not provide useful information – except for value changes relating to derivatives and liabilities held for trading (such as short sales). The IASB is proposing, therefore, that all gains and losses resulting from changes in 'own credit' for those financial liabilities that an entity chooses to measure at fair value should be recognised as a component of 'other comprehensive income', not in profit or loss. The ED does not propose any other changes for financial liabilities. Consequently, the proposals will affect only those entities that elect to apply the fair value option to their financial liabilities. Importantly, those who prefer to bifurcate financial liabilities when relevant may continue to do so. That is consistent with the widespread view that the existing requirements for financial liabilities work well, other than the 'own credit' issue that these proposals cover.

Unlike FAS 133, IAS 39 no longer requires bifurcation of embedded derivatives that are not "clearly and closely related" to the host instrument.

"IASB Addresses 'Counter-intuitive' Effects of Fair Value Measurement of Financial Liabilities," SmartPros, May 10, 2010 ---
http://accounting.smartpros.com/x69432.xml

The International Accounting Standards Board (IASB) today published for public comment its proposed changes to the accounting for financial liabilities.

This proposal follows work already completed on the classification and measurement of financial assets (IFRS 9 Financial Instruments).

The IASB is proposing limited changes to the accounting for liabilities, with changes to the fair value option. The proposals respond to the view expressed by many investors and others in the extensive consultations that the IASB has undertaken—that volatility in profit or loss resulting from changes in the credit risk of liabilities that an entity chooses to measure at fair value is counter-intuitive and does not provide useful information to investors.

When the IASB introduced IFRS 9 many stakeholders around the world advised the IASB that the existing requirements for financial liabilities work well, except for the effects of changes in the credit risk of a financial liability (‘own credit’) that an entity chooses to measure at fair value.

Building on that global consultation on IFRS 9, the IASB sought the views of investors, preparers, audit firms, regulators and others on the ‘own credit’ issue. The views received were consistent with the earlier consultations—that volatility in profit or loss resulting from changes in ‘own credit’ does not provide useful information except for derivatives and liabilities that are held for trading.

The IASB is therefore proposing that all gains and losses resulting from changes in ‘own credit’ for financial liabilities that an entity chooses to measure at fair value should be transferred to ‘other comprehensive income’. Changes in ‘own credit’ will therefore not affect reported profit or loss.

No other changes are proposed for financial liabilities. Therefore, the proposals will affect only those entities that choose to apply the fair value option to their financial liabilities. Importantly, those who prefer to bifurcate financial liabilities when relevant may continue to do so. That is consistent with the widespread view that the existing requirements for financial liabilities work well, other than the ‘own credit’ issue that these proposals cover.

Commenting on the proposals, Sir David Tweedie, Chairman of the IASB, said:

Whilst there are theoretical arguments for treating financial assets and liabilities in the same way it is hard to defend the accounting as providing useful information when a company suffering deterioration in credit quality is able to book a corresponding large profit, especially when investors tell us that such information is often excluded from their financial models.

An IASB ‘Snapshot’, a high level summary of the proposals, is available to download free of charge from the IASB website at http://go.iasb.org/financial+liabilities.

The exposure draft Fair Value Option for Financial Liabilities is open for comment until 16 July 2010. It can be accessed via the ‘Comment on a proposal’ section on www.iasb.org from today.

Jensen Comment
What the IASB has not done is eliminate the enormous inconsistency in fair value accounting for financial assets versus financial liabilities.

The worst part of all this is that students, let’s call them classic sophomores, are willing to jump to conclusions like the following:

1. Historical cost accounting, even when price-level adjusted, leads to ancient balances of assets and liabilities that are seriously out of date with current market values whether markets are entry or exit value markets.

2.