New Bookmarks
Year 2011 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 
Tidbits Directory --- 

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

Bob Jensen's Threads ---

 Bob Jensen's Pictures and Stories


Choose a Date Below for Additions to the Bookmarks File


June 30 

April 30  



June 30, 2011

Bob Jensen's New Bookmarks May 1-June 30, 2011
Bob Jensen at Trinity University 


Humor Between May 1 and June 30, 2011 ---   

Humor Between April 1 and April 30, 2011 ---  

Humor Between February 1 and March 31, 2011 --- 

Humor Between January 1 and January 31, 2011 --- 

Some of Bob Jensen's Pictures and Stories

Since many of you know Herb and Lenore Miller I pass this notice of her death..

Herb got credit (and very wealthy) from the Finney and Miller Basic and Intermediate Accounting Textbooks (Professor Finney at the University of Chicago was much older than Herb and died in the early years of the F&M editions).

However, our good friend Herb readily admits that Lenore's contributions to these textbooks was enough to warrant co-authorship status (although she refused this full honor). Lenore knew a lot about accounting. She worked on much of the end-of-chapter material.

Both Herb and Lenore were expert bridge players. They have one daughter Barbara who I think earned a doctorate in religion from Harvard.

Both Herb and Lenore grew up in Iowa. Lenore actually grew up in Humboldt which is quite near where I grew up in North Central Iowa. Humboldt/Dakota City may be best known as the hometown (more accurately close by in Dakota City) where Harry Reasoner was allegedly murdered late in his own life ---

Herb and Lenore were very generous to good causes.

When I was finishing up my doctorate Herb was a visiting professor at Stanford. He and Lenore are the main reason that I started my accounting faculty career at his home base of Michigan State University (where I then met their very, very close friends James Don and Clara Edwards).

One of Lenore's favorite stories was when later in life she got an offer to join the accounting faculty at a university and Herb would then tag along as an unemployed husband. She did not accept the offer and later followed Herb to the University of Georgia after James Don became director of the accounting program and eventually Dean of the college of business.

My life is so blessed with fond memories of great friends.

Bob Jensen

Accounting Hall of Fame ---

Congratulations to the latest inductees into the Accounting Hall of Fame. On August 8, 2011 the following well known scholars and researchers will be inducted into the Accounting Hall of Fame:

Gary John Previts
Reed K. Storey

I'm very sorry indeed that I will miss the induction breakfast on August 8 (Dan Jensen is kind enough to invite me every year even if we're not blood relatives). Following her 14th spine surgery, Erika will not be able to get on an airliner for at least six months. And I will not leave her by herself in this recovery period. Sorry to miss this ceremony and the other networking that takes place at the AAA Annual Meetings. In my case there are fewer and fewer professors that I know at these meetings and more and more new faces that look awfully young.

I'm especially sorry that I will miss Hall of Famer Steve Zeff's plenary session (Professor Zeff is the speaker chosen for the Presidential Address by current AAA President Kevin Stocks) ---
Steve will be focusing on the history of the IASC/IASB. I would rather he focused on the failings of accounting research over the past five decades ---
"Research on Accounting Should Learn From the Past"
by Michael H. Granof and Stephen A. Zeff
Chronicle of Higher
Education, March 21, 2008
Scroll down at

Steve will also make a short presentation in a concurrent session following his plenary speech. That session will allow the audience to sneak in questions about how academic research could be doing a better job in helping the IASB. It seems obvious to me that if accountics research is to help the IASB then accountics research should first be validated with replications ---
I can sneak the replications topic into anything at any time --- even a Sunday School Picnic.

The Category "Recent Inductions" has not been brought up to date by Dan Jensen at

In 2010 there was only one inductee --- former Comptroller General and Deficit Fighter David Walker
Dan has not yet added David Walker to the list at
I think it's time to remind Dan to bring the site up to date for 2010 and 2011.

In 2011 the inductees will be Gary and Reed as noted above.
Good choices.


Carl Olson's CPA Watch ---
What has gone wrong with CPA auditors? ---

What is "the" major difference between medical research and accounting research published in top research journals?

Medical researchers publish a lot of research that is "misleading, exaggerated, or flat-out wrong." The difference is that medical research eventually discovers and corrects most published research errors. Accounting researchers rarely discover their errors and leave these errors set in stone ad infinitum because of a combination of factors that discourage replication and retesting of hypotheses. To compound the problem, accounting researchers commonly purchase their data from outfits like Audit Analytics and Compustat and make no effort to check the validity of the data they have purchased. If some type of rare research finding validation takes place, accounting researchers go on using the same data. More commonly, once research using this data is initially published in accounting research journals, independent accounting researchers do not even replicate the research efforts to discover whether the original researchers made errors ---

Nearly always published accounting research, accounting research findings are deemed truth as long they are published in top accounting research journals. Fortunately, this is not the case in medical research even though long delays in discovering medical research truth may be very harmful and costly.


""Lies, Damned Lies, and Medical Science," by David H. Freedman, Atlantic, November 2010 ---
Thank you Chris Faye for the heads up.

. . .

But beyond the headlines, Ioannidis was shocked at the range and reach of the reversals he was seeing in everyday medical research. “Randomized controlled trials,” which compare how one group responds to a treatment against how an identical group fares without the treatment, had long been considered nearly unshakable evidence, but they, too, ended up being wrong some of the time. “I realized even our gold-standard research had a lot of problems,” he says. Baffled, he started looking for the specific ways in which studies were going wrong. And before long he discovered that the range of errors being committed was astonishing: from what questions researchers posed, to how they set up the studies, to which patients they recruited for the studies, to which measurements they took, to how they analyzed the data, to how they presented their results, to how particular studies came to be published in medical journals.

This array suggested a bigger, underlying dysfunction, and Ioannidis thought he knew what it was. “The studies were biased,” he says. “Sometimes they were overtly biased. Sometimes it was difficult to see the bias, but it was there.” Researchers headed into their studies wanting certain results—and, lo and behold, they were getting them. We think of the scientific process as being objective, rigorous, and even ruthless in separating out what is true from what we merely wish to be true, but in fact it’s easy to manipulate results, even unintentionally or unconsciously. “At every step in the process, there is room to distort results, a way to make a stronger claim or to select what is going to be concluded,” says Ioannidis. “There is an intellectual conflict of interest that pressures researchers to find whatever it is that is most likely to get them funded.”

Continued in article

Advice and Bibliography for Accounting Ph.D. Students and New Faculty by James Martin ---

"So you want to get a Ph.D.?" by David Wood, BYU ---

Why accountancy doctoral programs are drying up and why accountancy is no longer
required for admission or graduation in an accountancy doctoral program ---

Bob Jensen's threads on what went wrong with "accountics research" can be found at

Arrogant professors often assume that practitioner journals mostly publish fluff. In reality, practitioner journals often publish technical jargon papers for which academic experts are nonexistent or very rare finds by journal editors.

One of the great myths in academe is that academic research journals are more technical than practitioner journals. In reality sometimes academic journal editors cannot find a professor to referee a technical paper such as a very technical paper in insurance accounting, international tax accounting, ERP, XBRL, or many of the esoteric subtopics in FAS 133.

In reality, practitioner journals sometimes publish articles that are deemed too technical for academic accounting research journals. I mentioned previously that I submitted a rejoinder article to Issues in Accounting Education on accounting for derivative financial instruments for which the Editor could not find a single professor to referee the article. The IAE Editor then found to technical practitioners in Big Four firms to referee my paper --- 

As a second illustration, two of my best technical submissions were turned back by academic journal editors with comments that they were too narrow and too technical for their academic readership. I then found a practitioner journal that had both papers refereed by Wall Street experts ---

June 11, 2011 reply from Robert Bruce Walker

On Sat, Jun 11, 2011 at 8:00 PM, Robert Bruce Walker <>  wrote:

I have thought about what practice focused accounting research would comprise and I have some difficulty seeing what it might be. For academic research to benefit practice necessitates that there be some generic problem of interest to practitioners. In civil engineering, for example, academic research might contribute by looking at the attributes of some new building material. Medicine benefits by study of new drugs or surgical techniques and so on. But accounting happens at the level of the particular. Each accounting problem is unique to itself. Accounting is the process by which double entry is applied to produce a representation of what happened (or what might happen I suppose).

Short of the academic actually participating in the messy practice of accounting I don’t see how they can contribute to the real business of accounting. But then that might be the answer. In my practice I have more accounting problems than I can practically deal with … where are the academics and their students to help me?

June 12, 2011 reply from Bob Jensen

Hi Robert,

Research is defined as a contribution to new knowledge whereas scholarship is the mastery of existing knowledge.

You raise three questions of interest.

The most important question is whether research (new knowledge) on professional problems is making a valuable contribution to the practice of accounting?
The answer to the first question is a resounding yes, although the "value" of "new knowledge" contributions varies greatly by topical area. Where would tax practice be today without research on international and domestic taxation, including legal and economic research? Where would accounting information systems (AIS) be today without research on design, software, security, hardware, etc. be without research? In your specialty, where would forensic accounting be today without research on how and why frauds and other types of cheating take place?


The second question is whether academic researchers made the seminal contributions to valuable contributions to the practice of accounting?
The second question is difficult and in some cases impossible to answer unless a "eureka moment" actually transpired that led to improvements in accounting practice. In most instances those monumental "eureka moments" just did not happen as research accumulated like bricks being added to a building. Or the "eureka moments" transpired so far down at the foundation level that they're sometimes forgotten when adding bricks to the upper walls. For example, we can trace computer hardware back to the "eureka moment" of the conception of a transistor (Shockley) and millions of other Eureka moments in science and engineering technology taking place over the past 100 years or even further back in time if we want to delve into the "eureka moments" in electricity.

On occasion we've identified some "eureka moments" to accounting practices. Bob Kaplan traces ABC costing back to such a moment in a John Deere factory. Dale Flesher traced dollar-value LIFO back to a practitioner. But those eureka moments are seldom identified since more often than not changes in accounting practice are rooted in new knowledge in underlying disciplines of science and engineering and the social sciences, including economics. When there've been "eureka moments" leading to changes in accounting practice,  those moments are almost never attributed to academic researchers. Understandably they arise from practitioners themselves seeking ways to improve their job functions and contributions.

Many changes in accounting practices are rooted in new knowledge of financial contracting. Although options contracts can be traced back to the Roman empire, things like interest rate swaps are rooted in an IBM contract in the 1980s. And a defeasance contract can be traced back to an Exxon contract in the 1980s. Major contributions to practice such as the Black-Scholes Option Pricing Model can be traced to seminal moments of academic researchers, but these seminal moments more often than not took place outside the discipline of accounting.

Many "eureka moments" in fraud can be traced back to the perpetrators themselves who dreamed up frauds that the rest of the world had never dreamed of before the frauds actually transpired. Sometimes the clever thinkers had not even finished high school.

The pickings are pretty slim when if we try to award "Walker Prizes" to accounting professors who made "eureka moment" seminal contributions to changes in accounting practice. As I stated above, changes in accounting practice came more from bricks being laid in a building than where one brick is designated as a cornerstone. The American Accounting Association has made five "Seminal Contributions to Accounting Literature Awards" over the years, but I doubt that most practitioners can name even one of the seminal literature pieces, although some might've expected Bob Kaplan to get an award for his work in ABC Costing. But Bob will be the first to admit that the seminal contribution to ABC Costing came from unknown practitioners in a John Deere plant.  The other recipients, including the Ball and Brown initial award, built upon earlier research with seminal contributions in economics and finance ---
In any case, the changes in accounting practice that took place due to these particular seminal contributions are very difficult to link. Practitioners most likely would not have made any of these seminal research award.



The third question is whether academic accounting researchers made valuable additions to seminal contributions of practitioners and academic researchers in other academic disciplines?
If we confine ourselves to those contributions that changed practice, we must conclude that academic accountants have their names etched into parts of bricks put into practice buildings. Often the incremental value of academic accounting research is mixed into the clay and mortar along with other ingredients such that "Walker Prizes" would be very difficult to award in terms of a what a particular author contributed to a particular brick in the wall of practice. Certainly tax professors have added ingredients to changes in accounting practice. AIS professors like Bill McCarthy have added ingredients to changes in AIS practice. The academic works of some professors like Mary Barth have added ingredients to accounting standards even if we cannot point to a particular contribution that stands out above all other contributions.

If we examine the American Accounting Association's Notable Contributions to Accounting Literature Award we find few if any such awards that can be linked to specific changes in practice ---

Most practitioners (more than 99%) probably cannot name a single winner of the NCAL Award and randomly picked academic accounting teachers probably cannot do much better if pressed to name the title and/or author of one of the literature pieces that won the monetary NCAL Award. Most of these awards have been accoutics research awards chosen by accountics research professors. Some NCAL Award winning articles, especially before 1979, were actually aimed at changing accounting practice but the changes are generally difficult to trace into practice. There are no Nobel Prize winners here where practitioners can remember the importance of the literature piece.

Many of the contributions of academic accounting researchers have been important in theory even if they did not have marked impact on practice. My best example here is the 1976 NCAL Award to Yuji Ijiri. The contributions of Yuji to accounting practice in the Year 2080 may be more appreciated by practitioners than it is in the Year 2011 in part because as of 2011 Yuji's contributions are just not yet practical for practitioners. The same might be said for Carl Devine and many of the other recipients of this prize.

Very few NCAL Award recipients had immediate and marked impact on practice, although the contribution of Eric Lie is an exception. Regulators pounced upon his findings and changed practice immediately. Sadly he is a finance professor receiving an accounting prize for an article published in a non-accounting journal. Such is life on occasion when awarding a Notable Contribution to Accounting Literature.

In Conclusion
In conclusion Robert, I would have to argue that accounting practice has changed greatly in the past 700 years due to new knowledge, and new knowledge was generated mostly by some type of research. More often than not it was not accounting practitioners or academics who made the seminal contributions. And more often than not the seminal contributions were probably made by accounting practitioners vis-à-vis accounting professors, but it is naive to deny that accounting professors did not make research contributions that added to the clay and mortar going into the brick walls of accounting practice.

My best example of changes in accounting practice is XBRL that is now having and will soon have an even more monumental impact upon accounting practice. If we try to provide seminal awards to developers of XBRL where do we start since XBRL builds upon so many research contributions leading up to XBRL ---

XBRL is but one brick laid upon all the bricks that are laid under this brick ---

Hypertext ---> PC ---> GUI,Mouse ---> GML,SGML --->Internet --->Hypermedia --->HTML, HTTP, WWW --->
DYNAMIC WEB TIMELINE                 
CGI,Java,JavaScript,DHTML,ActiveX,ASP ---> XML/SMIL --->RDF and OWL ---> OLAP ---> XBRL -
"Opening Search to Semantic Upstarts: Yahoo's new open-search platform is giving semantic search a helping hand," by Kate Greene, MIT's Technology Review, September 8, 2008 --- 



THE FUTURE OF SEARCH (or so says IBM) --- The Future of Search (or so says IBM) ---


From the National Science Foundation
 The Birth and Rise of the Internet ---

Also see Richard Jensen's (History, U of Illinois-Chicago) --- Scholars' Guide to WWW

Charles Hoffman, a CPA practitioner, should probably get seminal credit for making the leap from XML to the XBRL reporting system. But since Charlie made his seminal contribution, many academic researchers in accounting and outside accounting have made valuable contributions to this evolving change in practice in accountancy.

It's new knowledge that leads to change Robert, and new knowledge is research!
And research contributions are only seldom identified "eureka moments."

Bob Jensen's threads on accounting theory and research are at:

Remember the days when Professor Abe Briloff was scouring annual reports and publishing red flags in Barron's about departures from GAAP and GAAS that sometimes immediately affected stock prices of companies, warnings that might otherwise have been overlooked by analysts less diligent than Professor Briloff and his students?

Barron's is still scouring quarterly and annual reports for red flags without the aid of Professor Briloff who is now over 90 years old and blind.

"Barron's Red Flags:  Do They Actually Work?" by Tim Loughrana; Bill McDonald,  Journal of Behavioral Finance Volume 12, Issue 2, 2011, Pages 90 -

Investors are often concerned that managers might hide negative information in filings. With advances in textual analysis and widespread document availability, individuals can now easily search for phrases that might be red flags indicating questionable behavior. We examine the impact of 13 suspicious phrases identified by a Barron's article in a large sample of 10-Ks. There is evidence that phrases like unbilled receivables signal a firm may subsequently be accused of fraud. At the 10-K filing date, phrases like substantial doubt are linked with significantly lower filing date excess stock returns, higher volatility, and greater analyst earnings forecast dispersion.

Jensen Comment
If these red flags really work, this runs counter to the infamous Efficient Market Hypothesis ---

How are human beings more than the sum of their parts?
Try applying Industrial Revolution cost accounting discoveries to this factory.

Human Anatomy Video
Man as Industrial Palace: Famous 1926 Lithograph Brought to Life --- Click Here

Jensen Comment
At first this seems totally unrelated to accounting, but there is an analogy here in the sense that much of managerial/cost accounting evolved from the industrial revolution and its factories as did the depiction of the human body as a factory. Factories of virtually all types are of interest to researchers in cost accounting and systems analysts.

The timing of this is even more interesting as we are in the dawn of a new era where parts of the human body in human parts factories.

I admit it's a bit far out, but that's one of the joys of being an accountant staring at mountains. I can afford the luxury of empty-headed daydreaming about the future of human beings and cost accounting.

Of course this also relates to the great debate over whether computers like HAL 9000 will one day think like humans and eventually become more creative than humans.

How long will it take to build a "human" factory that simulates the evolved "human" factory?

June 27, 2011 reply from Jagdish Gangolly


The model depicted by  Fritz Kahn is a very partial model
(only anatomical aspects and physiological aspects only
at a very high level). In this model, the whole is a
sum of the parts. To be more than that, the model should
also exhibit evolution, learning,...

Work in that area goes by the name "artificial life". Some
interesting sites are:

Jagdish S. Gangolly, (
Vincent O'Leary Professor Emeritus of Informatics,
Director, PhD Program in Information Science,
Department of Informatics, College of Computing & Information
7A Harriman Campus Road, Suite 220
State University of New York at Albany, Albany, NY 12206.
Phone: (518) 956-8251, Fax: (518) 956-8247



What are two of the most  Freakonomish and Simkinish processes in accounting research and practice?

Accounting researchers may want to track Freakonomics publications along with the works of Mikhail Simkin at UCLA

Freakonomish and Simkinish processes in auditing pracice
The IASB and FASB are moving us ever closer into requiring subjective evaluations of unique items for which CPA auditors have no comparative advantages in evaluation. For example, CPAs have no comparative advantage in estimating the value of unique parcels of real estate (every parcel of real estate is unique). Another example would be the ERP system of Union Carbide that has value to Union Carbide but cannot be dismantled and resold to any other company.

The problem with many subjective evaluations is that the so-called experts on those items are not consistent in their own evaluations. For example, real estate appraisers are notoriously inconsistent, which is what led to many of the subprime mortgage scandals when appraisers were placing enormous values on tract housing as if the real estate bubble would never burst. And placing a fair value on the ERP system of Union Carbide is more of an art than a science due to so many unknowns in the future of that worldwide company.

Freakonomish and Simkinish processes in accounting research
Secondly, accounting researchers may want to track Freakonomics and  the related works of Mikhail Simkin at UCLA. Professor Simkin made quite a name for himself evaluating subjective evaluators and in illustrating the art and science of subjective and science evaluations ---

And the tendency of accounting researchers to accept their empirical and analytical academic publications as truth that does not even need a single independent and exacting replication if Freakonomish and Simkinish in and of itself ---

"Measuring The Quality Of Abstract Art: Abstract artists are only 4 per cent better than child artists, according to a controversial new way of evaluating paintings," MIT's Technology Review, June 14, 2011 ---

Here's a bit of mischief from Mikhail Simkin at the the University of California, Los Angeles.

Simkin has a made a name for himself evaluating the relative performance of various groups and individuals. On this blog, we've looked at his work on the performance of congress, physicists and even World War I flying aces.

Today, he turns his attention to abstract artists. For some time now, Simkin has a run an online quiz in which he asks people to label abstract pictures either real art or fake. It's fun--give it a go.

One average, people answer correctly about 66 per cent of the time, which is significantly better than chance.

Various people have interpreted this result (and others like it) as a challenge to the common claim that abstract art by well-know artists is indistinguishable from art created by children or animals.

Today, Simkin uses this 66 per cent figure as a way of evaluating the work of well known artists. In particular, he asks how much better these professional artists are than children.

First, he points out the results of another well known experiment in which people are asked to evaluate weights by picking them up. As the weights become more similar, it is harder to tell which is heavier. In fact, people will say that a 100g weight is heavier than a 96g weight only 72 per cent of the time.

"This means that there is less perceptible difference between an abstractionist and child/animal than between 100 and 96g," says Simkin.

So on this basis, if you were to allocate artistic 'weight' to artists and gave an abstract artist 100g, you would have to give a child or animal 96g. In other words, there is only a 4 per cent difference between them.

That's not much!

Simkin goes on to say this is equivalent in chess to the difference between a novice and the next ranking up, a D-class amateur.

Continued in article

Bob Jensen's threads on what went wrong with accounting standard setting and academic accounting research are at

"A new approach to credit impairment is in the works ," Ernst & Young, June 23. 2011 --- Click Here

The FASB and the IASB are jointly developing a new credit impairment approach under which loans would be split into three buckets based on their underlying credit risk characteristics. Our To the Point publication summarizes the new approach.

Bob Jensen's threads on impairment issues ---

"Collaboration as an Intangible Asset,"  by Robert J. Thomas, Harvard Business Review Blog, June 15, 2011 --- Click Here

Jensen Comment
I did not see FAS 157 recommendations on how to capitalize and annually adjust the value of collaboration as an asset.

Investors who rely upon the balance sheet sums of IFRS-FASB fair values as surrogates of economic value are missing the big picture as much as our accounting standard setters are helping to mislead those investors. AC Littleton emphasized that historical cost accounting is not valuation whereas exit value accounting is valuation.

Bob Jensen's threads on intangibles and contingencies accounting are at

"8 Simple Ways To Share Data Online," by David Strom, ReadWriteWeb, June 17, 2011 ---

If you have to jointly author a spreadsheet with a colleague, what is the first thing that you do? Email it back and forth. This can be painful, particularly as you try to keep track of your partner's changes and hope the emails transit back and forth across the Internet. Add a third or fourth person, and things get worse. Luckily, there is a better way, and a number of Web-based service providers have stepped up with tools to make spreadsheet sharing a lot easier than sending attachments.

We've written about a few of them, including Longjump and Hyperbase (one of our products of the year for 2008), but I have tried a bunch others, and will show you what is involved and how they stack up.

The process is very straightforward: you either copy and paste data or take your spreadsheet and upload it to the service, after creating accounts for you and your collaborators. Then you can make changes via your Web browser, no other software is required. Some of the services allow for more bells and whistles. Setup time is minimal; your data is properly protected by the service and safe from harm. And you don't need to learn any Web/database programming skills either.

For many people, the spreadsheet is still one of the most popular low-end database applications. The rubric of a table of rows and columns is easily understood and can easily be used as a way to view records and fields of a database. Plus, you don't need to design special reports to view your data entries, and you can easily sort your data without having to create data dictionaries or other database structures, just use the appropriate Excel commands. Having a specialized service that can share this data makes it easier to collaborate too, whether your partners are across the office or on the other side of the world. As long as they have an Internet connection, they are good to go.

There are eight different services currently available, in order of increasing cost:

Online Spreadsheet Sharing Services




Storage limits


Free (for now)

1 MB

Google Docs


Really unlimited

Microsoft Live


50 MB

$10/mo for up to 10 spreadsheets

30 MB

Longjump Database

$19/mo for two users

3 MB


$175 setup plus $44/mo for 5 users

1.25 GB

$250/mo for 10 users

4 GB for entry plan

Intuit QuickBase

$299/mo for 10 users

1 GB for entry plan

Pricing and support

When you decide on the particular service, it pays to read the pricing fine print. There are discounts for annual subscriptions on most services, and some such as Smartsheet offer additional discounts for non-profit and educational institutions. All of these services have 14 day or 30 day free trials to get started, so you can get a feel of what is involved in manipulating your data and how easy it is to make changes, produce reports, and receive notifications.

Continued in article

Bob Jensen's threads on sending large files across the Internet ---

From Ernst & Young, June 2011
The Emerging Issues Task Force (EITF) reached final consensuses on a revenue recognition issue involving health care organizations and the accounting for fees health insurers will have to pay the federal government. The EITF also reached a consensus-for-exposure on accounting for the deconsolidation of a subsidiary that is in-substance real estate when the reporting entity loses control as a result of default on the debt secured by the real estate.


IFRS-FASB GAAP ‘Convergence’ Hits a Speed Bump (too bad it wasn't a cliff) ---


This is a good summary of the FASB-IASB Joint Projects and Standards Convergence Initiatives
"Joint Project Watch FASB/IASB joint projects from a US GAAP perspective May 2011," Ernst & Young, 2011 ---

Also see

Jensen Comment
Major delays are caused by divergent rules on revenue recognition. But there are other hangups, particularly in accounting for derivative financial instruments and hedging activities. The FASB does not agree with the IASB on portfolio hedging, netting rules, embedded derivatives, hedge effectiveness testing, and other chuck holes in the road to convergence. As I mentioned to Tom Selling, accounting standards convergence is like laying of fiber optic cable where the last mile costs more than all the other miles combined.

Bob Jensen is opposed to accounting standards convergence because, once the honeymoon is over, the IASB may no longer be as responsive to particular needs of any one of the 160 nations of the world, including the United States. The U.S. gets a lot of attention during the convergence courtship, but when the honeymoon is over we're likely to be ignored or worse --- like being pounced upon by our enemies.

I also do not like the loosey-goosey subjective nature of principles-based IFRS standards (whatever they are?) erasing the bright lines of FASB standards. A prime example of this is the loosey-goosey nature of hedge effectiveness testing under IFRS vis-a-vis the bright lines of FAS 133.

However, the IASB can win me over if it puts income statement comparability on a higher plane than balance sheet comparability, but that has the same chances as finding beautiful ice castles in hell. Neither the IASB nor the FASB can even define net income other than that meaningless number left over when balance sheet changes in fair values are netted out. Bob Herz recommends that we stop displaying this number in financial statements along with deleting aggregations in general.

What do CFO's think of Robert Herz's (Chairman of the FASB) radical proposed  format for financial statements that have more disaggregated financial information and no aggregated bottom line?

As we moved to fair value accounting for derivative financial instruments (FAS 133) and financial instruments (FAS 157 and 159) coupled with the expected new thrust for fair value reporting on the international scene, we have filled the income statement and the retained earnings statement with more and more instability due to fluctuating unrealized gains and losses.

I have reservations about fair value reporting ---

But if we must live with more and more fair value reporting, the bottom line has to go. But CFOs are reluctant to give up the bottom line even if it may distort investing decisions and compensation contracts tied to bottom-line reporting.

Before reading the article below you may want to first read about radical new changes on the way ---

"A New Vision for Accounting:  Robert Herz and FASB are preparing a radical new format for financial, CFO Magazine, by Alix Stuart, February 2008, pp. 49-53 ---

Last summer, McCormick & Co. controller Ken Kelly sliced and diced his financial statements in ways he had never before imagined. For starters, he split the income statement for the $2.7 billion international spice-and-food company into the three categories of the cash-flow statement: operating, financing, and investing. He extracted discontinued operations and income taxes and placed them in separate categories, instead of peppering them throughout the other results. He created a new form to distinguish which changes in income were due to fair value and which to cash. One traditional ingredient, meanwhile, was conspicuous by its absence: net income.

Kelly wasn't just indulging a whim. Ahead of a public release of a draft of the Financial Accounting Standards Board's new format for financial statements in the second quarter of 2008, the McCormick controller was trying out the financial statements of the future, a radical departure from current conventions. FASB's so-called financial statement presentation project is ostensibly concerned only with the form, or the "face," of financial statements, but it's quickly becoming clear that it will change and expand their content as well. "This is a complete redefinition of the financial statements as we know them," says John Hepp, a former FASB project manager and now senior manager at Grant Thornton.

Some of the major changes under discussion: reconfiguring the balance sheet and the income statement to follow the three categories of the cash-flow statement, requiring companies to report cash flows with the little-used direct method; and introducing a new reconciliation schedule that would highlight fair-value changes. Companies will also likely have to report more about their segments, possibly down to the same level of detail as they currently report for the consolidated statements. Meanwhile, net income is slated to disappear completely from GAAP financial statements, with no obvious replacement for such commonly used metrics as earnings per share.

FASB, working with the International Accounting Standards Board (IASB) and accounting standards boards in the United Kingdom and Japan, continues to work out the precise details of the new financial statements. "We are trying to set the stage for what financial statements will look like across the globe for decades to come," says FASB chairman Robert Herz. (Examples of the proposed new financial statements can be viewed at FASB's Website.) If the standard-setters stay their course, CFOs and controllers at every publicly traded company in the world could be following Kelly's lead as soon as 2010.

It's too early to predict with confidence which changes will ultimately stick. But the mock-up exercise has made Kelly wary. He considers the direct cash-flow statement and reconciliation schedule among the "worst aspects" of the forthcoming proposal, and expects they would require "draconian exercises" from his finance staff, he says. And he questions what would result from the additional details: "If all of a sudden your income statement has 125 lines instead of 25, is that presentation more clarifying, or more confusing?"

Other financial executives share Kelly's skepticism. In a December CFO survey of more than 200 finance executives, only 17 percent said the changes would offer any benefits to their companies or investors (see "Keep the Bottom Line" at the end of this article). Even some who endorsed the basic aim of the project and like the idea of standardizing categories across the three major financial statements were only cautiously optimistic. "It may be OK, or it may be excessive." says David Rickard, CFO of CVS/Caremark. "The devil will be in the details."

Net Loss From the outset, corporate financial officers have been ambivalent about FASB's seven year-old project, which was originally launched to address concerns that net income was losing relevance amid a proliferation of pro forma numbers. Back in 2001, Financial Executives International "strongly opposed" it, while executives at Philip Morris, Exxon Mobil, Sears Roebuck, and Microsoft protested to FASB as well.

(Critics then and now point out that FASB will have little control over pro forma reporting no matter what it does. Indeed, nearly 60 percent of respondents to CFO's survey said they would continue to report pro forma numbers after the new format is introduced.)

Given the project's starting point, it's not surprising that current drafts of the future income statement omit net income. Right now that's by default, since income taxes are recorded in a separate section. But there is a big push among some board members to make a more fundamental change to eliminate net income by design, and promote business income (income from operations) as the preferred basis for investment metrics.

"If net income stays, it would be a sign that we failed," says Don Young, a FASB board member. In his mind, the project is not merely about getting rid of net income, but rather about capturing all income-related information in a single line (including such volatile items as gains and losses on cash-flow hedges, available-for-sale securities, and foreign-exchange translations) rather than footnoting them in other comprehensive income (OCI) as they are now. "All changes in net assets and liabilities should be included," says Young. "Why should the income statement be incomplete?" He predicts that the new subtotals, namely business income, will present "a much clearer picture of what's going on."

Board member Thomas Linsmeier agrees. "The rationale for segregating those items [in OCI] is not necessarily obvious, other than the fact that management doesn't want to be held accountable for them in the current period," he says.

Whether for self-serving or practical reasons, finance chiefs are rallying behind net income. Nearly 70 percent of those polled by CFO in December said it should stay. "I understand their theories that it's not the be-all and end-all measure that it's put up to be, but it is a measure everyone is familiar with, and sophisticated users can adjust from there," says Kelly. Adds Rickard: "They're treating [net income] as if it's the scourge of the earth, which to me is silly. I think the logical conclusion is to make other things available, rather than hiding the one thing people find most useful."

. . .


Bob Jensen's threads on this proposed "radical change" in financial reporting are at 

I'm a big advocate of multi-column financial statements with one column for audited historical cost balances and additional columns for fuzzy numbers such as unaudited fair value estimates.  But who care what I think?

Bob Jensen's threads on controversies in the setting of accounting standards ---

"India Is Still Balking at This Whole Convergence to IFRS Thing," by Adrienne Gonzalez, Going Concern, June 24, 2011 ---
(Aw shucks, no F-word often used by Adrienne in this one --- guess she reserves that word for her own Jr. Deputy Accountant blog.)

. . .

GAAP has obviously failed. The evaporation of capital in the United States over the last 3 years proves it. But the whole Adopt-or-Else plan isn’t necessarily any better either.

In my humble opinion, it just makes the IASB look desperate and India look awesome. For now.

"Condorsement Condorsers): FASB's Potential New Role Under IFRS," by Matthew G. Lamoreaux, Journal of Accountancy, April 4, 2011 ---

Bob Jensen's threads on condoresment and covergence ---


"A Brief History of the Corporation: 1600 to 2100," by Venkat, RibbonFarm, June 8, 2011 ---

June 23, 2011 reply from Rick Lilly

Hi Bob,

I am reading an interesting book titled Life Inc., How Corporatism Conquered the World, and How We Can Take It Back, by Douglas Ruskhoff (ISBN-13: 978-0812978506).  Below is the URL link to the web page.


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

June 23, 2011 reply from Bob Jensen

A History of Entrereneurship
"Who Are The Entrepreneurs: The Elite or the Everyday Man? A History of Entrepreneurship," by Heather A. Haveman, Jacob Habinek, and Leo A Googman, UC Berkeley,  2011 ---;jsessionid=00ECE18AD2472F4956AAF2D00CC2132E#page-2
 Who Are The Entrepreneurs: The Elite or the Everyday Man? A History of Entrepreneurship

June 23, 2011 reply from Jagdish Gangolly


The years 1770-72 were also infamous for another reason. The East India Company which had earlier used the grant given to it by the Mughal emperor Akbar to the city of Calcutta had established its control over Bengal. Its disastrous tax and other policies, compounded by drought, led to the death by starvation of 10 million people.

Warren Hastings, who was the Governor General, was later impeached (for corruption) and later acquitted by the British Parliament. He was later made a Privy Councillor, a rather strange honour for one who stood like a Greek hero, counting the British tax revenues (which multiplied), while 10 million human beings died of starvation.

Venkat's lament about Alexander Fordyce's absconding for half a million pounds debt is a petty matter relative to the death of 10 million people caused by Hastings and his cohorts at the same British East India Company.

Sen asks a profound rhetorical question why there have been no famines in India since the British left. Democracy does not permit it.

Edmund Burke's speech in the British Parliament in the impeachment proceedings is, in my opinion, one of the finest pieces of writing in the English language. Here is a snippet:


My Lords, the East India Company have not arbitrary power to give him; the King has no arbitrary power to give him; your Lordships have not; nor the Commons, nor the whole Legislature. We have no arbitrary power to give, because arbitrary power is a thing which neither any man can hold nor any man can give. No man can lawfully govern himself according to his own will; much less can one person be governed by the will of another. We are all born in subjection -- all born equally, high and low, governors and governed, in subjection to one great, immutable, pre-existent law, prior to all our devices and prior to all our contrivances, paramount to all our ideas and all our sensations, antecedent to our very existence, by which we are knit and connected in the eternal frame of the universe, out of which we cannot stir.

This great law does not arise from our conventions or compacts; on the contrary, it gives to our conventions and compacts all the force and sanction they can have. It does not arise from our vain institutions. Every good gift is of God; all power is of God; and He who has given the power, and from Whom alone it originates, will never suffer the exercise of it to be practised upon any less solid foundation than the power itself. If, then, all dominion of man over man is the effect of the Divine disposition, it is bound by the eternal laws of Him that give it, with which no human authority can dispense neither he that exercises it, nor even those who are subject to it; and if they were mad enough to make an express compact that should release their magistrate from his duty, and should declare their lives, liberties, and properties dependent upon, not rules and laws, but his mere capricious will, that covenant would be void. The acceptor of it has not his authority increased, but he has his crime doubled. Therefore can it be imagined, if this be true, that He will suffer this great gift of government, the great, the best, that was ever given by God to mankind, to be the plaything and the sport of the feeble will of a man, who, by a blasphemous, absurd, and petulant usurpation, would place his own feeble, comtemptible, ridiculous will in the place of the Divine wisdom and justice?

The title of conquest makes no difference at all. No conquest can give such a right; for conquest, that is force, cannot convert its own injustice into a just title by which it may rule others at its pleasure. By conquest, which is a more immediate designation of the hand of God, the conqueror succeeds to all the painful duties and subordination to the power of God which belonged to the sovereign whom he has displaced, just as if he had come in by the positive law of some descent or some election. To this at least he is strictly bound: he ought to govern them as he governs his own subjects. But every wise conqueror has gone much further than he was bound to go. It has been his ambition and his policy to reconcile the vanquished to his fortune, to show that they had gained by the change, to convert their momentary suffering into a long benefit, and to draw from the humiliation of his enemies an accession to his own glory. This has been so constant a practice, that it is to repeat the histories of all politic conquerors in all nations and in all times; and I will not so much distrust your Lordships' enlightened and discriminating studies and correct memories as to allude to any one of them. I will only show you that the Court of Directors, under whom he served, has adopted that idea that they constantly inculcated it to him, and to all the servants that they run a parallel between their own and the native government, and, supposing it to be very evil, did not hold it up as an example to be followed, but as an abuse to be corrected that they never made it a question, whether India is to be improved by English law and liberty, or English law and liberty vitiated by Indian corruption. ... ...

Source:  ________________________________________________________________________

How profound and timely, in the context of all recent corruption scandals.

Jagdish -- Jagdish S. Gangolly, ( Vincent O'Leary Professor Emeritus of Informatics, Director, PhD Program in Information Science, Department of Informatics, College of Computing & Information 7A Harriman Campus Road, Suite 220 State University of New York at Albany, Albany, NY 12206. Phone: (518) 956-8251, Fax: (518) 956-8247 URL:


Bob Jensen's accounting history threads ---

History of Fraud in America ---


2010 PCAOB Annual Report ---


The number of accounting firms registered with the PCAOB grew slightly in 2010. At the end of the year, 2,397 firms were registered with the PCAOB, including 1,503 domestic firms and 894 non-U.S. firms located in 86 jurisdictions.

In 2010, registered firms began filing annual reports and special reports on certain events.


In 2010, the PCAOB conducted inspections of nine public accounting firms that performed more than 100 audits of public companies traded in U.S. markets. Inspectors examined portions of more than 350 audits performed by these firms. The PCAOB also inspected 245 firms with 100 or fewer public company audit clients, including 64 non-U.S. firms located in 20 jurisdictions.

In the course of those inspections, PCAOB staff examined portions of more than 600 audits.


In 2010, the Board adopted a suite of eight standards related to the assessment of and response to risk in an audit. The standards address many fundamental aspects of the audit, from the initial planning stages through the evaluation of audit results. Continued fallout from the financial crisis, as well as an increase in certain non-U.S. companies seeking capital in U.S. markets, prompted the PCAOB to alert auditors to existing standards relating to public companies’ use of unusual transactions; disclosure of potential liabilities related to mortgages and foreclosures; and reliance on the work of other firms or assistants engaged from outside the firm, including those based in non-U.S. jurisdictions, where the PCAOB may be barred from inspecting firms.

The Board also proposed new standards for confirmation procedures by auditors and for communications with audit committees. In 2010, the Board laid the groundwork for possible changes to the auditor’s report. PCAOB staff began a comprehensive outreach program to gather information from investors, preparers, issuers and auditors about the content and format of audit reports and the implications of potential changes.


In 2010, the Board initiated 15 formal investigations, conducted a number of informal inquiries and continued investigations that began in prior years. At the end of December 2010, the PCAOB was engaged in 23 formal investigations. PCAOB investigations are, by law, confidential and nonpublic.

The Board issued seven settled disciplinary orders in 2010, imposing sanctions ranging from censures to bars on association with registered accounting firms, as well as monetary penalties.

Other disciplinary proceedings were approved by the Board in 2010 and are in active litigation. Unlike similar auditor proceedings brought by the SEC, Board disciplinary proceedings are nonpublic as required by the Sarbanes-Oxley Act.

SEC Oversight

The Sarbanes-Oxley Act gives the Securities and ExchangeCommission oversight authority over the PCAOB.

Continued in article

"Haile Reviews Shaviro's Decoding the U.S. Corporate Tax," by Paul Caron, Tax Professor Blog, June 23, 2011 ---

Andy Haile (Elon) has published Book Review, 2 Elon L. Rev. 287 (2011) (reviewing Daniel N. Shaviro (NYU), Decoding the U.S. Corporate Tax (Urban Institute Press, 2009)):

Is it possible to make a book about reforming the U.S. corporate tax accessible and interesting? Daniel Shaviro does a credible job of both in Decoding the U.S. Corporate Tax. While tax policymakers and professors constitute the most likely audience to read and appreciate the book, Professor Shaviro’s entertaining writing style makes the book a useful primer for anyone interested in understanding the theoretical foundations (or lack thereof) of the existing corporate tax as well as possible future directions for the tax.

House Sales Tax in the Health Care Bill ---

Mixture of True and False Information That the Obamacare Legislation Kicks in a 3.8% Sales Tax

False:  Health care legislation imposes a 3.8% sales tax on all house sales in the United States

True:  Health care legislation imposes a 3.8% transactions tax on profits over the capital gains
          The calculation is really quite complicated

Does this transactions tax apply to profits that are plowed back into another house?

Jensen Comment
Although New Hampshire has a no sales tax on most items other than restaurant and hotel bills, it does have a formidable sales tax on the prices paid for real estate. Typically, 7% of the price is paid by the buyer and 8% is paid by the seller, although who pays what can be negotiated in the sales contract. This came as a surprise to me after I made an offer to buy the mountain cottage where I now live.


Capture” of Regulators by Fannie Mae and Freddie Mac," by Nobel Laureate Gary Becker, Becker-Posner Blog, June 12, 2011 ---

Political economists describe the process whereby government officials end up being the servants rather than the masters of the firms they are regulating as the “capture” by the industry of their regulators. When regulators are captured, much of what they do is motivated, consciously or not, by a desire to help the companies they are regulating, even when the social goals that the regulators should pursue are very different.

A famous illustration of capture is given by the way airlines were regulated under the Civil Aeronautics Board (CAB) from 1940 to 1978. Large airlines of those times, like American and Delta, naturally had a strong incentive to try to keep new airlines from entering the industry. As a compliant ally of the airline industry, the CAB did not approve one new interstate airline during this almost 40-year period. Many airlines entered the industry when President Carter abolished the CAB, and some of the old standbys, such as Pan Am and Eastern, ceased operations because they could not adjust to a competitive environment.

An economically disastrous example of the capture theory is provided by the disgraceful regulation of the two mortgages housing behemoths, Fannie Mae and Freddie Mac, before and leading up to the financial crisis. In their fascinating recent book, Reckless Endangerment, Gretchen Morgenson and Joshua Rosner explore in great detail how Fannie Mae used political connections and intimidation of anyone who stood in their way to gain a highly dominant position in the residential mortgage market. The authors’ show that various government officials, including congressmen and presidential cabinet members, closed their eyes to what these two government-supported enterprises (GSE) were doing. They allowed them to take on enormous risks, while publicly defending their behavior as not being highly risky.

Fannie Mae was created in 1938 as a government enterprise that purchased mortgages from banks that loaned money to homebuyers. It eventually became a private investment company regulated by the government, where investors expected that the government would help out if these companies got into trouble. By the beginning of the crisis in 2008, Fannie and Freddie held or guaranteed about half of the United States’ $12 trillion of assets in the residential mortgage market. In September 2008, both Fannie and Freddie were taken over by the federal government when they became insolvent. The loss to taxpayers is likely to be in the hundreds of billions of dollars because many of the mortgages are subprime and of little value.

Reckless Endangerment shows how the chief executive officers of Fannie Mae furthered the reach and reduced the regulatory control over their company by assiduously courting congressmen, Fed officials, the Congressional Budget Office, high-level officials of the U.S. Treasury, the Secretary of Housing and Urban Development, and major economists. The prominent and well informed congressman, Barney Frank, gets especially sharp criticism for his continual support of Fannie and Freddie while he was initially a member, and later chairman, of the House Financial Services Committee, the powerful committee charged with oversight of the housing and financial sectors. Barney Frank remained an unwavering supporter of Fannie and Freddie until 2010, when he admitted that they should have been more closely regulated. In a bit of irony, he is a principal author of the 2010 Dodd-Frank act that attempts to reform the financial sector mainly by giving even greater discretion to the regulators.

Fannie and Freddie had so much money and political power at their disposal that it became risky for anyone to oppose what they wanted: large increases in their holdings of subprime and other mortgages, with no questions asked. Different government agencies that were supposed to either regulate or oversee these GSEs ended up as advocates instead. Well-known economists wrote favorable articles downplaying the riskiness of the holdings of Fannie and Freddie. These articles were sometimes published in journals or other publications sponsored by these companies.

A few government officials were brave enough to risk the wrath of Fannie and Freddie. The authors give particular praise to June O’Neill (I am proud to say she is a former student of mine), who was then head of the Congressional Budget Office. A member of her staff wrote a report that was critical of the degree of risk to taxpayers from the assets held by Fannie and Freddie. These companies tried to get June to suppress the report- she refused- and then a few members of the House of Representatives in cahoots with Fannie and Freddie subjected her to vicious attacks when she steadfastly defended the report in testimony before Congress.

Continued in article

"Capture Theory and the Financial Crisis," by Richard Posner, Becker-Posner Blog, June 12, 2011 ---

The phenomenon of regulatory capture—the transformation of a regulatory agency into an anticompetitive tool of the regulated industry—is real, but I think Fannie Mae and Freddie Mac are more accurately regarded as examples, though no less unlovely, of something else: a capitalist-socialist hybrid. They were not regulatory agencies; until they collapsed during the financial crisis of 2008 and were taken over by the federal government, they were private corporations that had been chartered by Congress to promote home ownership. Their status as GSEs (government-sponsored enterprises) created an expectation that the government would guarantee their debts. This expectation enabled them to borrow at lower interest rates than other private corporations. They were supposed to promote home ownership by buying or guaranteeing home mortgages. They did that; they also pioneered mortgage securitization—in effect turning mortgages into bonds, which are more liquid than mortgages and so could be sold all over the world, bringing more capital into the U.S. residential real estate market, thus promoting home ownership, just as Congress wanted. Because of the low interest rates they paid, Fannie and Freddie were immensely profitable until the financial crisis brought them down.

As Becker points out, Fannie and Freddie were effective in obtaining congressional and presidential assistance to ward off threats to their activities and their profits. But I don’t think that that assistance, unseemly as it was, and perhaps corrupt as well, was the basic problem of Fannie and Freddie, or the cause of their collapse; nor do I think their collapse was of any great consequence for the nation.

I don’t think there was ever a good reason to promote home ownership over renting (so I would favor the abolition of the deductibility of mortgage interest from federal income tax). It ties up a lot of the capital of individuals and reduces labor mobility. Maybe it makes for more responsible citizens by giving people a property interest, but there must be better candidates for federal largesse. And even if there were a good reason for government to promote home ownership, federal chartering of mortgage institutions would not be a sensible means of implementation. Are the external benefits of home ownership, if any, so great that the mortgage-interest tax deduction is not subsidy enough? True, the lower the interest rates that Fannie and Freddie paid to borrow money, the riskier the mortgage loans they would agree to underwrite by buying or guaranteeing the loans, but home ownership is not promoted in any meaningful sense by the granting of mortgages to people likely to default.

Conservative critics led by Peter Wallison of the American Enterprise Institute lay on Fannie and Freddie a significant measure of blame for the housing bubble of the early 2000s and the ensuing financial crisis of September 2008. But these critics have not persuaded me. Private banks like Morgan Stanley and Goldman Sachs and Countrywide bought mortgages, securitized them, and sold interests in them (these firms also bought mortgage-backed securities created by other financial firms)—a sequence wholly separate from the activities of Fannie and Freddie. It was an immensely profitable activity, so there is no reason to think that had there been no Fannie and Freddie the volume of mortgage-backed securities would have been less than it was. Whether a market has X firms or X – 1 firm is unlikely to affect the volume of market activity. I don’t think Fannie and Freddie took more risks than their competitors; the difference is that they were more deeply committed to the housing market (that was their mission) than most other firms, so less likely to survive a housing bubble.

The financial crisis might actually have been worse without Fannie and Freddie. They collapsed and were simply taken over by the federal government. Had their debts instead been debts of Morgan and Goldman and other private banks, those banks might have collapsed and been taken over by the federal government as well, providing daunting challenges to the government’s ability to run the banking system. The cost to society of the government’s taking over Fannie and Freddie is hard to estimate. The takeover resulted in a transfer payment to creditors of Fannie and Freddie from (ultimately) the federal taxpayer. Had there been no Fannie or Freddie, other mortgage companies would have had more debt, and the owners of that debt would also have been bailed out by the federal government, in all likelihood.

Congress would do well to abolish Fannie and Freddie. But it won’t. The constellation of political forces that supports subsidizing home ownership is too strong.

Continued in article

Barney's Rubble ---

The largest earnings management fraud in history and the firing of KPMG ---


Bob Versus Steve on What Needs to Be Done to Improve The Accounting Review ---

May 3, 2011 reply from Jim Martin

Although nearly all management and accounting journals are accessible by
issue through various data base providers (JSTOR, Proquest, etc.), I provide
an alphabetical listing of articles and place them into topic bibliographies
as well. The idea is to provide a more convenient way to search for articles
by author, by journal, and by topic than searching one issue at a time.
MAAW's TAR bibliography stops at the five year wall for JSTOR links
(1926-2005), but the AOS bibliography is fairly current 1976-2010.
Links to the these and other Journal Bibliographies are on the following

"Weekly Book List, June 13, 2011," Chronicle of Higher Education, June 12, 2011 ---

Corporate Governance Failures: The Role of Institutional Investors in the Global Financial Crisis edited by James P. Hawley, Shyam J. Kamath, and Andrew T. Williams (University of Pennsylvania Press; 344 pages; $69.95). Writings on such topics as the limits of corporate governance in dealing with asset bubbles.

From Financial Crisis to Global Recovery by Padma Desai (Columbia University Press; 254 pages; $27.50). Considers the origins of the contemporary crisis and the prospects for recovery; includes comparative discussion of the Great Depression.

Bob Jensen's threads on the economic crisis ---

From the Tax Professor Blog of Paul Caron on June 12, 2011 ---

Top 5 Tax Paper Downloads

There is quite a bit of movement in this week's list of the Top 5 Recent Tax Paper Downloads, with a new #1 paper and new papers debuting on the list at #4 and #5:

1.  [214 Downloads]  Charity in the 21st Century: Trending Toward Decay, by Roger Colinvaux (Catholic)

2.  [212 Downloads]  Series LLCs in Real Estate Transactions, by Bradley T. Borden (Brooklyn) & Mathews Vattamala (J.D. 2012, Brooklyn)

3.  [193 Downloads]  Regarding the Disregarded Entity, by Thomas E. Rutledge (Stoll Keenon Ogden, Louisville, KY)

4.  [115 Downloads]  How Nations Share, by Allison Christians (Wisconsin)

5.  [95 Downloads]  Common Control and the Delineation of the Taxable Entity, by Michael Aikins (J.D. 2012, Yale)

Credit Rating Agencies Became Corrupt to the Core

There are two superpowers in the world today in my opinion. There’s the United States and there’s Moody’s Bond Rating Service. The United States can destroy you by dropping bombs, and Moody’s can destroy you by down grading your bonds. And believe me, it’s not clear sometimes who’s more powerful.  The most that we can safely assert about the evolutionary process underlying market equilibrium is that harmful heuristics, like harmful mutations in nature, will die out.
Martin Miller, Debt and Taxes as quoted by Frank Partnoy, "The Siskel and Ebert of Financial Matters:  Two Thumbs Down for Credit Reporting Agencies," Washington University Law Quarterly, Volume 77, No. 3, 1999 --- 

Credit rating agencies gave AAA ratings to mortgage-backed securities that didn't deserve them. "These ratings not only gave false comfort to investors, but also skewed the computer risk models and regulatory capital computations," Cox said in written testimony.
SEC Chairman Christopher Cox as quoted on October 23, 2008 at

"CREDIT RATING AGENCIES: USELESS TO INVESTORS," by Anthony H. Catanch Jr. and J. Edward Ketz, Grumpy Old Accountants Blog, June 6, 2011 ---

Dropbox --- 
"Dropbox misrepresented security features, researcher claims," MYCE, May 18, 2011 --- 
Thank you Scott Bonacker for the heads up.

With online data security being at the forefront of consumers’ minds after several recent high-profile breaches, cloud storage service Dropbox is now coming under fire for the way they handle customers’ files.

Christopher Soghoian, PhD and security researcher for the University of Indiana recently sent a letter to the U.S. Federal Trade Commission stating that the company’s security practices do not live up to their advertised claim

. . . 

The company claims to have 25 million users who save up to 200 million files to their servers daily.

After reading through the complaint, Dropbox’s original statements about their security levels seem glaringly inaccurate compared to the reality they’ve admitted. I would be surprised if the FTC didn’t levy a fine on the company in addition to requiring refunds to customers.

Bob Jensen's threads on computer and network security are at 

Unrelated Jensen Comments
Dah --- On Rebooting My Wireless Router
Even though I recently purchased a high end Windows 7 Dell laptop, I've very disappointed in the speed of the machine relative to my old reliable Dell XP machine. For example, Internet Explorer, Google Chrome, and IE are all much slower on the new machine even though I took pains to delete apps that were slowing the browsers down.

Last week my old and reliable XP laptop kept losing its wireless Internet connection. I thought it was the computer since my same home wireless router was still serving the Windows 7 computer reliably. I took the XP laptop to the local company (Amanoosic) that installed my wireless system, and their technician could find nothing wrong with my XP computer in his office. But when I brought it back home it was still being flaky about holding its Internet connection. Then I performed the dah task of rebooting my wireless system by simply pulling the power plug for 30 seconds. That solved my Internet connection problem on the XP computer.

I should've known better since I sometimes had to reboot my old hard-wired router to restore Internet connections. I guess I was misled since my new wireless router was working fine with my newer Windows 7 laptop. At least that's my excuse for today.

FrontPage ---
Yesterday I paid $199 to order a complete "new" in-the-box 2003 version of FrontPage that Microsoft has not sold in years. I have a 2003 version on my XP machine but lost the installation disks when I retired from Texas to New Hampshire in 2006. Around 2006, Microsoft replaced FrontPage with Microsoft Expression Web. I assumed EW would be better than FrontPage --- wrong! From the very beginning EW has been ten or more times slower than FrontPage for various tasks, especially when loading and saving large files that are more than 2 Mb in size. FrontPage will load and save such files in seconds whereas EW takes 5-30 minutes to load and save a large htm file.

Hence, even though I have EW Version 4 on my new Windows laptop, I plan to uninstall it and replace it with the much faster and much older FrontPage. Microsoft admits it has been deluged with complaints about the slowness of EW and promises to have some fixes later in the year, but I'll only believe that when I put it to the test after Microsoft upgrades EW for more speed with large htm files. Microsoft might succeed in making EW more effective and efficient. Most readers probably do not recall that the early versions of FrontPage would not even create or load a large htm file. Then as if by magic, FrontPage became the best or one of the best programs for creating, loading, and saving very large htm files.

Both FrontPage 2003 and EW 4 are poorly coded according to computer scientists (who generally think almost everything from Microsoft is badly coded). But I've not yet found a better HTML editor for large htm files than FrontPage. Many of my htm files are in the 3 Mb to 19 Mb range and most of them do not even have pictures and other multimedia since I'm trying to keep size down when possible.

I know I should split my large htm files into fragments, but this makes word searching terribly inefficient for users of my htm files.

If people tell me they are MS Office users and ask my advice about creating htm files for their Web servers, I advise them to first look into creating MS Word doc (or docx) files for storage and editing. Then any file (large or small) to be sent to a Web server can be saved as an htm file. But this was not an option back in the 1990s when I commenced many of my large htm files. In those days it was not possible to also save a doc file as a htm file using MS Word.

"Morale Bad and Getting Worse at the SEC,"  by David Albrecht, Summa, June 9, 2011 ---

Jensen Comment
What do you expect from SEC employees when you take their daily porn away ---
There are recent reports that porn is still a "problem" at the SEC.

AICPA Horizons Project Videos ---


Tags: future forum  Dallas  TSCPA  Michael Brown  Tom Hood  i2a  CPA Profession  CPA Horizons 2025  CPA Vision  future  AICPA 

Accountants are Blameless --- Really!

From the Tax Professor Blog on June 14, 2011 ---

Tax Court Rejects Private Equity Manager's 'Blame the Accountant' Defense

The Tax Court yesterday denied the request of Stephen G. Woodsum, founding managing director of Summit Partners, a private equity firm, to waive a $104,000 penalty assessed by the IRS for his failure to report on his return $3.4 million of income from the termination of a swap transaction by Deutsche Bank for which he received a Form 1099-MISC. The Tax Court forcefully rejected his attempt to escape the penalty by blaming his accountant for the underreporting. Woodsum v. Commissioner, 136 T.C. No. 29 (June 13, 2011):

Mr. Woodsum terminated the swap ahead of its set termination date because his watchful eye noted that it was not performing satisfactorily as an investment. That is, when his own receiving of income was in question, Mr. Woodsum was evidently alert and careful. But when he was signing his tax return and reporting his tax liability, his routine was so casual that a halfmillion- dollar understatement of that liability could slip between the cracks. We cannot hold that this understatement was attributable to reasonable cause and good faith.

Here's something the IASB and FASB "failed to cover" in their guidelines for measuring fair value ---
How do you value lewd pictures sent to you by Rep. Weiner?
Does FAS 157 cover highly unpredictable value deflation after the balance sheet date?

"TLP: How Weiner's Women Got the Money Shots and Avoided the Mess," Adrienne Gonzales, Jr. Deputy Accountant, June 14, 2011 --- Z

The practice was especially visible last week when ABC News ran an exclusive interview with Meagan Broussard, one of the women who was sent lewd photos by Anthony Weiner, after the network paid her about $15,000 for photos. ABC said it's extensive reporting, including the interview, led to Mr. Weiner’s admissions about his online behavior.

Continued in article

Jensen Comment
Seriously, how do you report fair value of an asset that deflates very quickly in value after the balance sheet date even though it had much higher value on the balance sheet date --- such as lewd photos paid for just before the fiscal-year cutoff on June 30, 2011?

Does FAS 157 cover this serious post-date valuation aspect of fair value accounting?
What if the valuation deflation is very hard to predict at the time the audited financial statements are released to the public?

Bob Jensen's threads on accounting blogs and accounting news sites are at

Jr Deputy Accountant and Going Concern Chosen as Top 50 Fantastic Accounting Blogs ---
Tom Selling also made the list with his Accounting Onion blog.

50 Fantastic Accounting Blogs ---

Jensen Comment
I applaud the sites that made the Top 50. However, I question the bias of the site itself. It's sponsored by For-Profit universities that do not have AACSB accreditation when, in my viewpoint, students should first seek out online accounting degree programs in AACSB-accredited universities. Go to at and do a search for online accounting degree programs. None of those listed will have the quality mark of AACSB accreditation. All will be For-Profit online accounting degree programs.

No mention is made that in state-supported AACSB universities, the cost per credit hour may be much lower and the quality more reliable than accounting programs linked in For-Profit of the online accounting courses at
For example, the accounting programs listed in a search of "accounting programs" does not even list the online accounting degree programs available from AACSB accredited universities.

It should also be noted that Texas will not even allow candidates to sit for the CPA examination unless they've had at least five accounting courses onsite such that graduates of fully online programs cannot even sit for the CPA examination.

My advice to prospective online accounting students is to first look for distance education accounting degree programs in AACSB universities such as flagship state university programs such as those the University of Connecticut, Wisconsin, Maryland, Massachusetts, etc.

My favorite example of what I consider For-Profit university frauds are the For-Profit online accounting doctoral programs listed at
If you want to embarrass and online accounting doctoral program, ask who will be advising the dissertations and look carefully to see if the curriculum is at all comparable to an accounting doctoral program at an AACSB accredited university ---
The fact of the matter is that graduates of these non-AACSB online accounting doctoral programs do not face the same academic job market alternatives that are available only to AACSB university accounting graduates.

In my judgment there is no respectable online accounting doctoral program in North America and probably will not be one until an accounting program in an AACSB-accredited university commences to offer an online accounting doctoral program. There are respectable online doctoral programs in other disciplines such as education, but there are none in accounting.

I have respect for the "50 Fantastic Accounting Blogs" but I've no respect for the company that chose these winners, at 

Accounting Doctoral Programs

May 3, 2011 message to Barry Rice from Bob Jensen

Hi Barry,

Faculty without doctoral degrees who meet the AACSB PQ standards are still pretty much second class citizens and will find the tenure track hurdles to eventual full professorship very difficult except in colleges that pay poorly at all levels.

There are a number of alternatives for a CPA/CMA looking into AACSB AQ alternatives in in accounting in North American universities:

The best alternative is to enter into a traditional accounting doctoral program at an AACSB university. Virtually all of these in North America are accountics doctoral programs requiring 4-6 years of full time onsite study and research beyond the masters degree. The good news is that these programs generally have free tuition, room, and board allowances. The bad news is that students who have little interest in becoming mathematicians and statisticians and social scientists need not apply --- 

As a second alternative Central Florida University has an onsite doctoral program that is stronger in the accounting and lighter in the accountics. Kennesaw State University has a three-year executive DBA program that has quant-lite alternatives, but this is only available in accounting to older executives who enter with PQ-accounting qualifications. It also costs nearly $100,000 plus room and board even for Georgia residents. The DBA is also not likely to get the graduate into a R1 research university tenure track.

As a third alternative there are now some online accounting doctoral programs that are quant-lite and only take three years, but these diplomas aren't worth the paper they're written on ---  Cappella University is a very good online university, but its online accounting doctoral program is nothing more than a glorified online MBA degree that has, to my knowledge, no known accounting researchers teaching in the program. Capella will not reveal its doctoral program faculty to prospective students. I don't think the North American academic job market yet recognizes Capella-type and Nova-type doctorates except in universities that would probably accept the graduates as PQ faculty without a doctorate.

As a fourth alternative there are some of the executive accounting doctoral programs in Europe, especially England, that really don't count for much in the North American job market.

As a fifth alternative, a student can get a three-year non-accounting PhD degree from a quality doctoral program such as an economics or computer science PhD from any of the 100+ top flagship state/provincial universities in North America. Then if the student also has PQ credentials to teach in an accounting program, the PhD graduate can enroll in an accounting part-time "Bridge Program" anointed by the AACSB --- 

As a sixth alternative, a student can get a three-year law degree in addition to getting PQ credentials in some areas where lawyers often get into accounting program tenure tracks. The most common specialty for lawyers is tax accounting. Some accounting departments also teach business law and ethics using lawyers.

Hope this helps.

Bob Jensen

Case Western has a very respected accounting history track in its PhD program, but I'm not certain how many of the accountics hurdles are relaxed except at the dissertation stage.

Bob Jensen's links to listservs, blogs, and social networks ---

Bob Jensen's threads on accounting news sites are at

"Boards to re-expose revenue proposal," Ernst & Young,, June 15, 2011 --- Click Here

Bob Jensen's threads on revenue reporting and frauds ---

University of Illinois: Gaming Initiative ---

The Realities of High Corporate Tax Rates in States Like Illinois and the Realities of Rotten Governmental Accounting
The same thing that drives corporations to set up sham corporate headquarters off shore (to keep profits out of reach of the IRS) also drives corporations to flee states that impose high corporate tax rates (like Illinois, New York, New Jersey, and California) to states that took on less unfunded entitlements burdens (like Texas and North Carolina). 

"Illinois Tax Firesale:  A case study in high corporate rates and special favors," The Wall Street Journal, June 9, 2011 ---

Illinois gained nationwide notoriety in January when Governor Pat Quinn signed into law a 67% hike in the personal income tax rate while lifting the corporate tax rate to 9.5%, the fourth highest in the nation. How is that working out?

The good news is that corporate tax receipts in Springfield are up by about $300 million amid the economic recovery—though the state comptroller's office announced in April that the state still faces $8 billion in unpaid bills. The bad news is that, according to the state's Department of Commerce, Illinois has already shelled out some $230 million in corporate subsidies to keep more than two dozen companies from fleeing the state. And more are on the way.

The ink was barely dry on the new taxes before major employers announced their unhappiness. The equipment giant Caterpillar, the spinal cord of the Peoria economy, says the higher business and personal income taxes will cost the company and its 23,000 Illinois employees $40 million a year. "I want to stay here, but as the leader of this business I have to do what's right for Caterpillar when making decisions about where to invest," CEO Doug Oberhelman said in the wake of the tax increase, adding that Illinois "is not favorable to business."

Caterpillar has long built new facilities outside Illinois to avoid the United Auto Workers, most recently in Texas. And after the Quinn tax hike, at least six states—from Virginia to zero income tax South Dakota—offered lower costs if the firm relocated. Caterpillar is staying put for now.

When the cellphone business Motorola Mobility hinted this spring that it might leave for San Diego, Mr. Quinn bounced into action. "I know how to work with the big businesses," he declared to the media, as he rushed—taxpayer checkbook in hand—to keep the company in the state. Motorola pocketed $100 million in tax incentives last month to stay in Libertyville.

Mr. Quinn's latest quest is to keep Sears in the state. In May, the retailer—based in Hoffman Estates with some 6,000 workers—hinted that it may look for a new home because of expiring tax breaks. The suitors include Georgia, North Carolina, Tennessee, Texas and even New Jersey. "We will sit down with the Sears people," Mr. Quinn promised. "I'm sure we'll work something out."

No doubt he will, since in two years in office Mr. Quinn has doled out corporate welfare to at least 80 firms, costing the state nearly $500 million, according to a tally by the Chicago Tribune. Late last year Navistar, the commercial truck engine maker, secured $65 million in handouts. Continental Tire nabbed $19 million. Even deal-of-the-day Web business Groupon, which is preparing an IPO to raise $750 million, grabbed $3.5 million in tax credits to stay in Chicago. U.S. Cellular got a $7.2 million package to keep its headquarters in the Chicago area, while Chrysler received an "investment package" worth $62 million for its Belvidere assembly plant.

Continued in article

Jensen Comment
Some states suffer worse from unfunded long-term entitlements obligations --- like Illinois and California made promises they may not be able to keep for retired state worker and teacher pension and medical plans relative to North Carolina that has much more conservative fiscal management.

Some state governments have made entitlements promises that they may just not be able to keep. Governmental accounting has been a game of shadows and mirrors and wonderland dreams.

Voters are just beginning to realize how the accounting profession aided and abetted the deceits of lousy fiscal management in local, state, and national government

"Escape From Illinois, Cont:. Now the Chicago Merc wants relief," The Wall Street Journal, June 15, 2011 ---

The line of businesses looking for tax relief in Illinois keeps growing, with the latest plea coming from the owner of the iconic Chicago Mercantile Exchange and Chicago Board of Trade. CME Group Executive Chairman Terrence Duffy told a shareholders meeting last week that Illinois Governor Pat Quinn's 30% hike in the corporate tax rate enacted in January will cost the company $50 million this year. "We don't want to leave Chicago," Mr. Duffy said, but "we have to do what's right for our shareholders." A spokesman confirmed that the company is exploring all options to save money.

We reported last week that dozens of major Illinois firms—from Caterpillar to Motorola to Sears—are in open rebellion in the wake of Springfield's $6 billion revenue grab and new 9.5% corporate rate, fourth highest in the U.S. Mr. Quinn has already carved out some $230 million in special tax breaks this year to save companies from his own tax policies and keep these firms from fleeing.

Our guess is that Mr. Duffy's statement is also an attempt to bargain for better tax treatment, and it's hard to blame him. The Chicago Tribune reports that CME pays 8.9% of its income in state tax, while most businesses pay well below 7% and many pay no tax at all thanks to rich deductions. Mr. Quinn says he's having an "ongoing conversation" with CME, and we'll bet a February pork belly contract that he'll deliver the bacon.

Continued in article

Bob Jensen's threads on the sad state of governmental accounting ---

"India's Powerful Can't Escape Jail:  A scandal over a telecom spectrum sale snares members of the elite," by Mehul Srivastava, Business Week, June 8, 2011 ---
(And jails in India are far worse that our Club Feds in the U.S.)

Jensen Comment
Jailing the rich and powerful is not as common in the United States where white collar crime generally pays even if you get caught. There are of course a few exceptions such as Bernie Madoff  and Bernie Ebbers. But those that spend a few years in Club Fed generally emerge to enjoy their stashed offshore loot or loot hidden by friends and family. Other rich and famous like Michael Milken, Martha Stewart, and Leona Helmsley legally remained billionaires after their vacations in Club Fed. White collar crime generally pays in the United States ---

June 4, 2011 message from Roger Collins about a prison where inmates prefer to be incarcerated (for the sex and drugs and protection)

Video of Club Fed in Venezuela 


Roger Collins
TRU School of Business & Economics

But, at the end of a day, your students walk out of the room looking exactly like they did when they first walked in (maybe a little sleepier). I think this is one of the reasons that teachers sometimes become mediocre. The results seem the same regardless of their efforts. They don’t get the positive reinforcement for their work that comes from seeing a tangible output. In fact, I’ll go so far as to say that I believe this has had negative consequences for the U. S. as it has morphed from a manufacturing economy to a service economy.
Joe Hoyle, "What do we accomplish?" Getting the Most From Your Students, June 9, 2011 ---

Jensen Comment
I don't quite agree and neither does Joe in the end. At the end of a help session students who got it have bigger smiles, more confidence, and seem a bit more awake. Our best hope is that what they just learned will stick with them for the rest of their lives.

From Deloitte's IAS Plus on June 3, 2011 ---

3 June 2011: IFRS Foundation publishes proposed IFRS Taxonomy 'common-practice' enhancements

The IFRS Foundation has published for public comment an exposure draft of the IFRS Taxonomy 2011 interim release: common-practice concepts.

The proposed interim release contains supplementary tags for the IFRS Taxonomy that reflect disclosures that are commonly reported by entities in their IFRS financial statements. The supplementary tags are intended to enhance the comparability of financial information, and are consistent with IFRSs and with the XBRL (eXtensible Business Reporting Language) architecture of the IFRS Taxonomy 2011.

The supplementary tags result from the IFRS Foundation previously announced intention to extend the IFRS Taxonomy. This was partially a response to United Statements Securities Exchange Commission (SEC) concerns about the suitability of the existing IFRS Taxonomy 2011 for US filing purposes, together and the outcomes of an pilot XBRL study. The SEC has issued a 'no action' letter in which it states foreign private issuers that prepare their financial statements in accordance with IFRS as issued by the IASB are not required to submit XBRL information to the SEC until it endorses an IFRS Taxonomy it considers suitable.

The proposals are open for comment until 2 August 2011.
Click for IFRS Foundation announcement (link to IASB website). More information about XBRL is available on our XBRL page.

Bob Jensen's sadly neglected threads on XBRL are at

"Third Phase of XBRL Implementation Takes Effect June 15," Journal of Accountancy, June 7, 2011 ---

The third phase of the SEC’s XBRL implementation program takes effect June 15, with nearly all public companies using U.S. GAAP now required to submit data in the fully searchable, digital format.


Over the past two years, the largest SEC reporting companies have begun submitting financial information in XBRL. The first phase, which took effect in 2009, required companies with a worldwide public equity float of $5 billion to file in XBRL; the second phase, for the next-largest tier of public companies, took effect in 2010.


XBRL allows computers to read financial information and use it in analytical tools, much like barcodes applied to merchandise are used for computerized inventory controls. In order to create an XBRL submission, filers must select tags from the U.S. GAAP taxonomy that best represent their financial reporting concepts.


The selected tags are then attached to the filer’s financial information by software programs or third-party service providers to complete the XBRL submission. XBRL helps to provide investors access to financial information in a form that’s ready for analysis and can help companies automate checks on the data quality in their reports. In addition, XBRL has helped companies enhance and streamline their reporting process. More and more companies are realizing this benefit and, as a result, there is demand to adopt XBRL across other reporting streams. Two bills currently are pending in the U.S. Congress – S. 904 and H.R. 1745, the Jobs, Opportunity, Benefits and Services Act of 2011 – that designate data reporting standards such as XBRL be used for the reporting of certain information under the Social Security Act.


In a company’s first year of XBRL compliance, each amount in the primary financial statements is tagged in XBRL, and each note to the financial statements and certain financial schedules is individually tagged as a block of text. In the second year of compliance, more detailed information is required, including: each accounting policy, each table and each amount in the notes and financial schedules also must be tagged separately in XBRL.


The only companies the XBRL rules do not apply to are investment companies registered under the Investment Company Act, business development companies and other entities that report under the Exchange Act and prepare their financial statements in accordance with Article 6 of Regulation S-X, according to the SEC. In addition, since the SEC has not yet approved the taxonomy for foreign private issuers that report under IFRS, these companies will not be required to submit XBRL exhibits.


For new XBRL filers, the rules include two permissible grace periods: a 30-day grace period for a company’s initial, basic tagged submission and, in the following year, a 30-day grace period for a company’s initial, more detailed tagged submission. The rules also include modified liability provisions for the first two years a company is required to provide XBRL submissions. The modified liability provisions are eliminated on Oct. 31, 2014.


For more information on XBRL filing, see the final rule on the SEC’s website, visit or see the EDGAR Filer Manual.


For additional resources, visit the AICPA’s XBRL resource center. This site includes links to additional articles, webcasts, events and other helpful information.

Bob Jensen's threads on XBRL are at

A Pair of Grumpy Old Accountants Ask a Question About Accounting Leadership
Where Are the Accounting Profession's Leaders?
By: Anthony H. Catanach Jr. and J. Edward Ketz 
SmartPros, May 2011 
These are the concluding remarks by Tony and Ed:

Tom Selling has gone so far as to suggest that part of the audit model problem might be that:

…auditors might be good at verification of things which are capable of being verified, and very little else.

If Tom is right, then we may be closer to the edge of the fall than we realized, and too late for even credible leadership to help.

Jensen Comment
I still don't see why financial statements cannot have multiple columns with the first column devoted to measurement that auditors can verify such as amortized historical costs. Then we can add more columns as verification drifts off into the foggy ether of fair value accounting and changes in earnings that may or may not ever be realized (e.g., not ever for held-to-maturity assets and liabilities that will not be liquidated until maturity).

As to leadership, don't look to our academy for leaders in the profession. Academe was overtaken decades by accountics faculty who really do not make many if any significant contributions to practitioner journals, the AICPA, the IMA, and other professional bodies except in certain specialized subtopics like AIS, history,  and tax ---

As of January 2011, the precursor of Bob Kaplan's great plenary speech is forthcoming in The Accounting Review (TAR) and can be downloaded before publication---
Accounting Scholarship that Advances Professional Knowledge and Practice
Robert S. Kaplan
The Accounting Review doi:10.2308/accr.00000031 Accepted Manuscript posted online October 2010
Abstract    Full Text: [ PDF (152 kB)  ]

Recent accounting scholarship has used statistical analysis on asset prices, financial reports and disclosures, laboratory experiments, and surveys of practice. The research has studied the interface among accounting information, capital markets, standard setters, and financial analysts and how managers make accounting choices. But as accounting scholars have focused on understanding how markets and users process accounting data, they have distanced themselves from the accounting process itself. Accounting scholarship has failed to address important measurement and valuation issues that have arisen in the past 40 years of practice. This gap is illustrated with missed opportunities in risk measurement and management and the estimation of the fair value of complex financial securities. This commentary encourages accounting scholars to devote more resources to obtaining a fundamental understanding of contemporary and future practice and how analytic tools and contemporary advances in accounting and related disciplines can be deployed to improve the professional practice of accounting. ©2010 AAA

Although all three speakers provided inspirational presentations, Steve Zeff and I both concluded that Bob Kaplan’s presentation was possibly the best that we had ever viewed among all past AAA plenary sessions. And we’ve seen a lot of plenary sessions in our long professional careers.

Now that Kaplan’s video is available I cannot overstress the importance that accounting educators and researchers watch the video of Bob Kaplan's August 4, 2010 plenary presentation
Note that to watch the entire Kaplan video ---
I think the video is only available to AAA members.
Don’t miss the history map of Africa analogy to academic accounting research!!!!!

This dovetails with my Web document at

"Accounting Giant KPMG LLP Faces $350 Million Gender Discrimination Class Action," PR Newswire, June 2, 2011 ---

Although KPMG LLP – one of the "Big Four" accounting firms – publicly touts its commitment to diversity and equal opportunity, the numbers tell a different story entirely. Women comprise about half of KPMG's employees, but are conspicuously absent from the top leadership positions. The Company's 20-member global executive team and 24-member global board each have only one female representative. Similarly, women are only 18% of all KPMG Partners compared to nearly 50% of all employees.

Aiming to put an end to the systemic gender discrimination at KPMG, a former female Senior Manager filed a $350 million class action discrimination lawsuit against the company today in the U.S. District Court for the Southern District of New York. The Plaintiff, Donna Kassman, lives in New York and worked in KPMG's New York office for seventeen years before resigning as a result of gender discrimination. Plaintiff Kassman and the class are represented by Janette Wipper, Siham Nurhussein, and Deepika Bains of Sanford Wittels & Heisler, LLP.

KPMG is an audit, tax, and advisory services firm headquartered in Netherlands with U.S. offices headquartered in New York City. In 2010, KPMG reported global revenues of $20.63 billion.

Plaintiff Kassman alleges that KPMG engages in systemic discrimination against its female Managers, including but not limited to Managers, Senior Managers and Managing Directors. The lawsuit is intended to change KPMG's discriminatory pay and promotion policies and practices, as well as its systemic failure to properly investigate and resolve complaints of discrimination and harassment. The Plaintiff is filing this action on behalf of a class of thousands of current and former female employees who have worked as Managers at KPMG from 2008 through the date of judgment.

KPMG promotes fewer women to Partner (18%) than the industry average (23%) and fewer women to Senior Manager (35%) than the industry average (44%). "Across the accounting industry, women are conspicuously absent from leadership positions; but at KPMG, women fare even worse," said Janette Wipper. "As soon as women come within reach of partnership, the Company's male-dominated owners find ways to block their advancement,"

Despite Plaintiff Kassman's long tenure and stellar performance, KPMG refused to promote her along the partnership track. Ms. Kassman's supervisors repeatedly told her throughout 2008 and 2009 that she was next in line for a promotion to Managing Director. Around the time Ms. Kassman was to be promoted, however, two male employees complained that she was "unapproachable" and "too direct," thinly-veiled gender-based criticisms designed to derail her career advancement. Based on these unfounded, discriminatory comments, KPMG removed Ms. Kassman from the promotion track, subjected her to numerous hostile interrogations, and advised her to meet with a "coach" to work on her supposed issues. Instead of disciplining the two male employees for their campaign of harassment, KPMG rewarded them by putting them up for promotion.

KPMG's female Managers are not only under-promoted, but underpaid as well. In one particularly egregious act of discrimination, KPMG slashed Ms. Kassman's base salary by $20,000 while she was on maternity leave because she was paid "too much." KPMG cited no business justification for slashing her salary. When Ms. Kassman complained about the salary cut, her male supervisor asserted that she did not need the money because she "ha[d] a nice engagement ring."

"Unfortunately, Ms. Kassman's story is completely representative of the treatment of women at KPMG," Siham Nurhussein said. "Ms. Kassman repeatedly complained up the chain of command about the gender discrimination and harassment she was experiencing, and the Company reacted with neither surprise nor concern. Her supervising Partner told her matter-of-factly that her male colleague might have a problem working with women, and the Office of Ethics and Compliance told Ms. Kassman that men had ganged up on women at KPMG before. KPMG not only tolerates gender discrimination, but displays an active interest in perpetuating it."

Continued in article

June 6, 2011 reply from Glen Gray


I don’t want to be too philosophical here, but your story below is about males behaving badly and you frequently send out emails about auditors behaving badly. Couldn’t someone ask where did the teachers/professors fail? You and I and many other professors on this list have been teaching for a long time—so these “bad” people were very likely our students. How come we didn’t put them on the correct ethical path? Or weed the bad apples out?

Glen L. Gray, PhD, CPA
Dept. of Accounting & Information Systems
College of Business & Economics
California State University, Northridge
18111 Nordhoff ST
Northridge, CA 91330-8372

June 6, 2011 reply from Bob Jensen

Hi Glen,

You ask the question that's been asked and "answered" over and over for the past few decades. I personally think that there's only a limited benefit that comes from increased focus on ethics in accounting curricula, although I certainly don't think it's topic that should be neglected in any accounting, auditing, systems, or tax course. Ethical behavior or lack thereof is far too complex to expect educators to solve the problem any more than we can expect preachers to eradicate sin in their congregations.

I was forever impressed with a presentation years ago by long-serving audit senior executive and later accounting professor Bob Sack, a professional that I truly admire with extensive and varied service to the American Accounting Association.

Bob contends that perhaps the major solution to the problem is the "tone at the top" as set by both the example and the policies set by by executives at the very top of the organization. However, I think the alleged behavior of this latest huge lawsuit against KPMG illustrates that the tone at the top is certainly important but not enough. Most certainly alleged bad behavior within KPMG runs totally counter to the tone at the top of KPMG and all other large auditing firms and most smaller auditing firms.

Of course we must note the American legal tradition of not being guilty until confessions transpire or being declared guilty in a court of law. There are perhaps some sides of this particular lawsuit that have not yet been disclosed in the media.

There are a growing number of interesting references to gender and ethics course materials and literature cited at the AAA Commons. I really recommend accounting teachers and researchers to use these categories in the Commons.

Of course there is still evidence of glass ceilings in auditing firms, but experts (not me) on gender and minority issues admit that the issues are far more complex than despicable bias.

I certainly invite more messaging on the AECM from experts on these issues as long as we keep in mind that the dust has not really settled on this particular KPMG lawsuit.

Everybody is also waiting breathlessly for the U.S. Supreme Court ruling on Wal-Mart. Is this a genuine grievance or a legal lottery or both? It's the "both" part that disturbs me the most when and if the punitive damages are more of a jackpot for the lawyers than the plaintiffs.

Bob Jensen

Bob Jensen's threads on the two faces of KPMG are at

PCAOB Snags KPMG Yet Another Time (this time for a client named Motorola with dubious revenue recognition to meet an earnings target)

The oversight board said a significant portion of the company’s earnings for the 2006 third quarter came from two licensing agreements that were recorded during the last three days of the quarter. One was the Qualcomm deal that wasn’t signed until the fourth quarter. The board also cited other deficiencies in KPMG’s review of Motorola’s accounting for the transactions.
"Dirty Secrets Fester in 50-Year Relationships," byJonathan Weil, Bloomberg News, June 9, 2011 ---

Another financial scandal. Another cover-up by regulators. Four years ago, inspectors for the auditing industry's chief watchdog discovered that KPMG LLP had let Motorola Inc. record revenue during the third quarter of 2006 from a transaction with Qualcomm Inc. (QCOM), even though the final contract wasn’t signed until the early hours of the fourth quarter. That’s no small technicality. Without the deal, Motorola would have missed its third-quarter earnings target.

The regulator, the Public Company Accounting Oversight Board, later criticized KPMG for letting Motorola book the revenue when it did. Although KPMG had discussed the transaction’s timing with both Motorola and Qualcomm, the board said the firm “failed to obtain persuasive evidence of an arrangement for revenue-recognition purposes in the third quarter.” In other words, KPMG had no good reason to believe the deal shouldn’t have been recorded in the fourth quarter.

The oversight board didn’t tell the public that this happened at Motorola, though. The maker of wireless- communications equipment, now known as Motorola Solutions Inc., didn’t restate its earnings for the period in question. And there’s no sign the Securities and Exchange Commission ever followed up with an investigation of Motorola’s accounting, even though it oversees the board and had access to its findings.

All of this is business as usual for America’s numbers cops. Since the board’s creation by the Sarbanes-Oxley Act in 2002, its inspectors have found audit failures by large accounting firms at hundreds of U.S.-listed companies. Yet its policy is to keep the identities of those clients secret.

‘Issuer C’

Likewise, in August 2008 when the board released its annual inspection report on KPMG, it referred to Motorola as “Issuer C” in the section on the auditor’s work for the company. For what it’s worth, Motorola paid the firm $244.2 million from 2000 to 2010.

This is the third column I’ve written revealing the name of a client whose accounting practices were a subject of a major auditing firm’s inspection report. Motorola is the biggest yet. I hope a whistleblower comes forward someday to leak many more. This is information investors need to know.

The Sarbanes-Oxley Act authorizes the oversight board to disclose “such confidential and proprietary information as the board may determine to be appropriate” in the public portions of its inspection reports. So it’s the board’s call whether to disclose clients’ names, although the SEC could overrule it. The board never does, bowing to the wishes of the accounting firms.

Identity Revealed

Motorola’s identity was disclosed in public records last month as part of a class-action shareholder lawsuit against the company in a federal district court in Chicago. The plaintiffs in the case, led by the Macomb County Employees’ Retirement System in Michigan, filed a transcript of a September 2010 deposition of a KPMG auditor, David Pratt, who testified that Issuer C was Motorola. KPMG isn’t a defendant in the lawsuit.

Pratt also identified the Motorola customers cited in the board’s inspection report. It’s his deposition that allows me to describe the report’s findings using real names.

The oversight board said a significant portion of the company’s earnings for the 2006 third quarter came from two licensing agreements that were recorded during the last three days of the quarter. One was the Qualcomm deal that wasn’t signed until the fourth quarter. The board also cited other deficiencies in KPMG’s review of Motorola’s accounting for the transactions.

Making the Numbers

Motorola booked $275 million of earnings during the 2006 third quarter as a result of the Qualcomm deal, according to estimates by the plaintiffs in the shareholder suit. The plaintiffs allege that all of it was recorded in violation of generally accepted accounting principles. That’s 28 percent of the net income Motorola reported for the quarter.

A Motorola spokesman, Nicholas Sweers, said the company’s accounting complied with GAAP, and that the financial statements for the periods covered in the inspection report have never been the subject of an SEC investigation. He declined to discuss details of Motorola’s accounting, citing the litigation. A KPMG spokesman, George Ledwith, declined to comment. So did an oversight board spokeswoman, Colleen Brennan, and an SEC spokesman, John Nester.

The story doesn’t end there. Last week the board’s new chairman, James Doty, gave a speech in which he said the board should consider setting mandatory term limits for auditors at public companies. To prove his point, he cited two instances that were “galling in their simplicity” where auditors “have failed to exercise the required skepticism and have accepted evidence that is less than persuasive.”

Making a Match

One of his examples matched the fact pattern of KPMG’s 2006 review at Motorola exactly. “PCAOB inspectors found at one large firm that an engagement team was aware that a significant contract was not signed until the early hours of the fourth quarter,” Doty said. “Nevertheless, the audit partner allowed the company to book the transaction in the third quarter, which allowed the company to meet its earnings target.”

Continued in article

Jensen Comment
Recall that KPMG was fired from the big Fannie Mae audit because of alleged cooperation in helping Fannie's top executives creatively meet earnings targets for their personal bonuses ---

Bob Jensen's threads on revenue recognition and Hypothetical Future Value are at

Bob Jensen's threads about the two faces of KPMG are at


How KPMG will be specifically affected by any fallout will be interesting to see.
"KPMG UK Report Shows Libya’s Qaddafi Held Billions in US and UK Banks," by Lisa Chapman, Big Four Blog, May 28, 2011 ---

In the Big Four world, truth sometimes appears to be stranger than fiction. A tale of how the Big Four firm KPMG is involved in a global financial intrigue is revealed by which has obtained papers which were prepared by KPMG UK on Libyan leader Col. Muammar el-Qaddafi’s ill-gotten and stashed wealth.

First, has obtained a leaked full investment profile of Libyan Investment Authority for the period ending June 30, 2010.

This report appears to be prepared by KPMG UK.

The New York Times notes, “The document, independently verified as authentic by The New York Times, is a summary of the Libyan Investment Authority’s investments, created for the fund by the London office of the KPMG consulting firm and dated June 30, 2010. “

And it is clear from this document that Qaddafi stashed $53 billion of Libyan oil revenues, with some big amounts with HSBC, Goldman Sachs, JP Morgan, HSBC Holdings and Société Générale. Goldman Sachs held $43 million in 3 accounts and HSBC held $292.69 million in 10 accounts. LIA also invested $1 billion in structured financial products through Société Générale and JPMorgan Chase; and in Central Bank of Libya, the Arab Banking Corporation and the British Arab Commercial Bank. The fund held large investments in top multinationals such as General Electric, Halliburton, Schlumberger, Caterpillar, BP and Nokia, and United States government bonds.

While this amount is mind boggling, it was not immune from market downtrends, the report notes that total market value of the fund’s investments fell 4.53% from $55.9 billion in March 2010 to $53.3 billion in June 2010.

The investments appear to have been legal at the time, although the United Nations, the European Union and the United States in February imposed targeted financial sanctions against the assets of Colonel Qaddafi and his family. The United States also froze the assets of Libyan government-owned and controlled entities.

Global Witness, which issued a statement on its website, said,” However the Libyan people could not know where it was invested or how much it was, because banks have no obligation to disclose state assets they hold. Global Witness asked both banks to confirm that they held funds for the state-owned Libyan Investment Authority, and whether they still hold them. They both refused, with HSBC citing client confidentiality. Numerous other banks and financial firms are listed including Societe Generale, UniCredit and the Arab Banking Corporation.”

Global Witness then pummels the banks….“It is completely absurd that banks like HSBC and Goldman Sachs can hide behind customer confidentiality in a case like this. These are state accounts, so the customer is effectively the Libyan people and these banks are withholding vital information from them,” said Charmian Gooch, director of Global Witness.

KPMG does not appear to be involved in any malfeasance or accused of any misdemeanor, as far as these public reports go, though it appears to have been the author of this leaked investment portfolio report.

How KPMG will be specifically affected by any fallout will be interesting to see.

Bob Jensen's threads on the two faces of KPMG are at

Teaching Tips, Ideas, and Inspiration 

"Teaching Carnival 4.10," by Billie Hara, Chronicle of Higher Education, June 1, 2011 ---

Bob Jensen's threads on Tools and Tricks of the Trade ---

"The Costs of Bad Security:  Mounting threats to the security of information are forcing companies to make more sophisticated cost-benefit analyses when they craft their security strategies," by David Talbot, MIT's Technology Review, June 1, 2011 ----

Jensen Comment
Accounting instructors who teach cost-benefit analysis may want to pass this article along to students.

Experiential Learning ---

Experiential Learning in Tax Courses
"Towards a Better Tax Law Student (and Professor)," posted by Chris Brummer, The Conglomerate, May 31, 2011 ---

Heather Field’s delightful essay, “Experiential Learning in a Lecture Class: Exposing Students to the Skill of Giving Useful Tax Advice,” kicked off our corporate law camp with a welcome examination of how to improve courses such that students can translate theory into practice, and in doing so emerge from courses as not only better educated, but also better lawyers.  

This is, of course, a dilemma facing not only tax lawyers, but corporate professors as well, especially as we seek to improve our students’ prospects on what is at times a challenging legal market.  Professor Field focuses in the article on modules that can be incorporated into lecture courses in order to help students begin to see how they can turn their growing substantive knowledge into what she calls “useful tax advice.”  Specifically, she seeks to generate new forms of experiential learning whereby students can begin to provide, while in school, understandable advice that comprehensively addresses the client’s economic objectives (including, but not limited to the client’s tax objectives) and that gives the client a clear appreciation of the benefits and risks of a tax-related business decision.   Ultimately, her approach involves weaving key documents and real-world quandaries into classroom sessions through experiential problem sets and negotiations—something unfortunately rare in the profession (how many times do contracts students actually see a contract?).  In doing so, she develops a cutting edge pedagogical approach to tax law that keeps an eye on substance and theory, with another on real world (and realistic) legal training. 

Professor Field thus not presents a vision as to what law students should be learning (and how they should learn it), but also what the role of the law professor should be in a world of increasing market pressures.   Curricular change, as many professors can attest, can be difficult to achieve in a world of procedural roadblocks and faculty voting requirements.  What I found refreshing is that the paper offers a blueprint as to what specifically professors can do individually to deliver value for students, regardless of the institutional sclerosis that may hamper larger school reforms.


Jensen Comment
One of the most difficult elements in experiential courses is evaluation of learning and assignment of grades. If testing and grading is standardized across multiple students in multiple learning circumstances, students tend to focus on what it takes for a grade rather than learning unique to experiential learning. If grading is adapted to each experiential learner there are limited benchmarks for grading and grades tend to become quite lenient for students who really put in genuine effort. Some of the most popular experiential learning courses are internships where students work for employers and then are graded by their college professors who coordinate the internships and evaluate the assigned internship course projects. Instructors should monitor employers to make sure that students are assigned to meaningful projects and are not just "gophers" doing mostly mundane tasks.

One of the most interesting experiential international accounting course was implemented on a trial basis in the late 1990s by Sharon Lightener at San Diego State University ---
The fact that this trial experiment was not continued illustrates problems of instructor burn out and lack of resources for innovative experiential learning courses.

Bob Jensen's threads on assessment are at

A parallel civil complaint brought by the Securities and Exchange Commission said that Mr. Goffer’s nickname among his fellow traders was “Octopussy” — a reference to the James Bond movie — because his arms reached into so many sources of information.
Peter Lattman, "Zvi Goffer Found Guilty in Insider Trading Case," The New York Times, June 13, 2011 ---

A federal jury in Manhattan on Monday found Zvi Goffer and two co-conspirators guilty of insider trading, the latest development in the government’s investigation into insider trading at hedge funds.

Mr. Goffer, his brother Emanuel Goffer and Michael A. Kimelman were convicted of participating in an insider trading scheme that produced more than $20 million in illegal profits.

The case was connected to the prosecution of Raj Rajaratnam, the hedge-fund tycoon and co-founder of the Galleon Group who was found guilty last month in the largest insider trading case in a generation. Zvi Goffer, who sat in on much of Mr. Rajaratnam’s trial, was employed by Galleon.

Continued in article

Bob Jensen's Fraud Updates are at

How do do your favorite Websites rate in terms of age, popularity, and Google love?

May 31, 2011 message from Emily

Good Morning Dr. Jensen,
Hope you had a nice memorial weekend. I wonder whether you receive my email sent to you on the 23rd? Did you have a chance to review our site Perhaps it is a valuable resource to your visitors in your page .htm under the section Additional resources?

Please get back to me.
Best Regards,

Jensen Comment
This is an interesting Website for various things, including consumer frauds:
reviewandjudge ---

I don't know just why, but this site also has a link to having any Website you choose evaluated for age, popularity, and a Google love rating. For example, I keyed in my home page at
Note that for some reason you have to delete the http:// part of the above URL to get this to work. Thus to make it work I key in only
I got 5.0/5.0  stars for age of the Webpage (I've been maintaining this page for over 15 years), 3.5/5.0 stars for popularity, and 3.5/5.0 stars for a Google love rating.

In order to put it to a comparison test, I know that sociology professor Mike Kearl has one of the most popular academic Websites served up by Trinity University. When I keyed in
the results were  5.0/5.0  stars for age of Mike's Webpage, 3.5/5.0 stars for popularity, and 3.5/5.0 stars for a Google love rating.

Either Mike and I are running neck and neck or there's something suspicious going on here. So I read in Jim Mahar's popular finance professor blog (after removing http://) at
He is doing much worse than Mike and me, although I think he has, in my viewpoint, one of the best finance blogs on the academic Web.

Next I read in the very popular blog maintained by economics Nobel laureate Gary Becker and famous law professor Richard Posner (after removing http://) at
Becker and Posner also fared worse than Mike and me except that they did get a 3.5/5.0 Google love rating.

Next I typed in Lady Gaga's home page (after removing http://) at
the results were   4.0/5.0 stars for popularity, and 3.5/5.0 stars for a Google love rating.
Yikes! Mike and I are doing almost as well with our dull academic sites as the site that links to many photos and videos of Lady Gaga in her underwear.

Next I read in the ABC News home page (after removing http://) at
the results were  5.0/5.0  stars for age of the ABC News page, 5.0/5.0 stars for popularity, and 4.0/5.0 stars for a Google rating.
Guess Mike and I aren't as popular as ABC News, but we're close, and this makes me slightly suspicious.

Next I read in the Stanford University home page at
the results were  5.0/5.0  stars for age of Stanford's home page, 4.5/5.0 stars for popularity, and 4.5/5.0 stars for a Google rating.

Next I read in the Harvard University home page at
the results were  5.0/5.0  stars for age of Harvard's home page, 4.5/5.0 stars for popularity, and 4.0/5.0 stars for a Google rating.
The bottom line is that Google loves Harvard a little less than Stanford, but Google's love for Harvard and Lady Gaga are identical.

One thing about which I'm certain --- this Web site rating site does is not based upon number of hits. In no way do Mike and I get hit as often as Lady Gaga, Stanford University, and Harvard University.


"Controversial Journal Rankings in Australia Affect Research Funds and Careers," by Jennifer Howard, Chronicle of Higher Education, May 8, 2011 ---

When Anna Poletti found out she'd had an article accepted by the journal Biography: An Interdisciplinary Quarterly, the young Australian scholar of life writing­—autobiography, biography, letters, and other forms of recorded experience—was thrilled. "It got me a whole lot of attention in the field," she says, because Biography is highly regarded by her peers.

It is not so esteemed, however, by the Australian government. A new journal-ranking plan—which helps the government determine how research money is doled out to universities—has dropped Biography from the highest ranking, A*, to a lowly C. Judged that way, an association with Biography looked like more of a career killer than a coup.

"I am actually dragging down the overall score of my unit by publishing in a C journal," says Ms. Poletti, a lecturer in English at Monash University—her first tenure-track job.

The ranking is part of an overall evaluation system devised by the Australian Research Council, an agency that finances scholarship and innovation in the country through grants and through advice to other government departments. At stake is a share of about $1.63-billion (U.S.), which supports a multitude of activities including academic research, says Margaret M. Sheil, chief executive officer of the council. The system, called Excellence in Research for Australia, helps the government decide how much goes to a given research unit at a university.

Journal rankings are not just an Australian phenomenon. Scholars worldwide are tangling with what Ms. Poletti calls "the culture of audit." The United States does not have such a ranking system, but U.S.-based researchers and journal editors find their work drawn into such assessments anyway.

Biography, for instance, comes out of the University of Hawaii's Center for Biographical Research. Around the world—in Britain, South Africa, New Zealand, and elsewhere—cash-strapped governments are experimenting with schemes to measure the quality of the academic research they pay to support.

In Europe, the European Science Foundation is about to release a new round of journal rankings as part of its European Reference Index for the Humanities. Ms. Sheil, who talks regularly with assessors in other countries, has recently traveled to the United States to discuss Australia's evaluation system.

Continued in article

Jensen Comment
Do to the reaction of professors in Australia, this initiative to rank journals was later abandoned.

Journal Ranking Site: Eigenfactor

Eigenfactor ranks journals much as Google ranks websites. It is somewhat similar to Thomson Scientific's (ISI) Journal Citation Index (JCI), though it's dataset is larger.

Some points to note:
* JCI only looks at the 8000 or so journals indexed by Thomson Scientific while potentially any journal could be included in Eigenfactor.
* The JCI is calculated based on the most recent 2-year's worth of citation data; Eigenfactor is based on the most recent 5 years.

* In collaboration with,
Eigenfactor provides information about price and value for thousands of scholarly periodicals.
* Article Influence (AI): a measure of a journal's prestige based on per article citations and comparable to Impact Factor. Eigenfactor (EF): A measure of the overall value provided by all of the articles published in a given journal in a year.
* The Eigenfactor Web site also presents the ISI Impact Factors, so it's possible to compare the
ISI's "Impact Factors" with Eigenfactor's "Article Influence"
* Both simple and advanced searching is available: "You can search by partial or full journal name, ISSN number, or you can view a selected ISI category, only ISI-listed journals, only non-ISI-listed journals or both listed and unlisted."
* Eigenfactor is Free!

From the Eigenfactor Web site:

Eigenfactor provides influence rankings for 7000+ science and social science journals and rankings for an additional 110,000+ reference items including newspapers, and popular magazines.

Borrowing methods from network theory, ranks the influence of journals much as Google's PageRank algorithm ranks the influence of web pages. By this approach, journals are considered to be influential if they are cited often by other influential journals. Iterative ranking schemes of this type, known as eigenvector centrality methods, are notoriously sensitive to "dangling nodes" and "dangling clusters" -- nodes or groups of nodes which link seldom if at all to other parts of the network. Eigenfactor modifies the basic eigenvector centrality algorithm to overcome these problems and to better handle certain peculiarities of journal citation data.

Different disciplines have different standards for citation and different time scales on which citations occur. The average article in a leading cell biology journal might receive 10-30 citations within two years; the average article in leading mathematics journal would do very well to receive 2 citations over the same period. By using the whole citation network, Eigenfactor automatically accounts for these differences and allows better comparison across research areas. is a non-commercial academic research project sponsored by the Bergstrom lab in the Department of Biology at the University of Washington. We aim to develop novel methods for evaluating the influence of scholarly periodicals and for mapping the structure of academic research. We are committed to sharing our findings with interested members of the public, including librarians, journal editors, publishers, and authors of scholarly articles.

The Eigenfactor Web site --- 

In my opinion citation indices are quite unreliable since for-profit journal publishing houses often urge paid editors and referees to push for citations to journals they publish. Hence, the bibliography of many research papers becomes somewhat artificial.

For academic accounting research journals see the following (slow loading):

At the AAA annual meeting in San Francisco in August, 2005, Judy Rayburn addressed the low citation rate of accounting research when compared to citation rates for research in other fields. Rayburn concluded that the low citation rate for accounting research was due to a lack of diversity in topics and research methods:

Accounting research is different from other business disciplines in the area of citations: Top-tier accounting journals in total have fewer citations than top-tier journals in finance, management, and marketing. Our journals are not widely cited outside our discipline. Our top-tier journals as a group project too narrow a view of the breadth and diversity of (what should count as) accounting research.
Rayburn [2006, p. 4]
As quoted at
Her data was derived from a Texas !&M study headed up by Ed Swanson.

Journal rankings greatly affect tenure and promotion decisions and annual performance evaluations in virtually all top North American universities. Many universities, however, have customized rankings developed by their own faculty members. For example, the University of Texas at Dallas has a very unique ranking system in its college of business that results in its program ranking in the top 10 in the nation with respect to research (I'm not certain if UT Dallas still publishes this controversial ranking system that, in my viewpoint, cherry picked the journals to receive highest priority).

For a specialized finance journal ranking system see

For criticisms see

Sheryl Sandberg (Chief Operating Officer of Facebook)  ---

In Support of the Feminist Movement
"Sheryl Sandberg's Graduation Speech for the Ages," by Andrew McAfee, Harvard Business Review Blog, June 1, 2011 --- Click Here

More on Where Accountics Research Went Wrong

June 10, 2010 reply from Richard Sansing


I'm confident that you can answer the question you posed, but since you asked me I will answer.

The TAR article by Fellingham and Newman, "Strategic considerations in auditing", The Accounting Review 60 (October): 634-50, is certainly a compression of the the audit process. I find it insightful because it highlights the difference in alpha and beta risks when auditors and clients are thought of as self-interested, maximizing agents.

Richard Sansing

June 11, 2011 reply from Bob Jensen

Hi Richard,

Has there ever been an audit that measured Type II (Beta) error?? Do you have some great examples where Type II error is actually measured (or specified) in TAR, JAR, or JAE articles?

There are only a few, very few, books that I keep beside my computer work station inside the cottage. Most of my books are on shelves in my outside studio that's now more of a library than an office. One of my prized textbooks that I always keep close at hand is an old statistics textbook. I keep it beside me because it's the best book I've ever studied regarding Type tI error. It reminds me of how quality control engineers often measure Type II error, whereas accounting researchers almost never measure Type II error.

In one of my statistics courses (Stanford) years ago from Jerry Lieberman, we used that fantastic Engineering Statistics textbook book authored by Bowker and Lieberman that contained OC curves for Type II error.

In practice, Type II errors are seldom measured in statistical inference due to lack of robustness regarding distributional assumption errors (notably unknown standard deviations) , although quality control guys sometimes know enough about the distributions and standard deviations to test for Type II error using Operating Characteristic Curves. Also there are trade offs since the Type I and Type II errors are not independent of one another. Accounting researchers take the easy way out by testing Type I error and ignoring Type II error even though in most instances Type II error is the most interesting error in empirical research.

Of course increasing sample sizes solved many of these Type I and II inference testing problems, but for very large sample sizes what's the point of inference testing in the first place? I often chuckle at capital markets studies that do inference testing on very large sample sizes. These seem to be just window dressing to appease journal referees.

What might be more interesting in auditing are Type III and Type IV errors discussed by Mitroff and Silvers in their 2009 book entitled Dirty Rotten Strategies (ISBN 978-0-8047-5996-0). Type III errors arise from skilled investigation of the wrong questions. Type IV errors are similar except they entail deliberately selecting the wrong questions to investigate.

I think Fred Mosteller in 1948 was the first to suggest Type III error for correctly rejecting the null hypothesis for the wrong reasons --- 

Has anybody ever tested Type III error in TAR, JAR, or JAE?

Bob Jensen

June 12, 2011 replies from Dan Stone and from Paul Williams

> Thanks Richard,
> Got it. Thanks for clarifying. Based on your response, here's a draft
> letter from you, Professor Demski, and Professor Zimmerman to parents,
> administrators, and legislators.
Dan Stone
I have resisted entering this thread, but your hypothetical letter compels me to provide a few anecdotes about the 10% of the insightful compression papers that do make it into print.  The first two are very public episodes.  Watts and Zimmerman's Notable Contribution prize winning paper that "verified" the believability of P/A stories was replicated by McKee, Bell and Boatsman.  The significance of the replication was that it made more realistic statistical assumptions and, voila, the significance went away.  Of course that didn't deter anyone from continuing to tell this story or at least seek to tell richer, more insightful stories. 
The second involves another notable contribution paper published by W&Z, the famous Market for Excuses paper.  As Charles Christensen and later Tinker and Puxty demonstrated the paper was incoherent from the start since it was self-contradictory (among many other flaws). The paper may have been good libertarian politics but it was not very good science.
My third anecdote involves a comment I wrote for Advances in Public Interest Accounting many years ago.  It was a comment on a paper by Ed Arrington.  In that comment I used a widely cited P/A paper (one that made Larry Brown's list in his AOS classic papers paper) as an example to illustrate the ideologicial blinders that afflict too many accounting researchers; we always tend to find what we are looking for -- perhaps because the insightful compressions we are looking for have to be consistent with Demski and Zimmerman's views on the way the world should be (it certainly isn't the way the world is). One comment I made on this P/A paper pertained to the statistical analysis and it was, basically, that the statistically significant variables really explained nothing and that there was no story there. 
To seek assurance I was on some kind of solid ground I took my comments and the paper to a colleague who was an econometrician (a University of Chicago Ph.D).  Back in those days there was no college of management at NC State, only the department of economics and business, which was comprised of all economists except one finance prof and the folks in accounting.  Three days after I gave him the material he called me into to his office to assure me I was correct in my interpretation and he made a gesture quite profound, given the metaphor about waste baskets.  He picked up the paper (published in one of the premier journals) and threw it in his waste basket. He said, "That is where this paper belongs."   My issue with TAR, etc. is just this -- even the 10% of papers we do publish aren't very good "science" (which is not definitive of a "form" that scholarship must have).   
Paul Williams

Bob Jensen's threads on where accountics research went wrong ---

May 31, 2011 message from Roger Collins

Of possible interest...

"It’s hardly news that the near meltdown of America’s financial system enriched a few at the expense of the rest of us. Who’s responsible? The recent report of the Financial Crisis Inquiry Commission blamed all the usual suspects — Wall Street banks, financial regulators, the mortgage giants Fannie Mae and Freddie Mac,
and subprime lenders — which is tantamount to blaming no one. “Reckless Endangerment” concentrates on particular individuals who played key roles.

The authors, Gretchen Morgenson, a Pulitzer Prize-winning business reporter and columnist at The New York Times, and Joshua Rosner, an expert on housing finance, deftly trace the beginnings of the collapse to the mid-1990s, when the Clinton administration called for a partnership between the private sector and Fannie and Freddie to encourage home buying. The mortgage agencies’ government backing was, in effect, a valuable subsidy, which was used by Fannie’s C.E.O.,
James A. Johnson, to increase home ownership while enriching himself and other executives. A 1996 study by the Congressional Budget Office found that Fannie pocketed about a third of the subsidy rather than passing it on to homeowners. Over his nine years heading Fannie, Johnson personally took home roughly $100 million. His successor, Franklin D. Raines, was treated no less lavishly...."

continued in article...


Bob Jensen's threads on earnings management fraud at Fanny Mae ---

Bob Jensen's threads on slease in thesubprime scandals ---

Is California really going to require 44 semester credits in accounting, 24 credits in business-related courses, and an added 10 credits in ethics courses for CPA licensure candidates?

"California to Unveil New CPA License Requirements," Accounting Today, May 31, 2011 ---

The California Board of Accountancy’s Accounting Education Committee and Ethics Curriculum Committee plan to hold a joint meeting to unveil their proposals for the 30 additional hours of education necessary for CPA licensure in California, beginning Jan. 1, 2014.

The Accounting Education Committee has been working on a framework for the 20 semester units of accounting study, while the Ethics Curriculum Committee has been working on a framework for the 10 semester units of ethics study. These additional hours were the result of the California Legislature’s passage of Senate Bill 819 in 2009. The new requirements are designed to enhance consumer protection by strengthening the competency of applicants as practitioners.

Continued in article

Also see
Also see

Jensen Comment
At present it's apparently possible in California, unlike in some other states, to take the CPA examination with only a 120-credit Baccalaureate degree such that the 150-credit requirement only applies for licensure in California. I had a student in Texas who got an accounting undergraduate degree and then beat the Texas law by flying to California to take the CPA examination because Texas would not allow him to take the CPA Examination without another 30 credits. He passed all parts on the first sitting in California, although he did not attempt to use that as a basis for a CPA license in Texas. He instead went on to become one of the top Law School graduates at the University of Texas. He's probably chasing ambulances now instead of CPA clients.

Under Current Regulations
Anyone applying for California CPA licensure for the first time (this includes candidates who have never been licensed anywhere as well as CPAs licensed out-of-state)—and cancelled California licensees applying for reissuance must pass the exam
(Ethics Exam 411) for Professional Ethics for CPAs (PETH). The CalCPA Education Foundation is the exam's only state-designated provider as well as the largest provider of continuing professional education for California CPAs."
I wonder if this is more for purposes of selling CPE credits than for raising the ethical quality of California CPAs?

California's First Time Applicant CPA Examination Handbook ---
Start on Page 3 for Education Requirements to Sit for the CPA Examination Requirements


demonstrate they meet the licensure education and experience requirements for their chosen Pathway. EXAMINATION

Pathway 1 (Section 5092) – Pathway 2 (Section 5093)

Education Requirement

  1. Baccalaureate degree.
  2. 24 semester units of accounting.
  3. 24 semester units of business-related subjects.


Pathway 1

Pathway 2

Education Requirement

  1. Same as Examination.
  1. Same as Examination.
  2. Plus
  3. Overall total of 150 semester hours.

Experience Requirement

  1. Two years of general experience, which may include 500+ attest hours for those who want to sign attest reports.
  1. One year of general experience, which may include 500+ attest hours for those who want to sign attest reports.


Details of topic areas follow in ensuing pages 

Added Jensen Comment
Texas has formidable course requirements to sit for the CPA examination plus a 150 semester credit requirement just to sit for the CPA examination in Texas (not just for licensure). In addition, Texas now requires that at least 15 of those credits (usually five semester courses) be taken onsite in an effort to restrict the number of courses that can be taken online even from AACSB accredited distance education programs like the University of Connecticut online accounting program. This also blocks out-of-state CPAs, like those from Connecticut, seeking licensure in Texas if they earned 150-credit distance education degrees without having the required onsite credits for designated accounting courses.

"Number of Accounting Grads Hits New High," AICPA, CPA Trendlines, May 27, 2011 ---

Newly minted accountants have some of the brightest job prospects in the nation, with nearly 90 percent of accounting firms forecasting the same or increased hiring of graduates this year compared with 2010, and nearly three quarters, 71 percent, of the largest firms anticipating more hiring – an indicator of a rebounding economy.

That’s according to survey results in the 2011 “Trends in the Supply of Accounting Graduates and the Demand for Public Accounting Recruits” report by the American Institute of Certified Public Accountants. The report shows record numbers of accounting students and graduates, but also hints at a potential challenge for the profession: demand for new talent eventually could outpace supply.

“Opportunities in the accounting profession continue to expand as the needs of firms and businesses grow ever more complex and global,” said Jeannie Patton, AICPA vice president for students, academics and membership. “As the U.S. and global economies recover, and as seasoned professionals begin to retire in unprecedented numbers, it’s even more important to guard against a talent shortage. Employers increasingly want graduates with advanced degrees at the same time colleges, facing budget and other constraints, are restricted in their capacity to train all the students who want to join our profession.”

The AICPA report echoes findings from the U.S. Bureau of Labor Statistics, which expects accountants to experience “much faster than average” employment growth in the coming years. The bureau’s 2010-2011 “Occupational Outlook Handbook” estimates 22 percent growth in accounting and auditing jobs in the decade between 2008 and 2018, adding that job candidates with professional designations, particularly CPAs, and graduates with masters degrees have the brightest outlook.

All told, 226,108 students were enrolled in undergraduate or graduate accounting programs during the 2009-2010 academic year, 6 percent more than in 2007-2008, the last time the AICPA conducted its survey. A record 68,639 students graduated with accounting degrees in 2010. Nearly 4 in 10 accounting graduates hired last year by CPA firms had master’s degrees, compared with 26 percent in 2008. By contrast, 43 percent of graduates hired had bachelor’s degrees, down from 56 percent in 2008.

The shift reflects growing complexity and globalization of the accounting industry. And against that backdrop, colleges and universities are struggling to keep up. According to the AICPA report, a growing number of accounting programs are rejecting qualified applicants because they don’t have capacity to accept them. The increase likely is due to budget constraints at universities brought on by the economic downturn and a shortage of academically qualified professors as many longtime teachers reach retirement.

Jensen Comment
I have trouble reading the graph that seems to show greater numbers of graduates in some years before and after 1990,
Why is 2011 called a "new high" year in terms of the number of accounting graduates?

Bob Jensen's threads on accounting careers are at

Dennis Huber gave me permission to share his article at
"Does The American Accounting Association Exist? An Example of Public Document Research," by Wm. Dennis Huber, Journal of Forensic & Investigative Accounting, Vol. 3, Issue 2, Special Issue, 2011

The purpose of this article is, in part, to illustrate and educate what forensic accountants do and how they do it with a step-by-step process. It demonstrates the kinds of simple research in which forensic accountants should engage and should help educate forensic accountants in the use of one of the basic tools of investigation – public records research using databases that are freely available. More information can, of course, be obtained from fee-based services, but one does not have to use fee-based services. This research can serve as a basis for showing forensic accountants where to look, what to look for, how to assemble various documents to tell a story, and how to arrive at conclusions based on the evidence obtained. Conducting a forensic accounting investigation typically leads to more questions as more facts are uncovered, which then leads the forensic accountant down other paths to discover other facts, and so forth, until a more complete picture is formed. This approach uses the American Accounting Association (AAA) as an example, looking at the AAA from a forensic accountant’s viewpoint.


A Rejoinder from the American Accounting Association Executive Committee

Dear AAA Members,

Over the last 12 months, many of you have received a series of emails from Dr. Larry Crumbley and Dr. Dennis Huber, sent from their personal email lists. These messages raise questions related to governance procedures and the legal standing of the American Accounting Association, unfairly maligning individual volunteers, and impugning the integrity of the Association. Allegations and misleading information have also been sent to organizations outside the AAA. As has been reported publicly in the AAACommons and based upon everything we know today (and have known since these e-mails began), we can categorically state that there is not, nor has there been, a problem threatening our organization's legal existence. Representatives of the State of Illinois, the State of Florida, legal counsel, and our audit firm have confirmed that there is no credible basis for any legal claim against the Association.

As an organization focused on scholarly interchange in accounting, it is our objective to promote a common set of values: integrity, objectivity, a sense of community, transparency, respect for others and high ethical values and standards. We are confident that these values have been upheld, and that accusations aimed at the organization and its member leadership are unfounded. To assure members of transparency and access to details, you'll find below a brief summary and a link to a detailed timeline and collection of source documents.

The "silver lining" in this situation has been our discovery of an administrative error, which caused no damage to the organization, its members, or any other party, but was necessary to resolve and has been dealt with. At no time during this process have questions or concerns about our legal status, or tax-exempt status been raised by representatives we have worked with in Illinois or Florida. Officials in both states as well as our attorney and auditors note the obvious good faith in which the organization has operated, filing 990s, and regular annual audits with audited financial reports published to members, etc.

We have been working over the last three weeks or so on a matter Karon Beyer, Bureau Chief in the Florida State Department described as an "administrative hiccup" that, while not ideal, is not uncommon in member-based non-profit organizations. In summary:

During the early part of this series of questions it was possible to respond relatively quickly to questions raised by Dr. Huber and Dr. Crumbley about balloting and governance, and early responses to questions raised were posted publicly in the AAACommons, as has been all the work of our recent governance review (see FAQs at

The tone of more recent communications has made responding quickly more difficult. Messages questioning the integrity of the AAA and its volunteer leaders and staff have been sent to our exhibitors, our auditor, the press, and the States of Illinois and Florida. These messages point to Dr. Huber's charges published in the Journal of Forensic & Investigative Accounting (an independent journal with no affiliation with the AAA or its Sections, edited by Dr. Crumbley and published by Louisiana State University). The journal's website (as of June 17, 2011) abstract page lists "AAA Attorney" under the Dr. Huber's name as author. AAA attorneys were not in any way involved in the writing of the article, nor are the section's included in the article under the sub-heading "AAA Attorney response" responses quoted from or written by the AAA Attorney. These escalating challenges, and our increased need to respond to them through a deliberative process in communications, has created a significant distraction for the AAA staff and volunteer leaders, draining resources, time, and funds.

Responding to the need for deliberative process in communications related to escalating challenges has become a significant distraction, draining resources of time, focus, and funds.

Members can find a compiled a list of source documents and details related to the issues raised by Dr. Huber and Dr. Crumbley on the AAACommons You will need your user name and password to log into the AAACommons. If you have any questions, please feel free to contact any one of us.

Finally, we affirm that we have the utmost confidence in our professional and volunteer leadership serving throughout this period. In particular, Dr. Sutherland, prior volunteer leaders, and the Governance Review Task Force have worked tirelessly to make sure that our Association operates with the highest standards and that members are treated with respect and consideration. Allegations against their actions and character are unwarranted and should not be allowed to go undisputed. 

Volunteer leaders contribute an enormous amount of time, energy, and ideas to the Association. More than 150 colleagues are serving today as officers of our Regions, Sections, and the AAA, and many more serve in committee and other important roles. They do so because they believe in the AAA and its work.  While we may have differing individual views on how best to achieve what we wish for in the organization, we are confident that our leaders and community have upheld the shared values of the American Accounting Association.


Kevin Stocks, President
Greg Waymire, President-Elect
Nancy Bagranoff, Past President
Karen Pincus, President-Elect-Nominee
Stacy Kovar, VP-Finance
Tracey Sutherland, Executive Director


Accounting, Finance, and Business Graduate Average Salaries are Neither in the Top Nor the Bottom Top Ten

"Major Decisions," by Kevin Kiley, Inside Higher Ed,  May 24, 2011--- Click Here

Jensen Comment
I always advised my students that things other than starting salaries were often more important. For example, in accounting the most important factors are client exposure (clients often make the best offers to auditors and consultants), the professional nature of interesting work, and the amount and quality of the training are more important for the long haul than starting salaries.

Advancement opportunities are also very important. Consideration should also be given to travel demands (good news to some graduates and bad news to other graduates) and pressures such as compensation based upon sales commissions or other pressure cookers.

Also give consideration to the numbers of opportunities and the locations of where those opportunities take place. Naval Architecture and Marine Engineering graduates are paid well, but they are relatively few in number and face only a limited number of job opportunities and locales. One of my closest friends has a son who graduated as an engineer from Maine Maritime Academy and received all sorts of opportunities in the Merchant Marines. However, after recently getting married the romance of being stationed aboard Far East merchant vessels lost a lot of its appeal with his young and pretty wife living on a horse farm in Conway, New Hampshire. If he'd instead become a N.H. CPA he could probably have great opportunities in the Mt. Washington Valley and live each day on the farm.

And in some cases health and pension plans can be very important. Any career that provides a lifetime pension after only 20-30 years of service provides a tremendous opportunity for double dipping later in life. Consider running for the U.S. Congress where a short four-year stint can get you a lifetime pension with great medical benefits for a lifetime. Of course there's a lot of crap to wade through getting nominated and elected.

To me the most important factor is independence and freedom of time control such as those freedoms afforded to college professors. If I had it to do all over again I would get a PhD in accounting (since accounting PhDs are in such short supply for the tremendous needs of the market). I guess in the 1960s I was the maggot that was dropped by a soaring bird into the sweetest manure pile around.

GirlGeeks --- 

Bob Jensen's threads on careers ---

"Say Anything: The Big Four Defense Of Overtime Exemptions," by Francine McKenna, re:TheAuditors, June 20, 2011 ---

"PricewaterhouseCoopers Headed For A Trial In California Overtime Case." by Francine McKenna, re:TheAuditors, June 17, 2011 ---

Jensen Comment
Francine discusses strategies used by large auditing firms to avoid paying overtime, often in conflict with both state laws and auditing standards. CPA firms are not unique in seeking out ways to avoid overtime pay laws. Similar ploys are taken by hospitals and medical clinics paying residents and universities paying adjunct faculty and graduate students.

Bob Jensen's threads on accountancy careers are at

How Accountants Hide the Pension Bomb in the Public Sectors

"The Hidden State Financial Crisis:  My latest research into opaque state financial statements suggests taxpayers will be surprised by how much pensions are underfunded.," by Meredith Whitney, The Wall Street Journal, May 18, 2011 ---

Next month will be pivotal for most states, as it marks the fiscal year end and is when balanced budgets are due. The states have racked up over $1.8 trillion in taxpayer-supported obligations in large part by underfunding their pension and other post-employment benefits. Yet over the past three years, there still has been a cumulative excess of $400 billion in state budget shortfalls. States have already been forced to raise taxes and cut programs to bridge those gaps.

Next month will also mark the end of the American Recovery and Reinvestment Act's $480 billion in federal stimulus, which has subsidized states through the economic downturn. States have grown more dependent on federal subsidies, relying on them for almost 30% of their budgets.

The condition of state finances threatens the economic recovery. States employ over 19 million Americans, or 15% of the U.S. work force, and state spending accounts for 12% of U.S. gross domestic product. The process of reining in state finances will be painful for us all.

The rapid deterioration of state finances must be addressed immediately. Some dismiss these concerns, because they believe states will be able to grow their way out of these challenges. The reality is that while state revenues have improved, they have done so in part from tax hikes. However, state tax revenues still remain at roughly 2006 levels.

Expenses are near the highest they have ever been due to built-in annual cost escalators that have no correlation to revenue growth (or decline, as has been the case recently). Even as states have made deep cuts in some social programs, their fixed expenses of debt service and the actuarially recommended minimum pension and other retirement payments have skyrocketed. While over the past 10 years state and local government spending has grown by 65%, tax receipts have grown only by 32%.

Off balance sheet debt is the legal obligation of the state to its current and past employees in the form of pension and other retirement benefits. Today, off balance sheet debt totals over $1.3 trillion, as measured by current accounting standards, and it accounts for almost 75% of taxpayer-supported state debt obligations. Only recently have states been under pressure to disclose more information about these liabilities, because it is clear that their debt burdens are grossly understated.

Since January, some of my colleagues focused exclusively on finding the most up-to-date information on ballooning tax-supported state obligations. This meant going to each state and local government's website for current data, which we found was truly opaque and without uniform standards.

What concerned us the most was the fact that fixed debt-service costs are increasingly crowding out state monies for essential services. For example, New Jersey's ratio of total tax-supported state obligations to gross state product is over 30%, and the fixed costs to service those obligations eat up 16% of the total budget. Even these numbers are skewed, because they represent only the bare minimum paid into funding pension and retirement plans. We calculate that if New Jersey were to pay the actuarially recommended contribution, fixed costs would absorb 37% of the budget. New Jersey is not alone.

The real issue here is the enormous over-leveraging of taxpayer-supported obligations at a time when taxpayers are already paying more and receiving less. In the states most affected by skyrocketing debt and fiscal imbalances, social services continue to be cut the most. Taxpayers have the ultimate voting right—with their feet. Corporations are relocating, or at a minimum moving large portions of their businesses to more tax-friendly states.

Boeing is in the political cross-hairs as it is trying to set up a facility in the more business-friendly state of South Carolina, away from its current hub of Washington. California legislators recently went to Texas to learn best practices as a result of a rising tide of businesses that are building operations outside of their state. Over time, individuals will migrate to more tax-friendly states as well, and job seekers will follow corporations.

Continued in article

Jensen Comment
Some accountants naively assume that the new IASB-FASB agreement on fair value accounting will make pension obligations more transparent, especially if the GASB follows suit. What they don't really understand is that obligations that are not recognized in the first place are not going to be made more transparent with fair value accounting if they're hidden in the first place. For ten years Arnold Swartzenagger disclosed four kids and hid a fifth kid from his wife and the rest of the world. With pensions it's more like disclosing one kid and hiding four from the world.

Hi Pat,

In Theory, Exit Values Often Should not be Disaggregated from "In Use" Factors
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 exit value usages for the sake of consistency makes any sense. Especially troublesome are non-financial fixed assets that have high "in use" values and low exit values. For example, ERP information systems, factory robots, computers, etc. may lose most of their exit values 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 the importance of the income statement vis-a-vis the balance sheet.

Exit value changes are pure fiction for held-to-maturity items, especially debt, where transactions costs of often preclude cashing in before maturity preclude taking advantage of changes in exit values. For example, a company that has $100 million of collateralized debt outstanding cannot t usually take advantage of short-term reductions in interest rates due to the transactions costs of paying off or calling in that debt prematurely and paying the transactions cost of issuing new collateralized debt. I was really sorry to see the IASB and the FASB abandon the concept of held-to-maturity since in many instances the HTM classification in FAS 115 prevented a lot of fiction movements in earnings that will never be realized.

I don't view "in use" net present value accounting necessarily more subjective than exit value estimations for items that have very unique values such as valuations of each of the Days Inns hotels where appraisers may differ greatly as the valuation of each and every hotel. I would in fact probably consider estimations of discounted net cash flows of a given hotel as probably being as reliable or even more reliable than real estate appraiser estimates of exit value (due largely to reasons mentioned below for in-use factors).

For nearly a century accounting theorists have advocated that "in use" valuation is preferable to exit valuation that ignores usage. One reason is that appraised values of items like real estate may move up and down with market movements that are will never be realized by a going concern that intends to keep using its assets like factory buildings irrespective of transitory shifts in local markets affecting exit values but not operating profits of the firm. Also there's a possibility that exit values of things factory buildings remain relatively constant while the economic values of the firm fluctuate up and down. Reporting stationary exit values in the presence of wildly changing "in use" economic values can be misleading for going concerns.

In Practice, Exit Values Often Cannot be Disaggregated from "In Use" Factors
The IASB naively assumes that exit values can be estimated apart from "in use" factors. This is very, very often just not the case and this greatly complicates estimation of exit values. Let me begin with a real-world case that took place in Littleton, NH around the turn of the century. I will treat this as a hypothetical case simply because I'm not familiar with the actual numbers. But the case actually transpired.

For decades Market B (a medium-sized super market) pretty much had a monopoly for Littleton-area residents. It operated out of an old but functional building. Suppose the 1999 and 2000financial statements read as follows:

  Market B
Net Book Value
Market B
Exit Value
Market B
Net Book Value
Market B
Exit Value
Land $100,000 $1,000,000 $100,000 $1,000,000
Building $210,000 $2,000,000 $200,000 $0

In use factors affected the 1999 exit value estimation of $2 million because, if the land and building were put on the market, bidders for this real estate would be other supermarket investors taking advantage of the monopoly status of Market B. They could buy this real estate before year 2000 and immediately set up shop as a monopoly supermarket.

Note that "in use" factors affected the real estate appraisal values since the buyers all had the same use in mind for the building. And there were quite a few potential buyers since Market B was very profitable as a monopolist.

In Year 2,000 Market S built a $10 million building literally adjacent to Market B. Potential supermarket buyers lost all interest in buying the Market B's building. The land still had serious value, but the old building was worth virtually zero (or negative) in alternate uses because of its age, condition, and costs of remodeling for alternate uses.

In 2001 Market S buys the Market B real estate for $1,000,000 and pays to tear down the Market B building that in 1999 was valued at $2,000,000 by independent real estate appraisers who had a pretty good idea of what the building was worth as long as there were outside buyers of the building to be put "in use" as a monopoly supermarket in the Littleton vicinity.

In 1999, would the new IASB exit value standard require a valuation of $0 since there was no alternate value of the building other than the value in use as a supermarket monopoly? In fact, if Market B had built a new building elsewhere it probably would have torn down the old building in 1999.

Actually this is very close but not identical to what happened when Buxtons had a supermarket monopoly in the Littleton vicinity. Then the giant Shaws supermarket chain built a huge supermarket literally next door to Buxtons. Buxtons quickly went out of business, and there were zero buyers interested in buying the building as a supermarket to compete with Shaws next door. Shaws bought the Buxton real estate and now leases about 10% of the building space to a drive-in bank. The remaining 90% of the building has been vacant for a decade.

In use factors repeatedly affect real estate values. One of my closest friends down the road owns rental properties scattered about northern New England. A few years back he competed with a number of other bidders willing to pay in the range of $1 million for a small office building in the mill town of Rumford, Maine. My friend acquired the building with a high bid of $1.2 million. Virtually all the buyers intended to keep leasing the building to the Veterans Administration that had an "in use" office operation in that building since World War 2 ended.

My friend invested more in the building to keep the VA happy as a tenant, including the cost of a new elevator. In 2002 my friend seriously considered an offer of $1.5 million to sell the building and mistakenly refused the offer. This was affected by "in use" factors since at the time nobody expected the VA to move out of the building.

But the paper mill towns in northern New England were hit hard times in the past decade. The Rumford economy took a nose dive, and one of its shopping malls became totally vacant. In 2009, the VA announced its intentions to move to the vacant mall. Now my friend has a building with negative economic value in a struggling mill town having great excess capacity for office space. My friend at the moment is seriously considering letting his investment go for taxes since the prospects of getting rental income in excess of property taxes appear to be nil for the foreseeable future.

Interestingly, real estate appraisers still estimate the building to be worth $800,000, but there are zero buyers for a building at its appraised value.

How does the new IASB standard deal with situations where appraised values of real estate are relatively high when there are no buyers willing to take on the property taxes?

Sometimes real estate has to be taken over by towns for taxes before those towns will lower the property taxes enough to attract buyers. This greatly complicates exit value estimations of real estate.

It's not hard to find millions of more examples where "in use" factors affect appraised values, especially in real estate.



Arnold pretty well ruined parts of his life when the that which was hidden was finally revealed. The same thing will happen to local, state, and national governments in the U.S. if hidden pension obligations are ever revealed. It will ruin everything in future elections if voters really understand how bad the hidden entitlements have really become ---

Although all 50 states are in deep financial troubles, what state is in the worst shape at the moment and is unable to pay its bills?
Hint: The state in deepest trouble is not California, although California is in dire straights!

How did accountants hide the pending disaster?

Watch the Video
This module on 60 Minutes on December 19 was one of the most worrisome episodes I've ever watched
It appears that a huge number of cities and towns and some states will default on bonds within12 months from now
"State Budgets: The Day of Reckoning Steve Kroft Reports On The Growing Financial Woes States Are Facing," CBS Sixty Minutes, December 19, 2010 ---

The problem with that, according to Wall Street analyst Meredith Whitney, is that no one really knows how deep the holes are. She and her staff spent two years and thousands of man hours trying to analyze the financial condition of the 15 largest states. She wanted to find out if they would be able to pay back the money they've borrowed and what kind of risk they pose to the $3 trillion municipal bond market, where state and local governments go to finance their schools, highways, and other projects.

"How accurate is the financial information that's public on the states? And municipalities," Kroft asked.

"The lack of transparency with the state disclosure is the worst I have ever seen," Whitney said. "Ultimately we have to use what's publicly available data and a lot of it is as old as June 2008. So that's before the financial collapse in the fall of 2008."

Whitney believes the states will find a way to honor their debts, but she's afraid some local governments which depend on their state for a third of their revenues will get squeezed as the states are forced to tighten their belts. She's convinced that some cities and counties will be unable to meet their obligations to municipal bond holders who financed their debt. Earlier this year, the state of Pennsylvania had to rescue the city of Harrisburg, its capital, from defaulting on hundreds of millions of dollars in debt for an incinerator project.

"There's not a doubt in my mind that you will see a spate of municipal bond defaults," Whitney predicted.

Asked how many is a "spate," Whitney said, "You could see 50 sizeable defaults. Fifty to 100 sizeable defaults. More. This will amount to hundreds of billions of dollars' worth of defaults."

Municipal bonds have long been considered to be among the safest investments, bought by small investors saving for retirement, and held in huge numbers by big banks. Even a few defaults could affect the entire market. Right now the big bond rating agencies like Standard & Poor's and Moody's, who got everything wrong in the housing collapse, say there's no cause for concern, but Meredith Whitney doesn't believe it.

"When individual investors look to people that are supposed to know better, they're patted on the head and told, 'It's not something you need to worry about.' It'll be something to worry about within the next 12 months," she said.

No one is talking about it now, but the big test will come this spring. That's when $160 billion in federal stimulus money, that has helped states and local governments limp through the great recession, will run out.

The states are going to need some more cash and will almost certainly ask for another bailout. Only this time there are no guarantees that Washington will ride to the rescue.

Continued in article

"Public Pensions Cook the Books:  Some plans want to hide the truth from taxpayers," by Andrew Biggs, The Wall Street Journal, July 6, 2009 ---

Here's a dilemma: You manage a public employee pension plan and your actuary tells you it is significantly underfunded. You don't want to raise contributions. Cutting benefits is out of the question. To be honest, you'd really rather not even admit there's a problem, lest taxpayers get upset.

What to do? For the administrators of two Montana pension plans, the answer is obvious: Get a new actuary. Or at least that's the essence of the managers' recent solicitations for actuarial services, which warn that actuaries who favor reporting the full market value of pension liabilities probably shouldn't bother applying.

Public employee pension plans are plagued by overgenerous benefits, chronic underfunding, and now trillion dollar stock-market losses. Based on their preferred accounting methods -- which discount future liabilities based on high but uncertain returns projected for investments -- these plans are underfunded nationally by around $310 billion.

The numbers are worse using market valuation methods (the methods private-sector plans must use), which discount benefit liabilities at lower interest rates to reflect the chance that the expected returns won't be realized. Using that method, University of Chicago economists Robert Novy-Marx and Joshua Rauh calculate that, even prior to the market collapse, public pensions were actually short by nearly $2 trillion. That's nearly $87,000 per plan participant. With employee benefits guaranteed by law and sometimes even by state constitutions, it's likely these gargantuan shortfalls will have to be borne by unsuspecting taxpayers.

Some public pension administrators have a strategy, though: Keep taxpayers unsuspecting. The Montana Public Employees' Retirement Board and the Montana Teachers' Retirement System declare in a recent solicitation for actuarial services that "If the Primary Actuary or the Actuarial Firm supports [market valuation] for public pension plans, their proposal may be disqualified from further consideration."

Scott Miller, legal counsel of the Montana Public Employees Board, was more straightforward: "The point is we aren't interested in bringing in an actuary to pressure the board to adopt market value of liabilities theory."

While corporate pension funds are required by law to use low, risk-adjusted discount rates to calculate the market value of their liabilities, public employee pensions are not. However, financial economists are united in believing that market-based techniques for valuing private sector investments should also be applied to public pensions.

Because the power of compound interest is so strong, discounting future benefit costs using a pension plan's high expected return rather than a low riskless return can significantly reduce the plan's measured funding shortfall. But it does so only by ignoring risk. The expected return implies only the "expectation" -- meaning, at least a 50% chance, not a guarantee -- that the plan's assets will be sufficient to meet its liabilities. But when future benefits are considered to be riskless by plan participants and have been ruled to be so by state courts, a 51% chance that the returns will actually be there when they are needed hardly constitutes full funding.

Public pension administrators argue that government plans fundamentally differ from private sector pensions, since the government cannot go out of business. Even so, the only true advantage public pensions have over private plans is the ability to raise taxes. But as the Congressional Budget Office has pointed out in 2004, "The government does not have a capacity to bear risk on its own" -- rather, government merely redistributes risk between taxpayers and beneficiaries, present and future.

Market valuation makes the costs of these potential tax increases explicit, while the public pension administrators' approach, which obscures the possibility that the investment returns won't achieve their goals, leaves taxpayers in the dark.

For these reasons, the Public Interest Committee of the American Academy of Actuaries recently stated, "it is in the public interest for retirement plans to disclose consistent measures of the economic value of plan assets and liabilities in order to provide the benefits promised by plan sponsors."

Nevertheless, the National Association of State Retirement Administrators, an umbrella group representing government employee pension funds, effectively wants other public plans to take the same low road that the two Montana plans want to take. It argues against reporting the market valuation of pension shortfalls. But the association's objections seem less against market valuation itself than against the fact that higher reported underfunding "could encourage public sector plan sponsors to abandon their traditional pension plans in lieu of defined contribution plans."

The Government Accounting Standards Board, which sets guidelines for public pension reporting, does not currently call for reporting the market value of public pension liabilities. The board announced last year a review of its position regarding market valuation but says the review may not be completed until 2013.

This is too long for state taxpayers to wait to find out how many trillions they owe.

"Whither Berkeley? Whither California?" by J. Edward Ketz, SmartPros, November 2009 ---

When people ignore economic realities and are foolish enough to make and adhere to ill-conceived and faulty budgets, well, they get what they deserve. Take California, for example.

The state has greatly reduced its cash infusions to the University of California system, and recently the university’s regents voted to increase fees (California’s code word for “tuition”) 32%. This has led to a strike at Berkeley and to student demonstrations and to the take-over of some buildings there and at Santa Cruz. This planned tuition hike comes on the heels of layoffs and furloughs and salary cutbacks of many university employees.

Recently, the Academic Senate at Berkeley voted to end financial support for the Department of Intercollegiate Athletics. The Senate even had the gall to ask the Athletics department to repay a loan of $5.8 million. Nothing is sacred anymore! But nothing to fear—I bet the regents will save Berkeley football before it saves the classics department.

The state of affairs at Berkeley will be watched all over because many other public universities are not much different. It is only a matter of time when they too will be faced with the question of how to endure economic sacrifice.

But, it won’t be all bad. Such difficult times provide moments when society can rethink its goals and strategic priorities. How many research universities do we really need in this country? How many administrators do we really need to protect the interests of Croatian students or to assist those who wish to preserve the heritage of Bon Jovi or to supply counselors for those trying to give up Law and Order? And does every town with a population of at least 1,000 really need a branch campus?

The state of California itself is much worse off than Berkeley. Given the state’s penchant to provide welfare to everybody who can generate a creative excuse for an entitlement, it was only a matter of time before the state’s budget was so out of whack even Alec Baldwin and Barbara Streisand could acknowledge it.

State legislators and governors over the last 10 to 20 years are to blame. Not only do they not understand the word “NO” when it comes to spending, they were very short-sighted when it came to revenue generation. They thought the dot-com slush funds would continue to be created out of nothing, though physics and economics indicate otherwise. They then did want virtually every politician does—they are so without original ideas!—they raised taxes on corporations and rich people. Unfortunately, the legislators and governors forgot that corporations and rich people can move, and indeed enough of them have left the state, leaving California in serious trouble.

The woes are so great that it is easy to predict that California will become the first state in U.S. history to declare bankruptcy. I put the odds at least at 50 percent in 2010.

Then the fun begins. California, before or shortly after entering Chapter 11, will ask for help from Washington. While the Obama administration and the Congress likely will administer CPR to the state finances, they really should just admit that the state is insolvent. The moral hazard is huge. If Washington provides assistance, there will be 49 states that will quickly follow suit.

The bankruptcy process itself will be interesting because nobody will know what to do with a state. Creditors might try to win concessions about the state’s budgeting process or membership to state agencies that make economic decisions. They will also attempt to rewrite existing contracts.

The biggest effect will be on bond yields. Any bankruptcy will shoot rates up and this will make future governmental borrowing hard and expensive for all governmental units.

Taxpayers will face a major nightmare. Taxes will skyrocket for those who are not fortunate enough to be retired. Maybe taxpayers will even wake up and realize that they have elected nothing but economic idiots for quite some time. But what do you expect from a state that thinks actors actually know something?

I just love California dreamin’.


Bob Jensen's threads on the sad state of government accounting and accountability ---

Bob Jensen's threads on pension schemes to hide debt ---

"AIG Share Sale Aids Ohio Firefighters Burned by Stock Losses," by Noah Bahayar, Business Week, May 24, 2011 ---

American International Group Inc. investors including Ohio firefighters are being compensated for stock declines dating to Eliot Spitzer’s 2004 probe as the insurer raises funds to move beyond a U.S. rescue.

AIG will use $550 million from a share sale scheduled for today to pay for a settlement reached last year in a securities- fraud case brought by investors led by Ohio pension funds. The bailed-out insurer and U.S. Treasury Department are selling 300 million shares to replace government funds with private capital. The sale would raise about $9 billion at yesterday’s closing share price, with two-thirds going to Treasury.

Chief Executive Officer Robert Benmosche, 66, has been working to resolve legal disputes tied to probes by Spitzer, who won a $1.64 billion settlement with AIG in 2006 when he was New York attorney general. Benmosche needs to attract private investors as Treasury seeks to lower its stake in the New York- based insurer from 92 percent.

“The new shareholders, after day one of this share sale, they absolutely want a clean slate,” said Roddy Boyd, author of “Fatal Risk: A Cautionary Tale of AIG’s Corporate Suicide.” AIG’s management has “enough competitive pressures out there, having sold their crown jewels, that they don’t need things weighing on the share price.”

AIG has slipped 38 percent this year through yesterday in New York trading as the insurer was forced to add $4.2 billion to reserves after disclosing a shortfall in February. Benmosche, AIG’s fifth CEO since 2005, has sold the company’s biggest non- U.S. life insurance units to help repay the bailout.

‘Better Trajectory’

The 2006 settlement resolved Spitzer’s allegations that AIG misled investors, faked bids and cheated workers’ compensation programs. The deal, which Spitzer said would “send AIG off on a better trajectory,” failed to restore investor confidence in the firm and fueled the insurer’s disputes with other states, rival insurers, investors and ex-executives.

Record losses in 2008 cast doubt on whether AIG could compensate investors hurt in 2004, said Thomas A. Dubbs, senior partner for Labaton Sucharow LLP and lead counsel for the Ohio funds, which provide for the retirement of firefighters, police officers and teachers. In 2010, as AIG returned to profit and struck a deal to regain independence, Benmosche agreed to settle the case for $725 million, with an initial $175 million payment.

Raising the rest through the share offering was “a creative and outstanding result, given that in the fall of 2008, many people believed AIG might not survive,” said Dubbs.

The agreement also covered public pension funds in New Mexico, Mississippi and California. The group said AIG had fraudulently inflated results, causing the share price to plummet when the deception was uncovered.

‘Restoring the Value’

The accord allows “AIG to continue to focus its efforts on paying back taxpayers and restoring the value of our franchise,” said Mark Herr, a spokesman for the insurer. AIG will use remaining proceeds from its portion of the share sale for general corporate purposes, the company said May 11.

AIG resolved legal disputes in 2009 with former CEO Maurice “Hank” Greenberg, who was forced out during the Spitzer probe. The insurer agreed to reimburse as much as $150 million in legal fees for Greenberg and ex-Chief Financial Officer Howard Smith.

State insurance regulators and AIG’s rivals said the Spitzer settlement didn’t account for all of the firm’s deception in shortchanging workers’ compensation pools and demanded additional funds. Benmosche agreed in December to pay $100 million in fines and $46.5 million in taxes to a group of state regulators.

Continued in article

From The Wall Street Journal Accounting Weekly Review on March 30, 2007

Ernst Censure Over Independence, Agrees to $1.5 Million Settlement
by Judith Burns
Mar 27, 2007
Page: C2
Click here to view the full article on ---

TOPICS: Accounting, Advanced Financial Accounting, Auditing, Auditing Services, Auditor Independence, Financial Accounting, Sarbanes-Oxley Act, Securities and Exchange Commission

SUMMARY: Ernst & Young (E&Y) "was censured by the Securities and Exchange Commission (SEC) and will pay $1.5 million to settle charges that it compromised its independence through work it did in 2001 for clients American International Group Inc. and PNC Financial Services Group. "Regulators claimed AIG hired E&Y to develop and promote an accounting-driven financial product to help public companies shift troubled or volatile assets off their books using special-purpose entities created by AIG." PNC accounted incorrectly for its special purpose entities according to the SEC, who also said that "PNC's accounting errors weren't detected because E&Y auditors didn't scrutinize important corporate transactions, relying on advice given by other E&Y partners.

1.) What are "special purpose entities" or "variable interest entities"? For what business purposes may they be developed?

2.) What new interpretation addresses issues in accounting for variable interest entities?

3.) What issues led to the development of the new accounting requirements in this area? What business failure is associated with improper accounting for and disclosures about variable interest entities?

4.) For what invalid business purposes do regulators claim that AIG used special purpose entities (now called variable interest entities)? Why would Ernst & Young be asked to develop these entities?

5.) What audit services issue arose because of the combination of consulting work and auditing work done by one public accounting firm (E&Y)? What laws are now in place to prohibit the relationships giving rise to this conflict of interest?

Reviewed By: Judy Beckman, University of Rhode Island

Bob Jensen's threads on audit firm professionalism and independence are at

Bob Jensen's threads on Ernst & Young are at

Teaching Case on Auditing, Regulation, Sarbanes-Oxley Act, SEC, Securities and Exchange Commission

From The Wall Street Journal's Accounting Weekly Review on June 10, 2011

U.S. Falls Behind in Stock Listings
by: Aaron Lucchetti
May 26, 2011
Click here to view the full article on

TOPICS: Auditing, Regulation, Sarbanes-Oxley Act, SEC, Securities and Exchange Commission

SUMMARY: "A combination of mergers, fewer U.S. IPOs, lower listing costs abroad and a shift in how investors and stockbrokers do their jobs has driven down the number of U.S. stock listings by a startling 43% since the peak in 1997-all during a period when the number of listings outside the U.S. has more than doubled." The article begins by describing the LinkedIN Corp. executives participation in ringing the opening bell on May 26; the ringing of the closing bell was done by the head of Sybase in honor of a golf tournament, but that company is no longer listed on the NYSE because it has been taken over.

CLASSROOM APPLICATION: Questions ask students to understand the overall scenario described in the article as well as the impact of regulation on companies undertaking listings on U.S. stock exchanges. The article could be used in any course covering regulation, such as auditing, and the role of stock exchanges, such as a financial reporting class.

1. (Introductory) Overall, what has been the trend in new listings (initial public offerings, or IPOs) on U.S. stock exchanges as described in this article?

2. (Introductory) Access the interactive graphic related to the article. What are the locations of the stock exchanges competing for major listings that are depicted in the graphic? Describe the trend in activity on each of these exchanges and in total for the time period covered.

3. (Introductory) What recent merger agreement has been made by the company that owns the New York Stock Exchange (NYSE)? What is the strategy behind that merger? (Hint: the related video will be most helpful with this question.)

4. (Advanced) What is the impact of regulation, such as complying with Sarbanes-Oxley, on companies' willingness to launch IPOs on U.S. exchanges as opposed to elsewhere?

5. (Advanced) What other costs besides regulatory compliance were cited by HaloSource, the Seattle-based water-purification company, in deciding to list its shares in London as opposed to listing in the U.S.?

Reviewed By: Judy Beckman, University of Rhode Island

Administration Isn't Serious About Regulatory Reform
by Nancy A. Nord, Commissioner, Consumer Product Safety Commission and others
Jun 01, 2011
Page: A18


"U.S. Falls Behind in Stock Listings," by Aaron Lucchetti, The Wall Street Journal on May 26, 2011 ---

Executives from LinkedIn Corp., reveling in their enormously successful initial public offering last Thursday, rang the New York Stock Exchange's opening bell. Big money, big smiles, the kind of moment that made the NYSE the Big Board.

The day's closing ceremonies told a different tale: The head of Sybase, in honor of a golf tournament it sponsored, rang the bell to end the day's trading. The firm, having been taken over by a European company, is no longer listed on the Big Board.

The steady decline in the number of stocks listed in the U.S. finally reached the point this year where both of the nation's big stock exchanges took dramatic action—NYSE Euronext agreeing to a foreign takeover, and then Nasdaq OMX Group trying unsuccessfully to bust that up and take over the NYSE itself.

A combination of mergers, fewer U.S. IPOs, lower listing costs abroad and a shift in how investors and stockbrokers do their jobs has driven down the number of U.S. stock listings by a startling 43% since the peak in 1997—all during a period when the number of listings outside the U.S. has more than doubled.

The result is some 3,800 fewer companies trade on the U.S. exchanges today than in 1997, according to consulting firm Capital Markets Advisory Partners. Abroad, there are nearly eight times as many listings as in the U.S., with Hong Kong, China and India among the leading venues.

"We're losing the ecosystem that has helped buoy the U.S. economy over decades," said Kate Mitchell, co-founder of Scale Venture Partners, a Silicon Valley venture-capital firm.

The U.S. exchanges aren't competitive for some large global IPOs, according to Nasdaq Chief Executive Robert Greifeld. "You see companies such as Prada who in the past would list here in the States," he said in April, blaming in part a "fractured message coming out of the U.S." as the two exchanges compete fiercely against each other. Italy's Prada SpA plans to list in Hong Kong. More From Deal Journal

NYSE's Niederauer on the Decline Nasdaq's Greifeld on Global Competition for Stock Listings

U.S. exchanges will certainly continue to attract some big IPOs. U.S. exchanges remain a draw for companies in industries such as social media, where U.S. investors are willing to pay a high price because they see a burgeoning profit opportunity. Looming in future years are public offerings from companies like Facebook Inc., Groupon Inc. and Twitter Inc. that are expected to be as splashy as LinkedIn's debut or more so.

Large consumer-product companies with many of their employees in the U.S. also tend to be more loyal to a U.S. stock listing. And several smaller IPOs are on tap soon, such as Spirit Airlines and Freescale Semiconductor Holdings.

But NYSE Euronext CEO Duncan Niederauer has acknowledged that the heyday of U.S. exchanges in listing newly public companies is long gone. It is one reason he has fought for the deal to be acquired by Deutsche Börse AG, he said in an interview last month.

NYSE executives say that being more global will make them more attractive for emerging-market companies looking to list their stocks somewhere in addition to their home markets, and also will position the NYSE to be a better partner for exchanges in emerging economies that want a joint venture or merger.

"The capital markets are global just like every other industry," Mr. Niederauer said. "No matter what happens in the U.S., there are 5,000 more public companies in China" coming to the market in the next 10 to 15 years. Mr. Niederauer is expected to be the head of the combined NYSE-Deutsche Börse if the deal is approved by shareholders and regulators. U.S. antitrust officials blocked Nasdaq's bid for the NYSE this month.

One of the leading reasons for U.S. exchanges' difficulty in gaining more listings is a prolonged slump in U.S. initial public offerings. The annual supply of U.S. IPOs since 2000 has averaged just 156, down 71% from the pace in the 1990s, according to Capital Markets Advisory.

Some U.S. start-ups that in the past might have turned to a U.S. exchange when they needed capital now list abroad, where fees are lower and they don't face costs such as complying with the Sarbanes-Oxley corporate-governance law.

Other closely held companies get capital by borrowing, rather than going public, amid today's historically low interest rates.

And many more private companies now simply sell themselves to a larger company. In technology, especially, cash-rich behemoths like Google Inc. and Intel Corp. are on the prowl, making offers that start-ups and entrepreneurs find hard to resist.

Skype Technologies SA filed for an IPO last August and was headed for a listing on the Nasdaq Stock Market, but this month the Internet phone company instead decided to sell itself to Microsoft Corp. for $8.5 billion.

A Bay Area technology company called BigFix Inc. worked on an IPO for nearly three years and had even selected a Nasdaq ticker symbol. But amid a choppy stock market last summer, plus an earlier hiccup in the company's growth rate, it dropped the plan and accepted a buyout offer from International Business Machines Corp.

Continued in article

Bob Jensen's threads on corporate governance ---

"Updating A Security Program," by Jerry Trites, IS Assurance, June 11, 2011 ---

Companies that have a security policy (don't all of them?) need to update it regularly. This has been a basic precept of good security. But in modern times, it still is not always done and the times point even more than ever to the need for it.

Ernst & Young has released a document called "Information Security in a Borderless World" in which it points out, based on a survey, that many companies feel their security risk has increased. The reasons relate to the increasing incidence of global attacks, the increase in cloud computing and the use of mobile devices. On the latter, the study points out that banning mobile devices will actually increase security, contrary to the instincts of some companies.

Continued in article

Download the article:

What I found interesting is that this tidbit was posted by Jerry at 3:30 a.m. I don't know whether he was up that early or had just not yet gone to bed.

Win Some and Lose Some:  Some Good News for Ernst & Young
"High Court Denies Suit Against E&Y Over Time-AOL Deal," by Samuel Howard,, June 13, 2011 ---
Thank you Caleb Newquist for the heads up!

The U.S. Supreme Court on Monday declined to hear an appeal brought by an AOL Inc. investor alleging that Ernst & Young LLP approved tainted financial statements related to Time Warner Inc.'s merger with AOL.

In rejecting the petition for certiorari, the high court dashed AOL investor Dominic Amorosa and co-petitioner attorney Christopher Gray’s claims that the Second Circuit failed to properly apply the Securities Litigation Uniform Standards Act of 1998 when it dismissed the fraud suit in February.

The decision brings an end to 2003 suit claiming that Ernst & Young, the independent auditor for AOL, Time Warner and the merged company, engaged in fraud and abetted the companies' fraud when it issued audited financial statements approving the companies' allegedly faulty accounting.

"My client and I believe that the certiorari petition raised significant and unsettled questions of law concerning an 'opt-out' securities plaintiff’s right to pursue individual claims under the Securities Exchange Act and state law," petitioner Christopher Gray said. "While we are disappointed with the denial of certioriari, obviously not every case can be heard by the U.S. Supreme Court on the merits and we look forward to moving on to other matters."

The Second Circuit found that Amorosa had failed to state a claim for loss causation because none of the events he identified as corrective disclosures addressed AOL’s accounting practices or in any way implicated Ernst & Young’s June 1999 audit opinion.

The petitioners argued that the high court previously established that a corrective disclosure explicitly reflecting the alleged false statement is not required state such a claim.

Amorosa and Gray also challenged the Second Circuit's finding in its Feb. 2 dismissal that SLUSA preempted Amorosa's state law claims.

SLUSA defines cases that are to be considered preempted as covered class actions — cases that seek damages for more than 50 people and that are joined, consolidated or otherwise proceed as a single action — but it does not preempt state law claims in individual securities lawsuits like Amorosa's, the petitioners argued.

Continued in article

Bob Jensen's threads on Ernst & Young are at

"PwC & Puma produce first global environmental P&L account,"  by Rachael Singh, Accountancy Age, May 27, 2011 --- Click Here

PUMA HAS UNVEILED the first global environmental profit and loss account, with the help of PwC and analysts Trucost. It is the first time water usage and carbon emissions have been monetised.
The sportswear retailer values both commodities for 2010 to be in the region of €94.4m (£81.9m).

Trucost worked on collating the data with PwC organising and reporting the findings as well as valuing the commodities. The Puma board was hoping to complete the environmental P&L alongside its annual report however, it missed the deadline and has released the information as a standalone statement. In future the annual report will contain the environmental information as part of its financial statements.

Continued in article

Triple Bottom Reporting
"Sustainability reporting: Seven questions CEOs and boards should ask," Ernst & Young, May 2011 --- Click Here$FILE/Seven_things_CEOs_boards_should_ask_about_climate_reporting.pdf

1. Who issues sustainability reports?

More than 3,000 companies worldwide, including more than two-thirds of the Fortune Global 500.

2. Why report on sustainability if you don't have to?

Increasingly, external stakeholders such as institutional investors expect it. Reporting can also bring operational improvements, strengthen compliance, and enhance your corporate reputation.

3. What information should a sustainability report contain?

Reports should contain key performance indicators relevant to the reporter’s industry. Four principles for deciding what to include are materiality, stakeholder inclusiveness, sustainability context, and completeness.

4. What governance, systems and processes are needed to report on sustainability?

Governance requires a high-level mandate and clear reporting lines. Also needed: robust systems and processes that help companies collect, store and analyze sustainability information.

 5. Do sustainability reports have to be audited?

Not yet. But they are being more closely monitored than ever before. As this trend continues, users of sustainability information will come to expect that the information has been validated by a reliable third party.

6. What are the challenges and risks of reporting?

Sustainability reporting presents many challenges, including data consistency, striking a balance between positive and negative information, continually improving performance and keeping reports readable and concise.

7. How can companies get the most value out of sustainability reporting?

Sustainability reports should be mandatory reading for all employees, and can be a valuable tool for communicating with external audiences as well. Setting targets in the form of KPIs also forces the organization to meet publicly stated goals, which makes reporting an accountability tool.

Download the full report: Seven questions CEOs and boards should ask about triple bottom line reporting

Continued in article

Bob Jensen's threads on triple bottom reporting are at

Thomas B. Fordham Foundation (education research) ---

Online Instructional Resources: Faculty Development Programs at Michigan State University ---

eLearn Magazine ---

First Monday ---

Educause ---

A Must Read
Educause:  Emerging Trends in Education Technology

Educause and the New Media Consortium have released the 2011 Horizon Report, an annual study of emerging issues in technology in higher education. The issues that are seen as likely to have great impact:

Bob Jensen's threads on education technology are at

Nobody Reads Financial Statements Any More
"No-one Reads Any More,"
by Paul Kedrosky, Infectious Greed, May 15, 2011 --- Click Here

Also see
"Word Power: A New Approach for Content Analysis"
by Narasimhan Jegadeesh (Emory University - Department of Finance) and  Andrew Di Wu (University of Pennsylvania - The Wharton School)
SSRN, April 2011

We present a new approach in financial content analysis to determine the strength of various words in conveying positive or negative tone. We apply our approach to quantify the tone of 10-K filings and find a significant relation between document tone and market reaction for both negative and positive words. Previous research has not been successful using positive words to quantify tone. We find that our measure of positive and negative tone is significantly related to filing period returns after controlling for factors such as earning announcement date return and accruals, while the earlier approaches in the literature are not. In addition, we find that the appropriate choice of term weighting in content analysis at least as important, and perhaps more important, than a complete and accurate compilation of the word list. We find that the market underreacts to the tone of 10-K’s, and this underreaction is corrected over the next two weeks.

Teaching Case on Fair Value Accounting Standards

From The Wall Street Journal Accounting Review on May 20, 2011

"Fair Value" Accounting Guidelines Tweaked
by: Michael Rapoport
May 14, 2011
Click here to view the full article on

TOPICS: Advanced Financial Accounting, Fair Value Accounting, Fair-Value Accounting Rules, International Accounting, International Accounting Standards Board, Valuations

SUMMARY: In furthering their convergence effort, the FASB and IASB are changing promulgated standards to provide a more consistent definition of fair value. As described in the article, most of the specific changes are relatively minor but are designed to achieve improvements in convergence. "Perhaps the most significant changes [result in requirements for companies to] disclose more about the processes and assumptions they use in their level 3 valuations." Changes also require disclosure of any movements of securities between Levels 1 and 2 of assets subject to fair value measurements.

CLASSROOM APPLICATION: The article is useful to introduce the topics of convergence and/or fair value measurement in U.S. GAAP and International Financial Reporting Standards. Instructors wishing to direct their students to investigate the Accounting Standards Update (ASU) in the U.S. and the promulgated IFRS 13 may wish to delete the remainder of this paragraph from student assignments. The Accounting Standards Update on which this article is based is No. 2011104, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The international authoritative guidance is IFRS 13, Fair Value Measurement.

1. (Advanced) Describe the process of convergence of U.S. and international accounting standards. What factors are driving this convergence effort?

2. (Introductory) How significant were the changes to U.S. GAAP discussed in this article? How significant were the changes to IFRS? Explain any difference in your answers between the two.

3. (Advanced) What is fair value? Why must promulgated accounting standards include a definition of this concept?

4. (Advanced) How is fair value measured under U.S.GAAP and IFRS?

5. (Advanced) What are the three levels of measuring fair value under U.S.GAAP and IFRS? What new disclosures must be made in U.S. GAAP reporting about assets measured at fair value? Identify your source for this information. Explain what benefits you think will be provided by these disclosures

6. (Advanced) When is this new standard to be applied by firms reporting under IFRS? How will this accounting change be handled? Identify your source for this information.

Reviewed By: Judy Beckman, University of Rhode Island


""Fair Value" Accounting Guidelines Tweaked." by: Michael Rapoport, The Wall Street Journal, May 14, 2011 ---

Accounting rule makers tweaked their guidelines for valuing assets based on market prices, a move that will bring U.S. and international accounting rules closer together and will require companies to disclose more about how they value their most exotic assets.

The changes adopted by the Financial Accounting Standards Board and the International Accounting Standards Board will provide a more consistent definition of "fair value," which is the market value or the closest approximation of it. Though most of the specific changes are relatively minor and won't affect the core aspects of how companies calculate fair value, the move better aligns U.S. and global accounting rules on asset valuation.

Perhaps the most significant changes affect companies' disclosures about their "Level 3" assets, which are the risky, illiquid securities valued using a company's own estimates and models rather than market prices. Companies will have to disclose more about the processes and assumptions they use in their Level 3 valuations. They will also have to discuss what might happen to the company's valuations if the factors they are using were to change.

Companies will have to disclose any movements of securities between the other two classes of fair-value assets: Level 1, those valued strictly using market prices, and Level 2, those for which a blend of market prices and a company's own models are used.

The fair-value changes are part of the rule makers' "convergence" project, their attempt to bring U.S. and international rules closer together in an effort to standardize the accounting rules used world-wide. The Securities and Exchange Commission is expected to vote later this year on whether U.S. companies should switch to using international rules altogether.

Most companies will adopt the fair-value measurement changes in early 2012.

Bob Jensen's threads on fair value accounting are at

"Telling It as It Is (to new first-year students), by Craig Stark, Inside Higher Ed, June 6, 2011 ---

Jensen Comment
This article, perhaps appropriately, does not go into the ins and outs of choosing a major upon arrival at a college or university. With a few exceptions, this is perhaps a good idea except in certain majors where there prerequisite first-year courses are essential such as in engineering and pre-med. For accounting, the prerequisite first courses can usually be delayed until the sophomore year. But the above article really does not deal with choosing a major early on before students learn a lot about education and careers during their first year on campus. Much of what they learn comes from informal interactions with students who are in their second, third, fourth, and higher levels of study. I think it's a mistake for general curriculum teachers to try to sell students on particular types of majors or particular types of politics. Let students sort these things out for themselves as they advance through the first and even the second years of study.

This article does talk about debt loads. I personally think that students in the first term of college should learn about personal finance, tax issues, and debt risk since many of them will make horrible mistakes in college and after college.

Bob Jensen's threads on personal finance helpers ---

"The Value of a Humanities Degree: Six Students' Views," by Jackie Basu et al., Chronicle of Higher Education, June 5, 2011 ---

"Toward a Plausible Rationale for the Humanities," by Frank Donoghue, Chronicle of Higher Education, June 3, 2011 ---

Bob Jensen's threads on Humanities Versus Business ---


"The Risks of Quantification," by William Byers, Harvard Business Review Blog, May 18, 2011 --- Click Here

Quantification — describing reality with numbers — is a trend that seems only to be accelerating. From digital technology to business and financial models, we interact with the world by means of quantification.

While we all interact with the world through more-or-less inflexible models, mathematics contributes to this lack of flexibility because it is seemingly precise and objective. Even though mathematical models can be very complex, you can use them without understanding them very well. A trader need not really understand the financial engineering models that he may use on daily basis. This uncritical acceptance amounts to the assumption that reality is identical to our rational reconstruction of reality — for example, that the economy or the stock market is captured by our latest model.

Hitting the bottom line is certainly easier when you know with precision what that bottom line is. Numbers give you this precision, making you feel more secure about where you are going — higher revenues, lower costs. Defining the risk of an unlikely event may make us feel like we've dealt with the threat. This is part of the contribution of the
"quants" on Wall Street, people with doctorates in math and physics. They bring with them a culture of quantification that they carry over from the mathematical and physical sciences and then apply to economic and financial situations. The complex mathematical models that they use may be brilliant, but the better they are the greater their potential is to misrepresent the actual, human situation that they are looking at. Because they give people like CEOs and politicians the idea that everything is understood and under control, these models often have the perverse effect of generating new, unanticipated problems.

What we misunderstand is that introducing mathematics and quantification into any situation subtly changes that situation and this needs to be taken into account. We are attached to our analytic and computational tools and have become blind to their limitations.

Consider the following four issues:

  1. Statistical models are all based on the notion of randomness, but no one can really understand randomness. Many people use the word random without realizing that random means what it says — randomness cannot be predicted or controlled. A model of randomness is no longer true randomness.
  2. Because they are logically consistent, mathematical models screen out ambiguity. Ambiguity is real, but business and financial models have little to no room for it. Ambiguity arises whenever there are two (or more) courses of action that are equally important yet conflict with one another. For example, we need nuclear reactors to solve some of our energy needs and to mitigate global warming. At the same time, nuclear power, as we see from Japan, comes with huge downsides. This same ambiguity is at the heart of most policy and business decisions, but mathematical models have taken out the ambiguity.
  3. Putting a situation into numbers enforces the belief that things are linear and events are necessarily comparable since for any two numbers one is larger and one is smaller. Suppose that you modeled teaching on a scale that goes from 1 to 10. You would conclude that a teacher with a score of 8.3 was better than one with 6.8, but this would inevitably ignore all kinds of qualitative factors. Models simplify things by ignoring certain aspects of the situation, but we can never be sure which factors should be included and which should be omitted.
  4. Any system that involves human behavior, like economics or finance, is inherently self-referential. We are all participants in, not just observers of, these systems. Self-referential systems are notoriously difficult to control and predict because they are often chaotic, not deterministic. Most mathematical models do not take this element of self-reference seriously and anyhow chaotic systems, by definition, cannot be predicted.

How do we make use of the realization that uncertainty is inevitable and our best models have blind spots? Simple acknowledgment that uncertainty is unavoidable already changes things in a fundamental way. However, this acknowledgment must be authentic and must overcome our psychological aversion to uncertainty. Uncertainty tends to make situations more complex and, therefore, projects more costly — another reason why it tends to be ignored or downplayed.

Continued in article

Bob Jensen's threads on what went wrong with accountics research ---

"Can Value Be Brought Back to the Auditor's Report? A Tale of Two Systems," by Jim Peterson, re:Balance, May 19, 2011 ---

Is it the best of times, in the struggle to re-introduce value into the traditional auditor’s report – or the worst of times? The age of wisdom or the age of foolishness?

Latest to join the Dickensian-length of characters is the International Auditing and Assurance Board, which on May 16 released its consultation paper, “Enhancing the Value of Auditor Reporting: Exploring Options for Change” (here).

Compared to the others, whom to list takes up three full pages of its appendix, the IAASB brings the essential combination of intelligence and technical skills. Well it should, charged with the promulgation of international standards on auditing (ISA’s), thus conversant with such abstruse but centrally relevant topics as the auditor’s responsibility for published information other than financial statements (ISA 720), and use of “emphasis of matter” and other paragraphs in an auditor’s report (ISA 706). 

Among the most prominent of those heard from, and least likely to offer substantive contributions, is the United Kingdom’s upper legislative chamber, whose Economic Affairs Committee has this spring gotten its lordly knickers in a twist over the bogus suggestion of a malign influence of international accounting standards on the crisis-era reporting of the British banks (here), and also prodded the UK’s Office of Fair Trading into an inquiry as to the market dominance of the Big Four (here) – yet another tedious exercise destined to yield neither surprises nor constructive suggestions. 

Joining the Lords in fullness of volume and emptiness of ideas has been EU markets commissioner Michel Barnier, whose “green paper” consultation served mainly to remind anyone interested of the capacity of European bureaucrats to sacrifice forests of trees to document the lowest-hanging fruit on a fragile bush (here). 

Continued in article

Jensen Comment
This is a good article, although I would've changed the wording to "Can More Vlue Be Brought Back to ..." since I do not agree with Jim regarding the lack of value in present auditor reports.

Jim is saying some of what I've been saying about "pass-fail" audit report cards ---  but Jim says it better.
"The PCAOB's Concept Release: What Might a Truly Useful Auditors' Report Actually Say?" by Jim Peterson, re:Balance, June 28, 2011 ---

Bob Jensen's threads on professionalism in auditing are at

Deferred Tax Asset Teaching Case

From The Wall Street Journal Accounting Weekly Review on May 27, 2011

Sony Expects Hefty Loss
by: Juro Osawa
May 24, 2011
Click here to view the full article on

TOPICS: Earning Announcements, Earnings Forecasts, Income Taxes, Supply Chains, Tax Deferrals

SUMMARY: "Sony Corp. warned it expects to post an annual loss of $3.2 billion, reversing a previous prediction of a return to profitability as the Japanese electronics giant struggles to recover from the March 11 earthquake and tsunami. Sony said it would take a $4.4 billion write-off on a certain portion of deferred tax assets in Japan, in what would be the company's third straight year of red ink....Sony said that under U.S. accounting standards, a third straight year of losses from the part of the company's operations based in Japan-due partly to the yen's strength-raised questions over the validity of its deferred tax assets in Japan."

CLASSROOM APPLICATION: The article is excellent for class use to cover deferred tax asset valuation allowances but it also touches on supply chain issues. The article is as well useful to discuss management forecasts (guidance), interim and annual reporting practices in Japan, foreign private issuers' filings on Form 20-F, and Sony's use of U.S. GAAP. One question also asks the students to consider whether the effects of the Great East Japan Earthquake and tsunami should be expected to be treated as extraordinary under U.S. GAAP. By the time students answer this last question, the company should have made its filing on Form 20-F which will allow for verification of the assessment.

1. (Introductory) Summarize your understanding of the announcement that Sony has made and that is reported in this article. For what time period is the company reporting? In your answer, comment on the usual fiscal year-end date for Japanese companies.

2. (Introductory) What is a deferred tax asset? What is a deferred tax asset valuation allowance?

3. (Introductory) For what reasons did Sony Corp. record deferred tax assets? Why must the company now write them down by establishing valuation allowances? In what reporting period will the company show the charge for this write down as a deduction in determining net income?

4. (Advanced) Why does this deferred tax asset write-down become an "admission that the March disaster has shattered its [Sony's] expectations for a robust current fiscal year"?

5. (Advanced) Access the Filing on Form 6-K which describes the investor briefing regarding the revision of management's forecast of consolidated results that is reported on in thie article. The filing is available at Explain your understanding of the importance of the taxable income shown by "Sony Corporation as an unconsolidated unit and its consolidated tax filing group companies in Japan" to the loss that will be reported by Sony.

6. (Advanced) Why does Sony focus on the impact of the Japanese taxable income on accounting under U.S. GAAP? In your answer, comment on the financial reporting requirements for companies traded on U.S. stock exchanges.

7. (Introductory) What was the impact of the "Great East Japan Earthquake" on sales and operating profits in the last fiscal year? In the current year?

8. (Advanced) Do you think that the impact of the earthquake and tsunami described above will be give extraordinary item treatment under U.S. GAAP? Support your answer.

Reviewed By: Judy Beckman, University of Rhode Island

"Sony Expects Hefty Loss," by: Juro Osawa, The Wall Street Journal, May 24, 2011 ---

Sony Corp. on Monday said it expects to post a $3.2 billion net loss for the just-ended fiscal year, blaming a $4.4 billion write-off on a certain portion of deferred tax assets in Japan, in what would be the company's third straight year of red ink.

The write-off is an admission from the entertainment and electronics conglomerate that the March 11 earthquake and tsunami has shattered its expectations for a robust current fiscal year. While the disaster's direct impact on the company's operating profit wasn't large, the post-quake outlook put Sony in a position where it had to set aside reserves of 360 billion yen on certain deferred tax assets in its fiscal fourth quarter.

Sony lowered its net outlook for the fiscal year that ended in March to a loss of 260 billion yen from the profit of 70 billion yen it forecast in February. In the previous fiscal year, the company racked up a loss of 40.8 billion yen.

The company, however, said it predicts a return to profitability for the current business year through March 2012.

Sony said that under U.S. accounting standards, a third straight year of losses from the part of the company's operations based in Japan—due partly to the yen's strength—raised questions over the validity of its deferred tax assets in Japan. But until March, Sony saw no need to write off the assets.

"Until the quake hit, we had been counting on a considerable recovery in earnings," in the current fiscal year, Sony Chief Financial Office Masaru Kato said at a news briefing.

But conditions have changed drastically since the earthquake and tsunami. In the wake of the disaster, Sony temporarily shut 10 plants in and around the quake-hit region. All but one of those plants have since resumed operations, at least partially.

Sony said the disaster siphoned off 22 billion yen from the company's sales and 17 billion yen from its operating profit in the just-ended business year.

The company left its forecast for operating profit unchanged at 200 billion yen, but lowered its revenue outlook to 7.18 trillion yen from 7.2 trillion yen.

Sony didn't disclose what it expects for the fiscal fourth quarter, but according to a Dow Jones Newswires calculation, it is estimated to have posted a net loss of 389.2 billion yen for the January-March quarter. That compares with a loss of 56.57 billion yen a year earlier.

Like other Japanese auto and electronics makers, Sony continues to face uncertainties because its recovery prospects are partially dependent on parts and materials suppliers, many of which have also been affected by the quake.

"The supply-chain situation should recover significantly in the second half of this fiscal year," Mr. Kato said.

In the current fiscal year, Sony estimates that the quake is likely to have a negative impact of about 440 billion yen on sales and 150 billion yen on operating profit, mainly through supply-chain disruptions.

Despite the quake's expected impact, Sony said it expects that its revenue will increase this fiscal year, and that its operating profit will be about the same as the previous fiscal year.

Continued in article

Bob Jensen's threads on FIN 48 are at


Ernst & Young

To the Point: A U-turn on straight-line lease expense

Today, the FASB and the IASB reversed course on their tentative decision to introduce lease classification and straight-line rent expense into their new accounting model for lessees. The Boards have decided to go back to their exposure draft approach of requiring lessees to recognize interest expense using the interest method and separately amortize the right-of-use asset (generally on a straight-line basis). This approach accelerates lease expense for today's operating leases. Our To the Point publication summarizes what you need to know about these developments.
To the Point: Key differences between IASB's new consolidation guidance and US GAAP

Click Here

The IASB has issued new consolidation accounting guidance that establishes a single consolidation model for all entities. The new guidance is more similar to the guidance for the consolidation of variable interest entities (VIEs) in US GAAP than the current IASB guidance, but it creates new differences between US GAAP and IFRS in some areas. Some longstanding differences also remain. Our To the Point publication highlights some of the significant differences that exist between current US GAAP and the IASB's new guidance.

Bob Jensen's threads on leasing are at


Teaching Case on Microsoft's Purchase of Skype

From The Wall Street Journal Accounting Weekly Review on May 13, 2011

Microsoft Dials Up Change
by: Nick Wingfield
May 11, 2011
Click here to view the full article on
Click here to view the video on WSJ Video

TOPICS: Mergers and Acquisitions

SUMMARY: "Microsoft made an unsolicited bid for the Internet company last month and clinched its deal late Monday...." The price, including taking responsibility for Skype's outstanding debt, totals $8.4 billion.

CLASSROOM APPLICATION: The article is useful for introducing business combinations but also includes discussion of EBITDA and operating profit versus net income as well as the fact that the cash Microsoft will use otherwise might stay overseas and be unavailable for investment. Microsoft has most of its huge cash balance held in overseas locations and would be subject to repatriated earnings tax in order to get access to it.

1. (Introductory) What was the Microsoft stock price reaction to this announcement that it will buy Skype?

2. (Introductory) What are two questions about the value of this investment to Microsoft? In your answer, address the question of how Microsoft can justify a purchase price of $8.5 billion when the company is not making a profit.

3. (Advanced) Skype is "EBITDA positive but doesn't have net income," says Nick Wingfield, a WSJ Reporter, on the related video. What does this statement mean?

4. (Advanced) Why might Skype have operating profit but not net income? In your answer, define these two financial terms.

5. (Advanced) Skype's previous owner, EBay Inc., "...bought Skype in 2005 for around $3.1 billion but took a $1.4 billion charge for the transaction in 2007 after it failed to produce hoped-for synergies." What type of a write down do you think this was? Why does this write down have implications for the current Microsoft purchase?

6. (Introductory) Where is the cash that Microsoft will use to make this purchase? Why is the cash not available to Microsoft in the U.S.? How might the tax implication of using that cash impact the price Microsoft would be willing to pay for Skype?

Reviewed By: Judy Beckman, University of Rhode Island

Microsoft's Pricey Call on Skype
by Martin Peers
May 11, 2011
Page: C20


"Microsoft Dials Up Change," by: Nick Wingfield, The Wall Street Journal, May 13, 2011 ---

Microsoft Corp. racked up a whopping $8.5 billion phone bill to buy Skype SARL even though there were no signs of other serious bidders for the provider of free online video and voice chats, as the software giant moved aggressively to ramp up its growth.

Microsoft made an unsolicited bid for the Internet company last month and clinched its deal late Monday, nixing a planned Skype public offering and short-circuiting any talks with competitors such as Google Inc. and Facebook Inc.

Steve Ballmer, Microsoft's chief executive, defended the price in an interview, saying the deal—the biggest in his company's 36-year history—will let Microsoft "be more ambitious, do more things."

While Facebook, Google and Cisco Systems Inc. had shown interest in Skype, Microsoft was by far the most determined buyer, people familiar with the matter said.

The price tag—three times what Skype fetched 18 months ago—is a sign of just how hungry Microsoft is for growth opportunities—especially in the mobile-phone and Internet markets. Those missed opportunities are increasingly worrisome to Microsoft investors as traditional profit engines, like its Windows software, are showing signs of slowing.

The Skype deal is a gamble by Mr. Ballmer that he can succeed where those that have gone before him have failed: using the phone-and-video-calling service to make money. Microsoft's ambitious goal is to integrate Skype into everything from its Xbox videogame console to its Office software suite for businesses.

Microsoft also hopes Skype can jump-start its effort to turn around its fortunes in the mobile-phone market, an area where it has lagged far behind Apple Inc. and Google. Phones running Microsoft software were just 7.5% of the smartphone market last quarter, according to Comscore Inc.

he Skype purchase comes as the technology industry's momentum is increasingly being fueled by consumers, with the explosive rise of social network Facebook, now at more than 600 million global members, and devices such as Apple's iPad and iPhone reshaping the cellphone and computer markets.

That has pushed many big tech companies that had largely relied on businesses for growth—from Dell Inc. to Cisco—to seek ways into consumer technologies.

Some of those moves haven't paid off, however. Cisco, for example, recently shut down the division that made its Flip video cameras, just two years after acquiring the business.

Whether Microsoft can make a Skype acquisition work—especially at such a rich price—is a question mark. EBay Inc. bought Skype in 2005 for around $3.1 billion but took a $1.4 billion charge for the transaction in 2007 after it failed to produce hoped-for synergies.

EBay decided to shed the business, and sold a 70% stake in Skype to a group of investors led by private-equity firm Silver Lake Partners about 18 months ago. The deal valued all of Skype at a $2.75 billion.

Mr. Ballmer said Microsoft and Skype have far more in common than Skype had with eBay since both companies are in the "communications business." He said communications technologies have been "the backbone" of Microsoft's growth in recent years and that Skype has "built a real business," with more than $860 million in 2010 revenue.

"I think our case for why to bring this together comes from a very different place," he said.

Overall, Skype has more than 170 million active users and 207 billion minutes of voice and video conservations flowing through its service. But despite its widespread use, it has been slow to convert users into paying customers and generate meaningful profits. It had a net loss of $7 million last year.

Continued in article

Bob Jensen's threads on mergers and acquisitions are at

"Rating Agencies Face Crackdown," by Ben Protess, The New York Times, May 18, 2011 ---

Securities regulators are out to tame the credit rating agencies, crucial Wall Street players at the center of the financial crisis.

The Securities and Exchange Commission proposed sweeping new rules on Wednesday to overhaul the rating business — regulations that would force tougher internal controls, potentially curb conflicts of interest and even mandate that the agencies periodically test the competence of their employees.

“These rules are intended to help investors and other users of credit ratings better understand and assess the ratings,” Mary L. Schapiro, chairwoman of the S.E.C., said at a public meeting on Wednesday. “It is a massive proposal,” she said of the plan, which spans more than 500 pages.

The S.E.C.’s five commissioners unanimously agreed to advance the proposals, which are now open for public comment for 60 days.

The agency’s Republican commissioners indicated, however, that they would push for some changes. The proposals “could be life threatening” to small rating agencies,” Kathleen L. Casey, a Republican commissioner, said at the public meeting.

A rating agency, for instance, would have to take on the costs of periodically administering performance exams that would “test its credit analysts on the credit rating procedures and methodologies it uses,” according to a summary of the proposal.

The proposals stem from the Dodd-Frank Act, the financial overhaul law enacted last year. The S.E.C. has already proposed new policies under Dodd-Frank that would strip references to credit ratings from rules that govern securities offerings.

The rating agencies in recent years became a target in Washington, as regulators and lawmakers blamed them for feeding the mortgage bubble by awarding top grades to bonds backed by subprime mortgages. The investments later soured, driving the economy to the brink.

A Congressional panel that chronicled the crisis called the largest rating agencies — Standard & Poor’s, Moody’s Investors Service and Fitch Ratings — “essential cogs in the wheel of financial destruction.”

The problems, critics say, stem from an inherent conflict of interest plaguing the rating agencies’ business model.

Banks and corporations that issue debt must pay the rating agencies to assign their bonds a letter grade. In the lead-up to the crisis, the rating agencies had a heavy hand in the mortgage bond business, as they advised big banks how to earn a top triple-A grade. In a quest for profits, the critics say, the agencies compromised the integrity of their ratings.

The S.E.C.’s proposal intends to mitigate some of those conflicts, which have long hurt the industry’s reputation.

The plan would prohibit analysts from issuing a rating if they also marketed their rating agency’s products or services. Small rating agencies can apply for an exemption from this rule.

The proposal also takes aim at the revolving door between the rating agencies and Wall Street firms that seek the grades.

Under the plan, the rating agencies would have to examine whether their former analysts awarded overly rosy ratings to a firm that later hired that person. In such cases, the rating agencies would have to “promptly determine whether the credit rating must be revised.”

Ms. Casey said that this proposal “threatened to cross the line” into dictating the substance of credit ratings. “I am concerned.

Continued in article

How to Get AAA Ratings on Junk Bonds

  1. Pay cash under the table to credit rating agencies
  2. Promise a particular credit rating agency future multi-million contracts for rating future issues of bonds
  3. 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. ---
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 ---

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 ---


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

Bob Jensen's threads on which the top credit rating agencies got caught giving AAA ratings to junk bonds ---

From Paul Caron on May 10, 2011 ---

Morgan: International Tax Law as a Ponzi Scheme

Ed Morgan (University of Toronto, Faculty of Law) has posted International Tax Law as a Ponzi Scheme, 34 Suffolk Transnat'l L. Rev. ___ (2011), on SSRN. Here is the abstract:

This paper explores the extent to which international tax law is more than the sum of its parts. It does so by examining three recent legal/policy decisions. The 2006 judgement of the Tax Court of Canada in MIL Investments decided that a statutory general anti-avoidance rule of interpretation does not operate to bar the practice of treaty shopping for corporate residence; the 2008 judgement of the United States Tax Court in Jameison determined that the alternative minimum tax credit limitation trumps the Canada-United States tax treaty foreign tax credit as the last-in-time enactment; and the Internationally Agreed Tax Standards issued by the OECD seek to implement a coordinated international standard for tax reporting. These decisions demonstrate that although tax treaty networks and a centralized OECD structure have been put in place, the interpretation and application of these instruments reflect much international law thinking in that they invariably circle back to unilateral state policy.

Bob Jensen's threads on Ponzi Schems ---

Are profit-seeking corporations hopeless sociopaths?
"Business-School Leaders Debate Corporate Responsibility," by Katherine Mangan, Chronicle of Higher Education, May 1, 2011 ---

The nation's financial meltdown and the sweeping regulatory overhaul it sparked are providing business schools with plenty of sobering teaching material about ethics, corporate social responsibility, and the unintended consequences of financial reform, according to participants at the annual meeting here of AACSB International: the Association to Advance Collegiate Schools of Business.

The meeting, which wrapped up on Saturday, included spirited discussions about the role that business schools play in society and the lessons they should be passing on to the next generation of corporate movers and shakers.

More than 1,300 business educators and leaders from 53 countries and territories attended the meeting of the association, which accredits 620 institutions worldwide.

"This isn't just a teachable moment about the financial crisis," said Robert Glenn Hubbard, dean of Columbia Business School and a former chairman of the White House Council of Economic Advisers under President George W. Bush. "It's a teachable moment about how you connect the dots" so another crisis doesn't occur.

In addition to offering courses in corporate governance and ethics, business schools are struggling to educate students about the financial-overhaul legislation, the Dodd-Frank Wall Street Reform and Consumer Protection Act (HR 4173), that was enacted last year.

Many of the business educators here were skeptical about the value of the legislation, which mandated comprehensive regulation of financial markets and greater openness about complex investments called derivatives.

Franklin R. Edwards, director of the Center for the Study of Futures Markets at Columbia Business School, called the legislation "a hodgepodge of regulatory initiatives" that puts regulators in charge, despite their failure to protect consumers in the past.

"If I had to grade it as a professor, I'd be giving it a D-plus," he said. Misgivings About Graduates' Behavior

In another session, Ira A. Jackson, a visiting scholar at the Legatum Center for Development and Entrepreneurship at the Massachusetts Institute of Technology, said business schools should feel "humbled" by the role they may have played in the crisis. Their former students were among the people selling "grenade loans" to their competitors, hoping they would blow up on them, he said.

"Those were our graduates. Why weren't they figuring out how to help working-class people afford homes in a responsible way?" he said.

Arguing against him in the debate-style panel was Aneel G. Karnani, an associate professor of strategy at the Ross School of Business at the University of Michigan. Mr. Karnani explained why he dismisses the idea that corporations should be socially responsible as "useless" and even "dangerous."

Noting the slew of angry letters he received after an essay he wrote appeared in The Wall Street Journal, Mr. Karnani said that arguing against the idea that companies have a duty to act in the public interest "is kind of like coming out against motherhood and apple pie." Putting the Onus on Regulators

Mr. Karnani said business schools should stop demonizing government and regulation and recognize that the fiscal crisis was caused not by a lack of ethics but by a lack of regulation. Publicly held businesses should just follow rules set by the government and not try to solve the world's social problems if doing so cuts into their profits, he argued.

He added that corporate social responsibility is "fundamentally undemocratic" because company officials decide what values they are going to promote instead of letting the government and voters decide.

Mr. Jackson countered that students are demanding that business schools take a more proactive approach.

Continued in article

Islamic and Social Responsibility Accounting ---

Triple Bottom Accounting ---

Ernst & Young

Technical Line: Hedge accounting - is convergence possible?

April 30. 2011
The FASB and the IASB have not attempted to jointly address the differences in their proposed hedge accounting models. This week, the FASB began reviewing responses to questions it had asked constituents about the IASB hedging proposal. The FASB is expected to consider that input as it continues its deliberations on its own model. Meanwhile, the IASB has moved forward separately with its own redeliberations.

Our Technical Line publication compares and contrasts the two hedging proposals and explains how we believe some of the novel concepts the IASB model introduces would work. We also offer our thoughts on how certain aspects of the proposed IASB hedging model should be incorporated into the FASB version.

Jensen Comment
There's an old saying when cable companies are bringing fiber to households:
"The last mile costs more than all the other miles."

The FASB and IASB may well have delayed the most controversial issues in standards convergence to the "last mile" items in that convergence like convergence on hedge accounting standards. At the moment there are quite a few big differences such as hedge accounting for embedded derivatives (that was abandoned by the IASB) and hedge accounting for portfolios where hedged item risks within a portfolio differ from hedging contract risks. These are not small pebbles in the convergence stream.


Thank you for this Tom --- Click Here

Jensen Comment
The IASB cannot seem to distinguish between simplified accounting rules and ambiguity as if ambiguity and subjectivity equate to greater transparency.

The fact is that financial risk and hedging contracts have become exceedingly complex. The IASB thinks they are so complex that auditors and their clients should be allowed to report these contracts according to judgment/judgement rather than bright lines. This is exactly like replacing all the speed limit signs in school zones with signs that read "Please Drive Safely."

The best illustration of replacing "standards" with ambiguity arises is the absurd new IFRS rules for assessing hedge effectiveness. If you want to find illustrations of how identical contracts are accounted for differently by auditors and their clients in financial statements, this is the best, but certainly not the only, place to look.

Thanks Tom!

Accounting Doctoral Programs

PQ = Professionally Qualified under AACSB standards
AQ = Academically Qualified under AACSB standards

May 3, 2011 message to Barry Rice from Bob Jensen

Hi Barry,

Faculty without doctoral degrees who meet the AACSB PQ standards are still pretty much second class citizens and will find the tenure track hurdles to eventual full professorship very difficult except in colleges that pay poorly at all levels.

There are a number of alternatives for a CPA/CMA looking into AACSB AQ alternatives in in accounting in North American universities:

The best alternative is to enter into a traditional accounting doctoral program at an AACSB university. Virtually all of these in North America are accountics doctoral programs requiring 4-6 years of full time onsite study and research beyond the masters degree. The good news is that these programs generally have free tuition, room, and board allowances. The bad news is that students who have little interest in becoming mathematicians and statisticians and social scientists need not apply --- 

As a second alternative Central Florida University has an onsite doctoral program that is stronger in the accounting and lighter in the accountics. Kennesaw State University has a three-year executive DBA program that has quant-lite alternatives, but this is only available in accounting to older executives who enter with PQ-accounting qualifications. It also costs nearly $100,000 plus room and board even for Georgia residents. The DBA is also not likely to get the graduate into a R1 research university tenure track.

As a third alternative there are now some online accounting doctoral programs that are quant-lite and only take three years, but these diplomas aren't worth the paper they're written on ---  Cappella University is a very good online university, but its online accounting doctoral program is nothing more than a glorified online MBA degree that has, to my knowledge, no known accounting researchers teaching in the program. Capella will not reveal its doctoral program faculty to prospective students. I don't think the North American academic job market yet recognizes Capella-type and Nova-type doctorates except in universities that would probably accept the graduates as PQ faculty without a doctorate.

As a fourth alternative there are some of the executive accounting doctoral programs in Europe, especially England, that really don't count for much in the North American job market.

As a fifth alternative, a student can get a three-year non-accounting PhD degree from a quality doctoral program such as an economics or computer science PhD from any of the 100+ top flagship state/provincial universities in North America. Then if the student also has PQ credentials to teach in an accounting program, the PhD graduate can enroll in an accounting part-time "Bridge Program" anointed by the AACSB --- 

As a sixth alternative, a student can get a three-year law degree in addition to getting PQ credentials in some areas where lawyers often get into accounting program tenure tracks. The most common specialty for lawyers is tax accounting. Some accounting departments also teach business law and ethics using lawyers.

Hope this helps.

Bob Jensen

Case Western has a very respected accounting history track in its PhD program, but I'm not certain how many of the accountics hurdles are relaxed except at the dissertation stage.

May 3, 2011 reply from Jim Martin


I have been developing a new topic on the MAAW site - "Advice for
Accounting Ph.D. Students and New Faculty. It includes a bibliography,
some blog notes, and several summaries. Your former student might find it

May 9, 2011 message from Denny Beresford

This is a very nice summary document – suitable both for explaining a public company audit to a business person or an accounting student.



From: Cindy Fornelli []
Sent: Monday, May 09, 2011 10:31 AM
To: Dennis R Beresford
Subject: In-Depth Guide to Public Company Auditing


May 9, 2011

Dear Friend of the CAQ:

I am pleased to share with you the CAQ’s newest publication, the In-Depth Guide to Public Company Auditing.

The booklet is designed for investors and others interested in understanding the external audit process for public companies and role the audit plays in our capital markets.

The In-Depth Guide to Public Company Auditing provides more detail about the audit process than the CAQ’s 2009 Guide to Public Company Auditing, which serves as an introduction and overview of public company auditing.

The CAQ’s continuing dialogue with individual investors indicates that many in the marketplace do not fully understand the scope of the audit process and the responsibilities placed on public company auditors. We hope the In-Depth Guide to Public Company Auditing will help to bridge that information gap.

The new Guide also will inform our future investor education activities. Last month, we launched the “For Investors” section of our Web site,, which provides information about auditing and links to financial literacy resources. Additional investor education activities are planned in the coming months.

The Guide can be accessed at


As always, I welcome any feedback you may have about CAQ publications.


Cindy Fornelli
Executive Director
Center for Audit Quality | 601 13th Street NW, Suite 800N | Washington, DC 20005 

May 10, 2010 message from Jim Peterson

Dear Bob --

With thanks for your posting about my thoughts on the Doty speech -- and a couple words of further observation for your thoughts.

First on the PCAOB's track record to date, it is important I think not to measure by inputs, but by results.  No grown-up would argue in favor of the the history of state-level and AICPA oversight as a satisfactory set of bench-marks, but the absence of beneficial impact on the tumultuous events of the last four years suggests that the question "where were the regulators?" remains appropriate. Counting the number of reports issued on a miniscule sample of the audits of public companies is a little like the police commissioner who claims success for hiring a bunch of new cops, without counting the actual impact on the crime statistics.

As for "hitting the ground running," the agency record on the international front itself is instructive -- the time and money wasted through the early years of frustrated foreign-firm registration and inspection are abysmal. Meanwhile although a blip on the government screen, the agency operates with a budget (and a salary structure!) that are disproportionate and out of line with its record.

(And, by the way, I accept that I am probably in a minority in my hostility to the entire adventure in internal controls reporting -- where the eventual cost to the profession for issuing those clean reports on companies whose own opinions are being litigated even today has yet to be reckoned. Again, the nuanced issue is not a matter of what "has been done," but what the results might have been had something else been done, including leaving the post-Enron era to the cyclical cleansing that I think would have been inevitable without the cost and disruption the SarBox imposed.)

While it may not always come across, I will assert a perspective different from that of McKenna, Turner, Levitt and the other unremitting critics of the profession, whose antagonism seems in my view to seek nothing less than the collapse of the large-firm organizations: namely, that on a career's worth of engagement with friends, partners and clients in the profession, I try to promote the goal of achievable and sustainable delivery of assurance value to the community of users. It is, unfortunately, necessary to be blunt to the point of lack of diplomacy to say that leadership in all sectors has -- following the basic DNA of each of the players -- been sadly lacking in both vision and execution.

Well -- enough. Thanks again and as always I welcome the dialog.

Best regards --


May 10, 2011 Reply from Bob Jensen

Burglar Bars
Hi Jim,

I agree to a point, but what I admire most about the PCAOB is the organization's willingness, from the very beginning, to tackle the myth that a more expensive audit from a Big Four firm is necessarily a superior audit and the myth that the Big Four firms always place investor interests ahead of their clients' interests. In many cases the Big Four audits are mostly conducted by fresh college graduates that are about as effective as Keystone cops going through the motions.

In a way, the PCAOB took over where Abe Briloff left off. Abe also only examined a minuscule portion of the public financial statements and found an even smaller proportion of Big Eight audit failures and evidence of lack of independence.

But one-by-one Abe's anecdotal disclosures of audit failures added up over the years to a point where the accumulated record was far more influential than most any fine or lawsuit. The Big Eight went after Briloff because over time his revelations really did knock them off their high horses. The same thing is happening with the PCAOB audit inspections. Please give them a little more time!

I think Briloff and now the PCAOB are doing more to improve audit professionalism than most any other single thing apart from multimillion losses in court settlements.

And I don't think we can wipe off the SOX successes with a sweep of the pen until we actually study the evidence of these successes and failures. Unfortunately, the biggest SOX successes are like auditing successes in general --- successes in ex ante prevention rather than ex post correction. After SOX, how many clients really invested a significant amount of time and money in improving internal controls so as not to be caught up with weaknesses that might be discovered later on in CPA audits? I think the investments were huge.

To me the real benefits of SOX and auditing in general are in the prevention benefits, and these are literally impossible to evaluate in terms of failures that would've happened had there not been prevention efforts.

It's a lot like the security bars (with fire escape locks)  on all windows and doors of our former San Antonio home.
San Antonio has an extremely high number of car thefts and home burglaries. In part, this is due to the high number of undocumented poor young men in San Antonio who sneaked across the Rio Grande and cannot find suitable jobs. Drug addictions also are heavily to blame, because hard core addicts will take great chances to get money for street narcotics.

We won't ever know the true benefit versus cost of our burglar bars in San Antonio. What we do know is that we never had a burglary when over a third of the other homes in our upscale neighborhood, including those with electronic security, were burglarized. One captured burglar said he skipped our house because of the bars. Instead he hit our immediate neighbor's home and was hauling off possessions of our dear friends when  police arrived at the scene.  How many other burglars passed on by our house while seeking out homes without bars on the windows and doors?

Burglar bars are a lot like investments in internal controls in that the unmeasurable preventative benefits most likely greatly exceed the costs. SOX made companies think more about the effectiveness of their preventative internal controls.

Bob Jensen


2011 PCAOB Standards and Related Rules
Published by the AICPA

This is a good summary of the FASB-IASB Joint Projects and Standards Convergence Initiatives

"Joint Project Watch FASB/IASB joint projects from a US GAAP perspective May 2011," Ernst & Young, 2011 ---

Keeping up with the standard-setting activities of the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) (collectively, the Boards) on their many joint projects can be challenging. But with several major projects in active stages, it’s important that you consider the potential effects of new standards on your company. The Boards recently revised their work plans, announcing delays on certain projects, but are still scheduled to complete work on many of these projects in 2011.

This publication is designed to give you a snapshot of key developments from a US GAAP perspective each month, along with our observations about the potential implications for companies. We also include references to other Ernst & Young publications that provide more background and detail on the projects and proposals. These publications are available at

The following discussion is based on our observations of the standard setter meetings. The Boards are actively redeliberating many of these projects, making tentative decisions that may be different from earlier decisions and those in the exposure drafts (EDs). At this point, the Boards’ decisions and our observations are all subject to change.

Joint projects

Financial instruments ................................ ............................................................... 1

Revenue recognition ................................................................................................. 4

Leases......................................................................................................................... 5

Fair value measurement ..................... ...................................................................... 6

Insurance contracts ................................................................................................... 7

Other joint projects .................................................................................................... 8

Presentation of other comprehensive income .................................................................. 8

Reporting discontinued operations ................................................................................. 8

Consolidation ................................................................................................................ 9

Emissions trading schemes ............................................................................................. 9

Financial instruments with characteristics of equity ...... ................................................. 10

Financial statement presentation ................................................................................... 10

Joint projects timeline .............................................................................................. 11


Ernst & Young

Technical Line: Hedge accounting - is convergence possible?

April 30. 2011
The FASB and the IASB have not attempted to jointly address the differences in their proposed hedge accounting models. This week, the FASB began reviewing responses to questions it had asked constituents about the IASB hedging proposal. The FASB is expected to consider that input as it continues its deliberations on its own model. Meanwhile, the IASB has moved forward separately with its own redeliberations.

Our Technical Line publication compares and contrasts the two hedging proposals and explains how we believe some of the novel concepts the IASB model introduces would work. We also offer our thoughts on how certain aspects of the proposed IASB hedging model should be incorporated into the FASB version.

Jensen Comment
There's an old saying when cable companies are bringing fiber to households:
"The last mile costs more than all the other miles."

The FASB and IASB may well have delayed the most controversial issues in standards convergence to the "last mile" items in that convergence like convergence on hedge accounting standards. At the moment there are quite a few big differences such as hedge accounting for embedded derivatives (that was abandoned by the IASB) and hedge accounting for portfolios where hedged item risks within a portfolio differ from hedging contract risks. These are not small pebbles in the convergence stream.

Thank you for this Tom --- Click Here
Jensen Comment
The IASB cannot seem to distinguish between simplified accounting rules and ambiguity as if ambiguity and subjectivity equate to greater transparency.

The fact is that financial risk and hedging contracts have become exceedingly complex. The IASB thinks they are so complex that auditors and their clients should be allowed to report these contracts according to judgment/judgement rather than bright lines. This is exactly like replacing all the speed limit signs in school zones with signs that read "Please Drive Safely."

The best illustration of replacing "standards" with ambiguity arises is the absurd new IFRS rules for assessing hedge effectiveness. If you want to find illustrations of how identical contracts are accounted for differently by auditors and their clients in financial statements, this is the best, but certainly not the only, place to look.

Thanks Tom!

Bob Jensen's free tutorials on hedge accounting are at

Bob Jensen's threads on accounting standards controversies ---

"State Audits on the Increase," NexusNegiotuator, May 6, 2011 ---

Say the word “audit” and most people will immediately link it to the IRS. But we’re seeing an increase in state audits, as state governments try to replace missing revenues. We’re also hearing that these audits can be unpleasant and difficult experiences.

Audits are on the increase in California, New York, New Jersey, and Idaho. California announced in late 2010 that it had California’s tax collection agencies are getting an additional $226 million to hire more auditors and tax collectors and pay for new enforcement initiatives, including hiring attorneys in other states to assist with cross-border nexus collections and researching land records to find out-of-state property owners.

In New York, restaurant owners recently complained about state auditing methods that frequently changed, or created unrealistic sales projections, on which companies were then assessed uncollected sales tax. Owners also complained of confrontational auditors and unprofessional behavior.

In Illinois, officials recently announced the addition of 50 new auditors, bringing the state total to just under 200, to help with the increasing audit workload. And Connecticut announced it would be increasing the number of audits conducted in 2011 by 10% over previous year’s rates.

As states look to increase audits, one of the areas they are specifically targeting is out-of-state taxpayers who have created nexus for themselves in some fashion. For example, many states closely examine land records, looking for owners with out-of-state addresses, or companies that are not also registered as land-owners with the state. In addition, there are some states, including New York, where the failure to file a return can be a red flag. The state is looking to establish that someone has truly severed all ties to the state, rather than simply claiming a new principal residence elsewhere and continuing to maintain property in-state.

As financial pressure on states continues to increase, so to will the number of audits. If you think you may have a possible connection to another state, now is the time to act. There are options available, including a negotiated settlement between you and a state that can limit fines and penalties and unpaid taxes. However, once a state finds you, your negotiating power is limited. Talk to your CPA or tax advisor right away, and take the necessary steps.

The Newness Versus Rigor Tradeoff:  The "rigor" bar has been ratcheting up for the last 20-30 years

"FMA Decisions Are Out," The Unknown Professor, Financial Rounds, May 3 ---

. . .

This tale of two papers reminds me of a piece I read a while back (unfortunately, I can't recall its title). It discussed how there's a trade-off in research between "newness" and "required rigor". In other words, if you're working on a topic that's been done to death (e.g. capital structure or dividend policy), you'll be asked to do robustness tests out the yazoo. On the other hand, if it's a more novel idea, there's a lower bar on the rigor side, because the "newness" factor gets you some slack on the rigor side.

In general, however, the "rigor" bar has been ratcheting up for the last 20-30 years, regardless of the "newness" factor. To see this, realize that the average length of a Journal of Finance article in the early 80s was something like l6 pages - now it's more like 30-40. As further (anecdotal) evidence, a friend of mine had a paper published on long-run returns around some types of mergers in the Journal of Banking and Finance about 9 years back. They made him calculate the returns FIVE different ways.

Continued in article

I only wish "rigor" in accounting research demanded more independent validity research and replication ---

What clunkers erroneously got cash for clunkers?

In 473 cases, the tax agency erroneously allowed 439 prisoners who were in jail the entire year, 16 dead people and 18 children under the age of 15 to claim just over $1 million in deductions.

"Audit: IRS Erroneously Gave Out $151 Million In Auto Tax Breaks," by Kristina Peterson, Dow Jones Wires via, June 8, 2011 ---

The Internal Revenue Service stumbled in handling a tax incentive designed to promote automobile sales, handing out more than $151 million in erroneous deductions, as well as 473 credits given to people who were imprisoned, dead or underage, a Treasury Department report said Wednesday.

The IRS missed 4,257 individuals who claimed more than $151 million in undeserved tax deductions as part of the 2009 stimulus package program designed to boost automobile sales, according to an audit released Wednesday from the Treasury inspector general for tax administration.

In 473 cases, the tax agency erroneously allowed 439 prisoners who were in jail the entire year, 16 dead people and 18 children under the age of 15 to claim just over $1 million in deductions.

The tax incentive was designed to boost vehicle sales by allowing taxpayers up to a certain income level to deduct some state and local taxes from buying a car, light truck, motorcycle or motor home between February 2009 and January 2010. The deduction expired Dec. 31, 2009, and hasn't been extended.

Problematically, the IRS doesn't require individuals to supply independent documents proving that they bought a car that qualified for the tax deduction, leading them to permit the tax break in error at times, the report found. When auditors looked at a sample of 150 tax returns of individuals who applied for the deduction, they only found records that 65 of those people had actually purchased a qualified vehicle that year.

Even when the IRS does flag suspicious accounts, it doesn't always take the proper steps to decide whether the person deserves the deduction, the report concluded.

"It is imperative that the IRS address the weaknesses identified in this report," J. Russell George, the Treasury inspector general for tax administration said in a statement. "These are taxpayers' dollars, and the [IRS] must ensure that only those who deserve this and other tax benefits receive them."

The IRS agreed to review all of the cases flagged by the report.

Continued in article

Jensen Comment
At least I turned in a 1989 Cadillac that I inherited from my dad. It only had 70,000 miles and wasn't even a clunker. Unfortunately, it did not have four-wheel drive for these mountains.

Quantitative versus Fundamental Value–Let’s get ready to RUMMMBLE!
May 8, 2011


Bob Jensen's threads on the Efficient Market Hypothesis ---


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

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

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


October 28, 2009 reply from Paul Williams [Paul_Williams@NCSU.EDU]

Bob, et al,
I never cease to marvel at the powers of rationalization defenders of sacred institutions can muster. The above characterization of EMH was certainly not the version pedaled by its accounting disciples (notably Bill Beaver) back in the late 60s and early 70s. An accounting research industry was created based on a version of EMH that was decidedly more certain that securities were "properly priced." [Why else do studies to debunk the Briloff effect?].

Given the interpretation offered above, "Information Content Studies" make no sense. The whole idea of this methodology was that accounting data that correlated with prices implied market participants found it useful for setting prices based on publicly available data, which implied such prices were the ones that would exist in an idealized world of perfectly informed investors. Thus, this data met the test of being information and was to be preferred to other "non-information" to which the market did not react.

But now we are told that this latest version of EMH does not justify such sanguinity because "...the prices in the market are mostly wrong...", thus prices are not an indicator of the value of data, i.e., just because there is a price effect we still don't know if that data is truly "information." Think of the millions and millions of taxpayer dollars that have been wasted over the last forty years subsidizing people to search for something that is indeterminate given the methodology they are employing.

And for this the AAA awarded Seminal Contributions. Jim Boatsman had an ingenious little paper in Abacus eons ago titled, "Why Are There Tigers and Things," that cast serious doubts on the whole enterprise of "testing" market efficiency. It addressed the issue Carl Devine harped on about needing an independent definition of "information." And this is related to the logical slight of hand EMH required of surmising there is a way to know what the "true" price is since we glibly talk about over and under and mis-priced securities.

But there is no way to know this, since security prices are CREATED by the institution of the securities market. There does not exist a natural process against which market performance can be compared. "Market value," which is what a price is, is a value established by the market. The market is all there is. To paraphrase NC's current governor's favorite expression, "The price is what it is."

It isn't over or under or mis or proper or anything else, other than what a particular institution created by us at one moment in time determines it is. If we lived in a society in which mob rule settled issues of justice, it would make little sense to argue that someone the mob hung was "not guilty." Of course he was guilty, because the mob hung him!!

Paul Williams 

A Fundamentals Approach to Valuing a Business

In the great book Dear Mr. Buffett, Janet Tavakoli shows how Warren Buffet learned value (fundamentals) investing while taking Benjamin Graham's value investing course while earning a masters degree in economics from Columbia University. Buffet also worked for Professor Graham.

The following book supposedly takes the Graham approach to a new level (although I've not yet read the book). Certainly the book will be controversial among the efficient markets proponents like Professors Fama and French.

Purportedly a Great, Great Book on Value Investing
From Simoleon Sense, November 16, 2009 ---

OMG Did I Die & Go to heaven?
Just Read, Applied Value Investing, My Favorite Book of the Past 5 Years!!
Listen To This Interview!

I have a confession, I might have read the best value investing book published in the past 5 years!

The book is called Applied Value Investing By Joseph Calandro Jr. In the book Mr. Calandro applies the tenets of value investing via (real) case studies. Buffett, was once asked how he would teach a class on security analysis, he replied, “case studies”.  Unlike other books which are theoretical this book provides you with the actual steps for valuing businesses.

Without a doubt, this book ranks amongst the best value investing books (with SA, Margin of Safety, Buffett’s letters to corporate America, and Greenwald’s book) & you dont have to take my word for it. Seth Klarman, Mario Gabelli and many top investors have given the book a plug!

Here is an interview with the author of the book, Applied Value Investing ( I recommend listening to this). Who knows perhaps yours truly will interview him soon.



A fellow blogger and friend will soon post a review of this book (hint: Street Capitalist!).

Video:  Warren Buffett's Secrets To Success ---

Bob Jensen's threads on valuation are at

Bob Jensen's threads on how the economic crisis may have been a "math error" are at

U.S. auditing firms are roaring tigers compared to Chinese auditing firms
Chinese Firms Need to Open Up Books

What do Trojan Horse viruses, listed Chinese companies in the U.S., and many for-profit universities have in common?

They all entered by way of the back door. Trojan viruses are known for the the sneaky way they gain back door entry into computer systems. Many for-profit universities bought regional accreditation (especially from the lax Northwest Acceditation Commission) by purchasing small, failing, and nearly bankrupt non-profit colleges that had shaky lingering accreditation due mostly to laxness of the accrediting agencies). And here's how Chinese companies entered into U.S. capital markets by way of the back door:

 In the U.S., Chinese companies have used reverse mergers to gain access to the benefits of public listing without having gone through the rigorous regulatory process of an initial public offering. Further, Chinese companies listed in Hong Kong and other worldwide markets are allowed to use auditors from mainland China in producing financial statements for submission in fulfillment of listing requirements. However, China has no agreement with international regulators to allow supervision over the audit function in the country. "In testimony to U.S. lawmakers this past April, James Doty, the PCAOB's chairman, called the group's inability to inspect the work of registered firms in China 'a gaping hole in investor protection.'"
See below

Teaching Case
From The Wall Street Journal Accounting Weekly Review on June 24, 2011

Chinese Firms Need to Open Up Books
by: Peter Stein
Jun 20, 2011
Click here to view the full article on
Click here to view the video on WSJ Video

TOPICS: International Accounting, International Auditing, Mergers and Acquisitions, Public Accounting, Sarbanes-Oxley Act, SEC, Securities and Exchange Commission

SUMMARY: In the U.S., Chinese companies have used reverse mergers to gain access to the benefits of public listing without having gone through the rigorous regulatory process of an initial public offering. Further, Chinese companies listed in Hong Kong and other worldwide markets are allowed to use auditors from mainland China in producing financial statements for submission in fulfillment of listing requirements. However, China has no agreement with international regulators to allow supervision over the audit function in the country. "In testimony to U.S. lawmakers this past April, James Doty, the PCAOB's chairman, called the group's inability to inspect the work of registered firms in China 'a gaping hole in investor protection.'"

CLASSROOM APPLICATION: The article may be used in an auditing class to relate the role of the PCAOB and the audit function to investor confidence in financial markets. It also may be used in an international accounting class to discuss current issues faced in globalization of financial markets.

1. (Advanced) What is the Public Company Accounting Oversight Board (PCAOB)?

2. (Advanced) What role does the PCAOB play that provides critical support to the Securities and Exchange Commission (SEC) and other regulators over U.S. markets?

3. (Introductory) What is the difference between the role the PCAOB fills with respect to U.S. publicly-traded companies and the role it can play regarding Chinese companies listed in the U.S.?

4. (Advanced) What is a "reverse merger"? How can this transaction avoid difficult requirements associated with an initial public offering (IPO)?

5. (Introductory) How do stock markets react to the uncertainty created by the current situation for Chinese companies with shares listed outside of their home country? What does it mean to say that these companies should "open their books" to resolve this uncertainty?

6. (Introductory) Refer to the related video. Who will get "left behind" as China moves to higher value added production as its economic focus? How does that possibility compare to the situation we face in the U.S.?

Reviewed By: Judy Beckman, University of Rhode Island

SEC Weighs Curbs on Backdoor Stock Listing
by Andrew Ackerman
Jun 22, 2011
Online Exclusive


"Chinese Firms Need to Open Up Books," by: Peter Stein, The Wall Street Journal, June 20, 2011 ---

Poor access to information is a major culprit in the selloff of China's overseas-listed companies. If China hopes to limit the damage, it needs to open up.

The Securities and Exchange Commission is investigating accounting and disclosure issues at a number of U.S.-listed Chinese companies that acquired backdoor listings through so-called reverse mergers, and even top-name Chinese companies are inviting new scrutiny. Renren Inc., a social-networking site that launched its shares to much fanfare in early May, now trades at about half its IPO price. Renren itself stirred controversy when it lowered the growth rate of its user base without explanation in its IPO prospectus and the head of its audit committee resigned just before the listing.

Shares of Toronto-listed Sino-Forest Corp. have plunged 80% since late May after a short seller alleged problems in the forestry company's accounting, which the company denies. Hong Kong-listed Chinese companies, too, are drawing new scrutiny over their accounting.

Not all Chinese companies are shady. But investors are right to ask: How do you know which aren't?

One answer is access to information. Auditors need it to be sure a company's business is as good as management says it is. So do regulators who oversee the auditors.

In the case of Chinese companies, however, there are no arrangements that allow the Public Company Accounting Oversight Board, the U.S. government's accounting regulator, to inspect the work of accountants in China. So the PCAOB can't really know whether that work is reliable. Using U.S. accountants doesn't help because they outsource the real work to accountants in China anyway.

In testimony to U.S. lawmakers this past April, James Doty, the PCAOB's chairman, called the group's inability to inspect the work of registered firms in China "a gaping hole in investor protection."

The limited ability of Hong Kong regulators to access information on Chinese companies has long been a risk factor for the city's stock market, the primary venue through which foreign investors buy a piece of China. That ability suffered a new blow late last year when the local exchange agreed to let mainland Chinese companies listed in the territory use mainland auditors. As part of the new arrangement, Hong Kong's Securities and Futures Commission secured a promise that it would be able to examine records of auditors for companies it wants to investigate.

"Clearly the test will be when we have a live case to go through," Martin Wheatley, the outgoing head of the SFC, recently said in an interview. That hasn't yet happened.

Concerns about the transparency of Chinese companies put one Hong Kong-listed stock through the wringer last week. On Tuesday, Standard & Poor's withdrew its ratings for long-term corporate debt of a major Chinese packaging manufacturer, Nine Dragons Paper (Holdings) Ltd., after its analyst complained of being unable to get senior management to answer questions about the company's business. The stock plunged more than 17% after S&P's move, though it regained much of the loss the next day, when Nine Dragons said it was willing to cooperate with S&P and respond to requests for information.

Continued in article

Jensen Comment
Sometimes we think it might be nice to send these listed Chinese companies out the back door on the horse they road in on, but then we must face the reality that China is our banker that keeps the deficit-ridden United States afloat. It's wise to send your banker back out on the horse he rode in on.

It would seem that listed Chinese companies would have audits conducted by large international CPA firms in order to attract investors suspicious of Chinese accounting and auditing. Capital market efficiency is not entirely dead.

"(Francine) McKenna Covers The Berkshire Hathaway Annual Meeting," by Francine McKenna, re:TheAuditors, May 3, 2011 ---

There are many ways journalists, investors, and Warren Buffett himself refer to the Berkshire Hathaway Annual Meeting, held in Omaha, Nebraska. These short-cuts and sobriquets add a larger-than-life aspect to what is typically, for almost any other public company, a rather perfunctory affair. Barring any significant controversy, expected or unexpected, no one that doesn’t absolutely have to show up at an annual meeting usually makes the trip.

I had the good fortune to spend some time on Saturday with the New York Bureau Chief of The Economist Matthew Bishop. He’s a UK native and co-author of the book “Philanthrocapitalism”. This was also his first time at the “Woodstock for Capitalism.”

(That’s what Warren Buffet calls the event in his Annual Letter to Shareholders but I think this “Buffettism” is oxymoronic.)

Bishop told me that in the UK there used to be much higher attendance at shareholder meetings, usually for the banks. This reliable audience consisted mainly of retirees because the companies served a lovely lunch in the City. When that stopped, most budget-minded pensioners no longer attended.

Every once and a while someone calls me a “gad-fly” with regard to audit industry reform. I don’t much like that term because it makes a buzzing sound in my ears. When they also mention fabled shareholders’ activist Evelyn Y. Davis in the same breath, I warm to the label. You can still count on her to stir up a fuss at an Annual Meeting.

Ms. Davis is a corporate governance legend. Here’s her tombstone.

The Berkshire Hathaway Annual Meeting draws a huge crowd because it features several hours of the wit and wisdom of Berkshire Hathaway CEO and Chairman Warren Buffett and his friend and Vice Chairman Charlie Munger. To say that Buffett, Munger, and Berkshire Hathaway have a cult-like following would be a significant understatement.

The atmosphere is a “Buffett-a-palooza” – a term used across the board by major media as well as bloggers.

Jeff Harding at The Daily Capitalist: I like the fact that our society elevates people like Buffett and Munger to celebrity status. After all, we don’t have kings to adore. We Americans like and respect money and we admire people who make money. Ask de Tocqueville who was amazed at the audacity of poor people who thought they could elevate themselves through diligence and hard work. We may love our athletes and movie stars, but we listen to the ultra wealthy.

This year there was more interest than ever in the Berkshire meeting because of the Sokol affair.

The Wall Street JournalThe New York Times, The Motley Fool, and assorted others such as WalletPop Canada’s Neil Jain live-blogged the meeting, which ran from 9:30am until 5:00pm. The most complete transcript of the Q&A I’ve seen can be found here: Notes from the Berkshire Hathaway 2011 Annual Meeting, prepared by a soon-to-be graduate who calls himself The Inoculated Investor.

Understand… The formal Annual Meeting with a legal recording of the votes on resolutions in the proxy, election of the slate of Board of Directors and confirmation of the auditor – Deloitte – was conducted during the last half hour of the day. The rest of the meeting was a Q&A session with Buffett and Munger, the two of them alone on a bare stage in front of 40,000 people. It was an example of high performance art, including Buffett playing straight man to Munger’s snappy jokes until Munger finally nodded off about 4:30pm – or, more accurately, carbo-crashed on stage, after munching constantly all day on See’s peanut brittle.

I’ll let the New York Times’ Michael de la Merced set the tone:

9:26 a.m. | Ladies and gents, take your seats

It’s almost showtime. A gravelly announcer – who sounds awfully similar to that guy from all the movie trailers – tells of those who have gathered for “one gloriously capitalistic weekend.” He further intones, “All roads led them to Omaha” before the big finish: “You’ve arrived at the Berkshire Hathaway shareholders meeting. The movie will begin in 10 minutes.”

Press were asked to arrive and check in between 5:45am and 6:30am. Yes, three hours in advance of the start time.  It was a good thing, too, that I already had my press pass.

Continued in article

"Koss suit against former auditor (Grant Thornton) to proceed," by Doris Hajewski, Journal Sentinel, June 22, 2011 ---
Thank you Caleb Newquist for the heads up.

Koss Corp.'s lawsuit against the company's former auditor, Grant Thornton, will move forward in Cook County, Ill., according to a ruling from a judge in Chicago this week.

Koss accuses Grant Thornton of gross negligence for not uncovering the $34 million embezzlement by its former vice president of finance. Sujata "Sue" Sachdeva is serving an 11-year sentence in federal prison for the crime, which came to light in December 2009 when American Express notified Koss of the fraud.

Grant Thornton had sought to have the Cook County action dismissed.

In other litigation related to the embezzlement, a fairness hearing is scheduled Friday in Milwaukee County on a proposed settlement for a derivative lawsuit against the Koss board of directors, Sachdeva and Grant Thornton. The agreement, reached in May, calls for the dismissal with prejudice of claims against individual Koss directors. Claims against Grant Thornton and Sachdeva would be dismissed without prejudice, meaning they could be refiled

The suit didn't seek money for shareholders but asked the court to order corporate governance reforms at the company and for any money paid by defendants in that case to be paid to Koss.

Koss also has suits pending against firms that were involved in payments using embezzled money.

A Maricopa County court is considering Koss' request for reconsideration of the dismissal of its complaint against American Express. Koss claims Amex should have notified the company sooner when it discovered Sachdeva was using company money to pay her bills.

In another suit pending in Milwaukee County Circuit Court, Koss claims that Park Bank was lax in issuing checks to Sachdeva from company accounts and not detecting the fraud.

Bob Jensen's threads on Grant Thornton are at

"Being Expedient: PwC Settles Satyam U.S. Class Action," Some additional commentary by Francine McKenna, re:TheAuditors, May 9, 2011 ---

At the end of this posting Francine lists her previous blogs on the Satyam (pronounced Satan) scandals that were nearly a Divine Comedy.

Here’s the list of Francine's articles about Satyam, from earliest to most the recent prior to this one.

Satyam Scandal – PwC Turning Into Tandoori, January 8, 2009

Satyam – What We Know, What I Think, My Predictions, January 12, 2009

Price Waterhouse India’s Slumdog Millionaires – Cheating Pays, January 13, 2009

PwC and Satyam – Another Fine Mess You’ve Gotten Yourself Into, January 26, 2009

Round And Round She Goes, Where She Stops Nobody Knows, January 28, 2009

The Plot Thickens – Price Waterhouse India Plausibly Culpable, April 19, 2009

Satyam’s Bollywood Tragicomic Soap Opera, Apr. 23, 2009

How Satyam Supported PwC’s Schizophrenic Strategy To Reenter The Systems Integration Business, May 26, 2009
Satyam, SocMed, BDO International, and Sunshine, June 26, 2009
PwC Global Board: Risk And Quality Top Priorities, June 30, 2009
Dreaming of India: PwC and Satyam, July 17, 2009
PwC And Satyam: It’s Bigger Than A Blown Audit, July 24, 2009
McKenna Quoted In The Guardian, July 25, 2009
Satyam’s Internal Auditor: All Roar, No Bite, December 17, 2009
Roopen Roy, Deloitte India, On Audit Firm Mergers, January 21, 2010
Worlds Apart But Two of a Kind: Glitnir, Satyam, and Their Auditor PwC, May 17, 2010
PwC “Restructures” Indian Consulting Practice: Will It Be Enough To Preserve US and UK Interests?, July 12, 2010
Is PwC Conspiring To Evade Liability For Frauds In Iceland and India?, December 14, 2010
No Bark, No Bite: PwC Rolls Over To Beat Fraud Cases, December 30, 2010
Satyam Settles; PwC Left In Lurch, February 18, 2011
Price Waterhouse India Settles With Regulators But Satyam Saga Not Over, April 6, 2011
Not Over Until It’s Over: PW india Settles Satyam, April 11, 2011
The Grand Illusion: PwC Settles US Class Action Claims, May 6, 2011

American Insurance Group Scandals and PwC
A summary of writing on AIG, Maurice “Hank” Greenberg, PwC as auditors of AIG, and AIG’s relationship with Goldman Sachs during the financial crisis era.
By Francine McKenna
May 2011

Bob Jensen's on PwC's troubles are at

"Online Courses Should Always Include Proctored Finals, Economist Warns," by David Glenn, Chronicle of Higher Education, May 10, 2011 ---
Click Here

Online economics students do not absorb much material from homework and chapter tests during the semester—perhaps because they expect to be able to cheat their way through the final exam. That is the lesson from a study that Cheryl J. Wachenheim, an associate professor of agribusiness and applied economics at North Dakota State University, will present in July at the annual meeting of the Agricultural and Applied Economics Association.

Ms. Wachenheim is no enemy of distance education. As The Chronicle reported in 2009, she continued to teach her online courses even during a National Guard deployment to Iraq. But she has noticed that her online students perform much worse than their classroom-taught counterparts when they are required to take a proctored, closed-book exam at the end of the semester.

In her study—a previous version of which appeared in the Review of Agricultural Economics—Ms. Wachenheim looked at the performance of students in six sections of introductory-economics courses at North Dakota State. In online sections whose final exam was unproctored and open book, students’ exam grades were roughly the same as those of classroom-based students who took proctored, closed-book finals. But online sections that were asked to take proctored, closed-book final exams performed at least 15 points worse on a 100-point scale.

Ms. Wachenheim fears that students in those unproctored online sections really weren’t learning much, even though their grades were fine. In self-paced courses, many students appeared to cram most of the homework and chapter exams into the final week of the semester. Few of them bothered to do the ungraded practice problems offered by the online publisher.

Then there is the question of cheating. Ms. Wachenheim’s study did not gather any direct evidence, but she reports anecdotally that students have told her how they work in groups to compile huge caches of the publishers’ test-bank questions. She quotes one student as saying, “We may not learn the material, but we are guaranteed an A.”

Ms. Wachenheim’s findings parallel those of a 2008 study in the Journal of Economic Education. That study found indirect evidence that students cheat on unproctored online tests, because their performance on proctored exams was much more consistent with predictions based on their class ranks and their overall grade-point averages.

Continued in article

Jensen Comment
Since proctors are easily distracted and often miss peeking at cribbed notes and angled vision and pass the trash kinds of cheating, well placed videos can often be better than proctoring, especially when set up in individual cubicles.


Bob Jensen's threads on assessment ---

"What use is game theory?" by Steve Hsu, Information Processing, May 4, 2011 ---

Fantastic interview with game theorist Ariel Rubinstein on Econtalk. I agree with Rubinstein that game theory has little predictive power in the real world, despite the pretty mathematics. Experiments at RAND (see, e.g., Mirowski's Machine Dreams) showed early game theorists, including Nash, that people don't conform to the idealizations in their models. But this wasn't emphasized (Mirowski would claim it was deliberately hushed up) until more and more experiments showed similar results. (Who woulda thought -- people are "irrational"! :-)

Perhaps the most useful thing about game theory is that it requires you to think carefully about decision problems. The discipline of this kind of analysis is valuable, even if the models have limited applicability to real situations.

Rubinstein discusses a number of topics, including raw intelligence vs psychological insight and its importance in economics
(see also here). He has, in my opinion, a very developed and mature view of what social scientists actually do, as opposed to what they claim to do.

Continued in article

Bob Jensen's threads on analytics can be found at

Ailing BDO sued for another $10 billion

"Investors in Allen Stanford’s (Alleged) Ponzi Scheme Sue BDO," CNBC via Caleb Newquist, Going Concern, May 26, 2011 ---

Nearly two years after Texas financier Allen Stanford was indicted in an alleged massive Ponzi scheme, investors have just filed a $10 billion proposed class action suit against his auditor—the giant accounting firm BDO. The suit—filed Thursday in federal court in Dallas—says BDO did not only aid and abet the $7 billion dollar fraud…it was a “co-conspirator.” “BDO’s cozy relationship with the Stanford Financial Group was steeped in conflicts of interest and required ongoing deceptive and duplicitous manipulation of the facts to allow the Ponzi scheme’s exponential growth for over a decade,” the complaint says. “The result of this deception is the loss of thousands of investors’ life savings.

Bob Jensen's threads o BDO are at

A History of Entrereneurship
"Who Are The Entrepreneurs: The Elite or the Everyday Man? A History of Entrepreneurship," by Heather A. Haveman, Jacob Habinek, and Leo A Googman, UC Berkeley,  2011 ---;jsessionid=00ECE18AD2472F4956AAF2D00CC2132E#page-2
 Who Are The Entrepreneurs: The Elite or the Everyday Man? A History of Entrepreneurship

We trace the social positions of the men and women who found new enterprises from the earliest years of one industry’s history to a time when the industry was well established. Sociological theory suggests two opposing hypotheses. First, pioneering entrepreneurs are socially prominent individuals from fields adjacent to the new industry and later entrepreneurs are from an increasingly broad swath of society. Second, the earliest entrepreneurs come from the social periphery while later entrepreneurs include more industry insiders and members of the social elite. To test these hypotheses, we study the magazine industry in America over the first 120 years of its history, from 1741 to 1860. We find that magazine publishing was originally restricted to industry insiders, elite professionals, and the highly educated, but by the time the industry became well established, most founders came from outside publishing and more were of middling stature – mostly small-town doctors and clergy without college degrees. We also find that magazines founded by industry insiders remained concentrated in the three biggest cities, while magazines founded by outsiders became geographically dispersed. Finally, we find that entrepreneurship evolved from the pursuit of a lone individual to a more organizationally-sponsored activity; this reflects the modernization of America during this time period. Our analysis demonstrates the importance of grounding studies of entrepreneurship in historical context. Our analysis of this “old” new media industry also offers hints about how the “new” new media industries are likely to evolve.

Bob Jensen's threads on accounting history ---

Bob Jensen's helpers for small business ---

Oops! Is it too late?
"12 Ways To (Lawfully) Cheat The Canadian Taxman Before Tomorrow, Courtesy Ernst & Young," Big Four Blog, April 30, 2011 ---

A great teaching case for students learning about capital budgeting and rationing

From The Wall Street Journal Accounting Weekly Review on June 24, 2011

Ford Ramps Asian Car Plans
by: Jeff Bennett
Jun 17, 2011
Click here to view the full article on

TOPICS: Capital Budgeting, Capital Spending, Cost Management, Product strategy, Revenue Forecast

SUMMARY: "Ford Motor Co. believes it can earn a 'competitive return' in China and India even as it rolls out string of new cars in those markets that will sell for much lower prices than the vehicles it sells in North America and Europe."

CLASSROOM APPLICATION: The article is excellent for use in managerial accounting classes to discuss planned production in support of sales strategy and the particular need for target costing in this situation.

1. (Introductory) Why is Ford focusing on its planned auto sales in Asia and India?

2. (Advanced) What is target costing? Why is that strategy particularly important in Ford's growth strategy described in this article?

3. (Advanced) What other factors must the company consider as it designs "from the ground up" models for China and India "to sell at low prices"?

4. (Advanced) Summarize Ford's production capacity issues in the Asia-Pacific region. How do these issues contribute to difficulties in planning production and estimating product costs?

Reviewed By: Judy Beckman, University of Rhode Island


"Ford Ramps Asian Car Plans," by: Jeff Bennett, The Wall Street Journal, June 17, 2011 ---

Ford Motor Co. believes it can earn a "competitive return" in China and India even as it rolls out a string of new cars in those markets that will sell for much lower prices than the vehicles it sells in North America and Europe.

Over the next four years, Ford plans to expand to 15 from five the number of vehicles it sells in China. Some of the new cars will sell for less than $14,500, Ford's Asia Pacific and Africa President Joe Hinrichs said on Thursday. In India, Ford will sell eight models, up from three, with some selling for under $8,500 like its Figo subcompact, he said.

Auto makers often find it difficult to make money on small, inexpensive cars because of it can cost hundreds of millions of dollars to develop a new model from the ground up.

But Mr. Hinrichs said Ford is confident it can profitably sell low-cost cars in China and India by sharing the basic designs with other Ford units around the world, increasing the company's economies of scale. "We are making money there now and we can continue to," Mr. Hinrichs said at Ford's Dearborn, Mich., headquarters. "It's all about the scale and the cost base."

Ford last week set a goal of increasing its global automotive sales by 50%, to eight million vehicles a year by 2020, with the bulk of the gain coming from the Asia-Pacific region. During the same period, the company also hopes to improve global automotive operating margins to about 9% from 6.1% last year.

Mr. Hinrichs said Ford needs to develop new models that sell at low prices to be able to expand rapidly in Asia. Vehicles with sticker prices below $14,500 make up about 70% of the market in China, and while those under $8,500 account for 70% of the Indian market, according to Ford. Ford's best-selling vehicle in China today costs about $16,500; in India, its top seller costs about $7,600.

Brian Johnson, an automotive analyst at Barclays Capital, said it will be a challenge for Ford. "If Ford can leverage the global engineering and the locally-tailored content to produce a cheap, but reliable product, then there is room for them to succeed," he said.

Local Chinese and Indian auto makers "don't have the global scale" that Ford can leverage, while some other western car companies are not yet moving quickly into low-cost cars, he added. Tata Motors made a splash in India in 2009 when it began selling its small Nano car for about $2,500 although the vehicle ran into some problems when a faulty switch led to fires in three cars.

Mr. Hinrichs took over Ford's Asia-Pacific region in late 2009 and was given the additional duties as China chief executive last year. Ford expects 45% of the global industry automotive sales to come from Asia-Pacific by 2020, dwarfing the more mature Americas market's 25%.

Last year, Ford began building the $7,600 Figo at a plant in Chennai, India. It developed the car by starting with an older version of the Fiesta originally designed for the European market. Ford modified the vehicle and stripped out about $1,000 in cost to sell it at a much lower price in India, Mr. Hinrichs said.

Ford's forthcoming models for China and India will be designed from the ground up to sell at low prices, Mr. Hinrichs said.

One hurdle facing Ford in Asia is production capacity. Demand is outstripping supply despite $3.4 billion in plant construction or expansions projects that Ford has announced in China, India, Thailand and Africa.

Construction on one of those new investments, an engine plant in Chongqing. China, began on Thursday. When open in 2013, the $500 million plant will enable the Changan Ford Mazda Automobile joint venture to double its output to 750,000 engines a year.

Continued in article

Bob Jensen's threads on managerial accounting are at

For capital budgeting and valuation, also see


Humor Between May 1 and June 30, 2011

Darwin Awards ---

Hi Patricia,

Texas Instruments has a special relationship with TCU. You should explore various TI resources, including visiting speakers, TI home office tours, and access to various TI software and databases. For example, you might seek out TI experts on XBRL, SSARS 19, and Sox Section 404 on internal control auditing.

In answer to your question about auditing research courses, there's a Luleå University of Technology auditing research syllabus at

You might take a look at the various seminars available from the Institute of Internal Auditors ---

A major module in the course should be SSARS 19 ---

If TCU has a student license to PwC's Comperio, I would devote a major component of an auditing research course to Comperio (which also has the FASB's Codification) ---

Even if your students cannot all access Comperio, I recommend it for yourself when teaching virtually all accounting and auditing courses. You may find this the best teaching and research resource you've ever encountered.

Best if luck in your move to the land of the Horned Frogs.

Now comes my serious advice to you:

  1. Preparing for a new auditing research course is not nearly as difficult as learning how to do high speed reverses and twirls in the Texas Two-Step. I suggest that you spend most of the summer learning the Texas honky tonk dances before you make your big move to Fort Worth ---

    Former U.S. Senator Tom Delay from Texas who discovered he can't Two-Step his way out of prison ---

  2. CPA's generally need Prozac if they're transferred out of Manhattan and have to give up Lincoln Center performances, the NYC opera season, and the live theatres on Broadway. But CPAs transferred from Fort Worth need a daily double dose of Prozac plus psychotherapy if they have to give up Billy Bob's --- the "world's largest honky tonk in the historic Fort Worth Stockyards" ---

  3. A typical Texas "good time"  line dance at Billy Bob's stretches for 63.49% of a mile, all under one roof.---

  4. At Billy Bob's you can keep one eye on the bull rider and the other eye on the ambulance alongside the chutes. Another ambulance is available for aging accounting professors still trying the Boot Scootin' Boogie ---

  5. Patricia Walters will have to give up NYC Champaign and pet·it fours for higher calorie Fort Worth beer and BBQ and Zantac.

  6. Patricia Walters really has to learn to think football if she's serious about a move to Fort Worth. TCU stands for Tenure Credit Utility player ---

  7. TCU's head football coach, Gary Patterson, only dresses 14 players for games. The rest of his Horney Frog players have to get into their purple and white uniforms all by  themselves.


  8. The biggest divorce stumbling block in Texas is who gets custody of the Cowboy Stadium season tickets.

  9. Those guys waving sheep toward motorists late at night on Fort Worth street corners are pimps.

  10. Muslims worship Allah; Christians have Jesus; and Texas CPAs have Texas
    State Board of Public Accountancy's director, Bill Treacy.
    I recently had a call from a Bloomberg reporter asking me to comment on Big Brother Treacy.

  11. The Texas cosmetologist licensing examination has a section on how to castrate mean bulls, unruly stallions, and cowboys who never learned the meaning of the word "no." Cosmetologist stew is a popular in the far reaches of West Texas cafes.

  12. George Straight lies when he says he hangs his hat in Tennessee ---

  13. Fort Worth interior decorators don't make money innovating. How many ways can you decorate one big room with long horns over the fire place and stuffed taxidermy heads on all four walls --- wild boar heads, deer heads, eagle heads, hawk heads, turkey heads, horned frog heads, and the head of the feral hog you turned on a spit last Easter?

  14. My best advice for you, Pat Walters, is to give your students a wide array of course project options at TCU. A team project for football players could be having to alphabetize a box of Alpha-Bits cereal. If they can't handle this, try a package of M&Ms.

  15. Instead of moving your household goods from New York to Texas, fill the 54-foot moving van with bottles of water. You can get a 1,000% markup on the water and buy all new household goods. Sadly, you will eventually find yourself short of water. Think beer --- beer's probably cheaper than water in Fort Worth supermarkets.

Bob Jensen


Geriatric Dirty Dancing ---

How to always come out a winner in Las Vegas
Fat Man at a Buffet ---
The casinos will pay you $1,000 to leave the premises.

Nine Things That Will Disappear in our Lifetime ---

Jensen Comment
I'm not so sure some of them will disappear so much as be transformed, e.g., music and television. And the Post Office may survive as a parcel carrying giant that competes with UPS and FedEx.

Can you think of other things that are likely to disappear?


From Maureen (who lives on the outskirts of Boston)

The geographical center of Boston is in Roxbury. Due north of the center we find the South End. This is not to be confused with South Boston which lies directly east from the South End. North of the South End is East Boston and southwest of East Boston is the North End.

Harvard Bridge The bridge connecting Boston and Cambridge via Massachusetts Avenue is commonly known as the Harvard Bridge. When it was built, the state offered to name the bridge for the Cambridge school that could present the best claim for the honor. Harvard submitted an essay detailing its contributions to education in America, concluding that it deserved the honor of having a bridge leading into Cambridge named for the institution. MIT did a structural analysis of the bridge and found it so full of defects that they agreed that it should be named for Harvard.

This is all true

Information on Boston and the Surrounding Areas:

There is no school on School Street, no court on Court Street, no dock on Dock Square, and no water on Water Street. Back Bay Boston streets are in alphabetical awddah: Arlington , Berkeley, Clarendon, Dartmouth, etc. So are South Boston streets: A, B, C, D, etc. If the streets are named after trees (e.g. Walnut, Chestnut, Cedar), you are on Beacon Hill. If they are named after poets, you are in Wellesley.

Massachusetts Avenue is Mass Ave. Commonwealth Avenue is Comm Ave. South Boston is Southie. The South End is the South End. East Boston is Eastie. The North End is east of the former West End. The West End and Scully Square are no more; a guy named Rappaport got rid of them one night. Roxbury is The Burree, Jamaica Plain is J.P.

How to say these Massachusetts city names correctly (Say it wrong and be shunned).

Worcester : Wuhsta (or Wistah) Gloucester : Glawsta Leicester: Lesta Woburn: Woobun Dedham : Dead-um Revere: Re -vee-ah Quincy: Quinzee Tewksbury : Tooks ber ry Leominster : Le-min-sta Peabody: Pee-ba-dee Waltham : Walth-ham Chatham: Chaddum Samoset: Sam-oh-set or Sum-aw-set, but nevah Summerset!


Frappes are made with ice cream; milkshakes are not. If it is carbonated and flavored, it is tonic. Soda means CLUB SODA. Pop refers to DAD. When we want Tonic WATER, we will ask for TONIC WATER. The smallest beer is a pint.< BR>Scrod is whatever they tell you it is, usually fish. If you paid more than $7/pound, you got scrod. It is not a water fountain; it is a bubblah. It is not a trashcan; it is a barrel. It is not a spucky, a hero, or a grinder; it is a sub. It is not a shopping caht; it is a carriage. It is not a purse; it is a pockabook.

They are not franks; they are haht dahgs; franks are money used Switzahland.

Police do not drive patrol units or black and whites; they drive a crewza. If you take the bus, your on the looza crooza. It is not a rubber band; it is an elastic. It is not a traffic circle, it is a rotary. "Going to the islands" means going to Martha's Vineyard or Nantucket.

The Sox = The Red Sox The Cs = The Celtics The Bs = The Bruins The Pats =The Patriots

Things not to do:

Do not pahk your cah in Hahvid Yahd. They will tow it to Meffa (Medford ) or Summahville (Somerville) . Do not sleep on the Common. (Boston Common) Do not wear orange in Southie on St. Patrick's Day.

Things you should know:

There are two State Houses, two City Halls, two courthouses, and two Hancock buildings (one is very old; one is relatively new). The colored lights on top the old Hancock tell the weatha: "Solid blue, clear view." "Flashing blue, clouds due." "Solid red, rain ahead." "Flashing red, snow instead." (except in summer, flashing red means the Red Sox game was rained out! Most people live here all their life and still do not know what the hell is going on with this one. Route 128 South is I-95 south. It is also I-93 north. The underground train is not a subway. It is the T, and it does not run all night (fah chrysakes, this ain't Noo Yawk). Order the cold tea in China Town after 2:00 am; you will get a kettle full of beer.

Bostonians: think that it is their God-given right to cut off someone in traffic. Bostonians: think that there are only 25 letters in the alphabet (no Rs, except in id). Bostonians: think that three straight days of 90+ temperatures is a heat wave. Bostonians: refer to 6 inches of snow as a dusting. Bostonians: always bang a left as soon as the light turns green, and oncoming traffic always expects it.. Bostonians: believe that using your turn signal is a sign of weakness. Bostonians: think that 63 degree ocean water is warm. Bostonians: think Rhode Island accents are annoying.

Forwarded by Paula


No nursing home for us. We'll be checking into a Holiday Inn!

With the average cost for a nursing home care costing $188.00 per day, there is a better way when we get old and too feeble. I've already checked on reservations at the Holiday Inn. For a combined long term stay discount and senior discount, it's $59.23 per night. Breakfast is included, and some have happy hours in the afternoon. That leaves $128.77 a day for lunch and dinner in any restaurant we want, or room service, laundry, gratuities and special TV movies. Plus, they provide a spa, swimming pool, a workout room, a lounge and washer-dryer, etc. Most have free toothpaste and razors, and all have free shampoo and soap. $5 worth of tips a day you'll have the entire staff scrambling to help you. They treat you like a customer, not a patient. There's a city bus stop out front, and seniors ride free. The handicap bus will also pick you up (if you fake a decent limp). To meet other nice people, call a church bus on Sundays. For a change of scenery, take the airport shuttle bus and eat at one of the nice restaurants there. While you're at the airport, fly somewhere. Otherwise, the cash keeps building up.

It takes months to get into decent nursing homes. Holiday Inn will take your reservation today. And you're not stuck in one place forever -- you can move from Inn to Inn, or even from city to city. Want to see Hawaii? They have Holiday Inn there too. TV broken? Light bulbs need changing? Need a mattress replaced? No problem.. They fix everything, and apologize for the inconvenience.

The Inn has a night security person and daily room service. The maid checks to see if you are ok. If not, they'll call an ambulance . . . or the undertaker. If you fall and break a hip, Medicare will pay for the hip, and Holiday Inn will upgrade you to a suite for the rest of your life.

And no worries about visits from family. They will always be glad to find you, and probably check in for a few days mini-vacation.

The grandkids can use the pool. What more could I ask for?

So, when I reach that golden age, I'll face it with a grin.

Forwarded by Paula
AIDs Warning for Senior Citizens









Not   forgetting HIV
(Hair  is Vanishing)

Forwarded by Maureen

From the diary of a Pre-School Teacher

My five-year old students are learning to read. Yesterday one of them pointed at a picture in a zoo book and said, "Look at this! It's a frickin' elephant!"

I took a deep breath, then asked..."What did you call it?"

"It's a frickin' elephant! It says so on the picture!"

And so it does...

[Display picture of an African elephant!]

Hooked on phonics! Ain't it wonderful?

Jensen Comment
Trinity University retired chemist Ben Plummer gives us a picture of a frickn' elephant ---

Forwarded by Paula

A while ago a new supermarket opened in Topeka, KS. It has an automatic water mister to keep the produce fresh.

Just before it goes on, you hear the sound of distant thunder and the smell of fresh rain.

When you pass the milk cases, you hear cows mooing and you experience the scent of fresh mowed hay.

In the meat department there is the aroma of charcoal grilled steaks with onions.

When you approach the egg case, you hear hens cluck and cackle, and the air is filled with the pleasing aroma of bacon and eggs frying.

The bread department features the tantalizing smell of fresh baked bread and cookies.

I don't buy toilet paper there any more.

Forwarded by Gene and Joan

A six year old goes to the hospital with her grandmother to visit her Grandpa. When they get to the hospital, she runs ahead of her Grandma and bursts into her Grandpa's room ..."Grandpa, Grandpa," she says excitedly, "As soon as Grandma comes into the room, make a noise like a frog!"

"What?" said her Grandpa.

"Make a noise like a frog - because Grandma said that as soon as you croak, we're all going to DisneyWorld.

Dear God:  Here is a list of
just some of the things I must remember
to be a good dog:
1. I will not eat the cat's food before he eats
it or after he throws it up..
2. I will not roll on dead seagulls, fish,
crabs, etc., just because I like the way they smell.
3. The Litter Box is not a cookie jar.
4. The sofa is not a 'face towel'.
5. The garbage collector is not stealing our stuff.
6. I will not play tug-of-war with Dad's
underwear when he's on the toilet.
7.  Sticking my nose into someone's
crotch is an unacceptable way of saying 'hello'.
8. I don't need to suddenly stand
straight up when I'm under the coffee table.
9. I must shake the rainwater out of my fur before
entering the house - not after.
10. I will not come in from outside,
and immediately drag my butt across the carpet.
11. I will not sit in the middle of the living
room, and lick my crotch.
12. The cat is not a 'squeaky toy',
so when I play with him and he makes that noise,
it's usually not a good thing.

Why do American workers outsource their own jobs? ---

What's more dangerous --- Tripping or Slippin
Or put another way --- Where does all that kudzu end up?

Slip and Slide at Davidson College
From Inside Higher Ed on June 15, 2011

Davidson Turns Over a Tough Job to Goats

Kudzu is out of control on Davidson College's paths and trails, and officials fear that the growth could lead to walkers or runners tripping. After various human and machine efforts failed to match the kudzu, the college has rented 30 goats, which have been tasked with eating the problem away, WCNC News reported. The college is spending $3,000 to rent the goats, which eat 12-18 pounds of kudzu a day.

Jensen Comment
Being an old farm boy it struck me that the goats may leave something more hazardous on the trails.
And we hope runners take off their shoes before entering the dorms and cafeterias.

Accounting Case for Your Financial Accounting Courses
How will the lease on goats be accounted for under the new FASB leasing rules?

This lease most likely will not be renewed if the goats succeed or fail!

When Deloitte's professionals assist in hammer-and-saw repair of poor peoples' homes
"Caption Contest Tuesday: Deloitte Has a Lot of Tools," by Caleb Newquist, Going Concern, June 14, 2011 ---

Jensen Comment
I recommend reading the comments.

 The comment I added reads as follows:
"These are just accountants accelerating depreciation."

Forwarded by Maureen

One evening a husband, thinking he was being funny, said to his wife,
'Perhaps we should start washing your clothes in 'Slim Fast' .
Maybe it would take a few inches off of your butt!'

His wife was not amused, and decided that she simply
couldn't let such a comment go unrewarded .

The next morning the husband took a pair of underwear out of his drawer .
'What the heck is this?' he said to himself as a little 'dust' cloud appeared when he shook them out .

' Cathy ', he hollered into the bathroom, 'Why did you put talcum powder in my underwear?'

She replied with a snicker . 'It's not talcum powder; it's 'Miracle Grow'!

Forwarded by Gene and Joan,

When asked by a young patrol officer "Do you know you were speeding? This 83-year-old woman talked herself out of a ticket by stating . . ..

"Yes, but I had to get there before I forgot where I was going."

Some Dilbert Links form Paul Caron's Tax Professor Blog

Prior TaxProf Blog Dilbert coverage:


Forwarded by Aaron Konstam

Comments made in the year 1955!

I’ll tell you one thing, if things
keep going the way they are,
it’s going to be impossible to
buy a week’s groceries for $10.00.

Have you seen the new cars
coming out next year?  It won’t
be long before $1,000.00 will
only buy a used one.

If cigarettes keep going up in
price, I’m going to quit; 20 cents
a pack is ridiculous.
Did you hear the post office is
thinking about charging 7 cents
just to mail a letter.
If they raise the minimum wage
to $1.00, nobody will be able to
hire outside help at the store.
When I first started driving, who
would have thought gas would
someday cost 25 cents a gallon.
Guess we’d be better off leaving
the car in the garage.
I’m afraid to send my kids to the
movies any more.  Ever since they
let Clark Gable get by with saying
it seems every new movie has
either HELL or DAMN in it.

I read the other day where some
scientist thinks it’s possible to put
a man on the moon by the end of
the century. They even have some
fellows they call astronauts
preparing for it down in Texas .
Did you see where some baseball
player just signed a contract for
$50,000 a year just to play ball?
It wouldn’t surprise me if someday
they’ll be making more than the
I never thought I’d see the day
all our kitchen appliances would
be electric.  They're even making
electric typewriters now.
It’s too bad things are so tough
nowadays.  I see where a few
married women are having to
work to make ends meet.
It won’t be long before young
couples are going to have to hire
someone to watch their kids so
they can both work.
I’m afraid the Volkswagen car
is going to open the door to a
whole lot of foreign business.
Thank goodness I won’t live to
see the day when the Government
takes half our income in taxes.  I
sometimes wonder if we are
electing the best people to

The fast food restaurant is
convenient for a quick meal,
but I seriously doubt they
will ever catch on.
There is no sense going on short
trips anymore for a weekend.  It
costs nearly $2.00 a night to stay
in a hotel.
No one can afford to be sick
anymore.  At $15.00 a day in
the hospital, it’s too rich for
my blood.

If they think I’ll pay 30 cents
for a haircut, forget it.


Humor Between May 1 and June 30, 2011 --- 

Humor Between April 1 and April 30, 2011 ---  

Humor Between February 1 and March 31, 2011 --- 

Humor Between January 1 and January 31, 2011 --- 


And that's the way it was on June 30, 2011 with a little help from my friends.

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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)

“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?


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April 30, 2011

Bob Jensen's New Bookmarks April 1-April 30, 2011
Bob Jensen at Trinity University 

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Click here to search Bob Jensen's web site if you have key words to enter --- Search Box in Upper Right Corner.
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Bob Versus Steve on What Needs to Be Done to Improve The Accounting Review --- Click Here

Email Message Virus Warning

"In Case You Forgot, the Big 4 Are Hiring a Small Army of People This Year," by Caleb Newquist, Going Concern, March 31, 2011 ---

Bob Jensen's threads on careers are at

The Pathways Project is a major joint program between the AICPA and the AAA in setting guides for the future of accounting education and practice
There is a good deal of information about the Pathways Project at the AAA Commons site.
Much of the responsibility for this project falls on the shoulders of Tennessee's Bruce Behn

"Pathways Commission Forges Ahead:  Recommendations on future of accounting education expected by 2012," by Paul Bonner, Journal of Accountancy, May 2011 ---

Part 5 of a series of AICPA interviews with Leslie Seidman, the new Chair of the FASB who replaces Bob Herz ---

Poor Leslie did not get any stars from Tom Selling (he called her the First Goat in a series of "goats" who testified) after she testified in the Senate Hearings about the role of the accounting profession in preventing future economic crises in the United States (which will be even less of a role when the FASB turns over U.S. standard setting to the international  IASB) ---

Statement of Lynn E. Turner Before the Senate Subcommittee on Securities, Insurance and Investment; 
OnThe Role of the Accounting Profession in Preventing Another Financial Crisis

Dirksen Senate Office Building
April 6, 2011

Where were the auditors when over 1,000 banks failed in 2008 and 2009?

When we lavish praise for accomplishments we must be careful that we are simply overlooking the failures that critics for years have tried and tried and tried to get those in power to try to correct. The SEC has acted shamefully in some instances (Madoff, hedge funds, and financial risk accounting) and the FASB fumbled many opportunities to save the horses before they bolted from the barn (e.g., off-balance sheet financing in banks).

More importantly, I think both the FASB and the SEC earn low grades in learning the lessons from Enron. Consider the following lessons to be learned at the turn of this century that are still with us a decade later because of FASB and SEC failures of accomplishment. And I'm ashamed to say that all too often members of this Academy get low grades for not doing more to help students learn these lessons:

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 --- 
Watch the video!
We cannot take great pride in an FASB that allows this kind of financial reporting fiction writing to take place in our largest banks in the nation (or any U.S. banks for that matter). Members of the FASB and SEC should hang their heads in shame when they watch the above video.

How can the FASB take pride in allowing Lehman Brothers to follow the FAS 140 rules to the letter in an effort to cloud transparency and deliberately deceive investors and creditors about financial risk? How can the SEC take pride in letting Lehman and Ernst off the hook for such deliberate deceptive accounting?

How can the SEC take pride in giving Enron the green light to deceptive accounting?
Here's part of a letter written by the then President of the Financial Executives International:

"We're The Front Line For Shareholders,"  by Phil Livingston (President of Financial Executives International), January/February 2002 --- 

At FEI's recent financial reporting conference in New York, Paul Volcker gave the keynote address and declared that the accounting and auditing profession were in a "state of crisis." Earlier that morning, over breakfast, he lamented the daily bombardment of financial reporting failures in the press.

I agree with his assessment. The causes and contributing factors are numerous, but one thing is clear: We as financial executives need to do better, be stronger and take the lead in restoring the credibility of financial reporting and preserving the capital markets.

If you didn't already know it and believe it deeply, recent cases prove the value of a financial management team that is ethical, credible and clear in its communications. A loss of confidence in that team can be a fatal blow, not just to the individuals, but to the company or institution that entrusts its assets to their stewardship. I think the FEI Code of Ethical Conduct says it best, and it is worth reprinting the opening section here. The full code (signed by all FEI members) can be found here.

. . .

So how did the profession reach the state Volcker describes as a crisis?

  • The market pressure for corporate performance has increased dramatically over the last 10 years. That pressure has produced better results for shareholders, but also a higher fatality rate as management teams pressed too hard at the margin.
  • The standard-setters floundered in the issue de jour quagmire, writing hugely complicated standards that were unintelligible and irrelevant to the bigger problems.
  • The SEC fiddled while the dot-com bubble burst. Deriding and undermining management teams and the auditors, the past administration made a joke of financial restatements.
  • We've had no vision for the future of financial reporting. Annual reports, 10Ks and 10Qs are obsolete. Bloomberg and Yahoo! Finance have replaced the horse-and-buggy vehicles with summary financial information linked to breaking news.
  • We've had no vision for the future of accounting. Today's mixed model is criticized one day for recognizing unrealized fair value contractual gains and alternatively for not recognizing the fair value of financial instruments.
  • The auditors dropped their required skeptical attitude and embraced business partnering philosophies. Adding value and justifying the audit fees became the mandate. Management teams and audit committees promoted this, too.
  • Audit committees have not kept up with the challenges of the assignment. True financial reporting experts are needed on these committees, not the general management expertise required by the stock exchange rules.



The FASB and IASB do not hold up well against their most vocal critics, in which case I am more proud of the critics than I am of the people who could've done more but caved in to pressures of industry and Congress to do less.

I think Tom Selling and others are correct in what I think is resistance to the course set by the FASB and the SEC to turn standard setting over to the IASB. We are being lulled into complacency by all the efforts of the FASB and IASB to jointly write convergence standards. The rest of the world has been silent while the U.S. for a time makes the IASB look puppets on our strings attached approach to convergence, but once we've made the final commitment there are 90+ nations of the world that will voice screaming complaints about continued U.S. condorser influence on the IASB. ]

Lastly, sometimes Tom Selling does not know when to back off. He's been wrong to personally attack Bob Herz for no good reason that I can figure out. Let bygones be bygones and more importantly, in true academic spirit, admit to your own mistakes.

But without our critics like Tom, Lynn, and sometimes me those having the power, authority, and responsibility might be lulled into complacency. I've recorded many tidbits that show a mismatch between the lavish praise this profession bestows upon itself in the midst of failures it glosses over all too often  In the years of building up my picture of this profession, I now conclude that the picture is quite ugly to date and is probably going to become more horrid before it gets better ---


Lastly, I mention the post-Andersen speech of a former Andersen executive research partner:

Art Wyatt admitted:

And they Still Don't Get It!

Congratulations to the New Slate of Officers Guiding the American Accounting Association

2011-2012 Executive Committee and Council Officers Elected
Elections for the 2011-12 AAA Executive Committee and At-Large Council positions have come to an end and the nominees have been elected. Congratulations to the following AAA officers who are newly elected:
President-Elect - Karen Pincus, University of Arkansas
Vice President - David Stout, Youngstown State University
Vice President-Professional Relations - Ken Bouyer, Ernst & Young LLP
Vice President-International - Recep Pekdemir, Istanbul University
Vice President-Finance Elect - Dale Flesher, University of Mississippi
Council Member-at-Large - C. Richard Baker, Adelphi University
Council Member-at-Large - Samuel Tiras, Louisiana State University
International Council Member-at-Large - Jagdish Pathak, University of Windsor

Hi Linda,

While you were enjoying your wine last night on the prairie I gave some thought to possible content of your Socialism Accounting Course at Nebraska.

One module in that socialism course might ask students for creative suggestions for redesigning Nebraska's entire School of Accountancy curriculum if the U.S. became a socialist state and ended all financial capital markets, commodities markets, real estate markets, insurance markets, etc. We might even describe this as the dream of Paul Williams, Zafar Khan, and possibly even you Linda.

Virtually all accounting content based upon a market economy will have to be replaced. In fact, the entire curriculum will probably be changed to a series of governmental accounting and auditing courses.


Here are some changes and possibly some constants in the curriculum.

Change the Pacioli Equation from A=L+E to A=G
In Principles of Accounting all accountancy based upon market resource allocation would have to be modified. There would be no L for Pacioli's famous equation since there are no lenders seeking to profit from loans to companies. Obviously, there can no longer be an E in this equation since there are no equity markets under a full socialism economy that does not allow profits (and perhaps has a 100% tax rate on profits that might somehow arise). The new equation would be A=G and all accountancy courses based upon capitalism's markets would have to be replaced with governmental accounting and auditing courses.

Surprisingly, CPV Analysis Might Remain in the Curriculum
Initially one might think that there cannot be CPV Analysis if there are no "profits" in the economy and perhaps not even prices in a socialism resource rationing economy. But Lange prices can be used to implement demand and supply in place of capitalism's market resource allocations. Lange prices were invented by the famous Polish socialist Oskar Lange ---

Years ago when I took Alan Manne's Operations Research Economics course in Stanford's doctoral program, we were required to eliminate market-driven prices and build a dynamic linear programming model to derive Lange prices to implement Central Planning Board (CPB) desired resource rationing. For example, in capitalist markets factories and their customers make pricing decisions based upon demand and supply markets for spikes (really huge nails) versus brads (tiny little nails). Oskar Lange devised a scheme for setting socialism prices so that a Polish war would not be lost for want of a single horseshoe nail.

The idea was that the CPB's resource allocations could be implemented using Lange prices in place of market prices. Factory managers and hardware store managers could then make production and purchase decisions based upon CPV analysis using Lange prices. This lends efficiency to socialism rationing since CPB rationing can be implemented without massive and complicated rationing schemes --- the pricing scheme that's so efficient in capitalism can thereby be utilized for decentralized demand and supply decisions using Lange prices. Of course any "profits" that accrue to factories and stores will probably be taxed later on at 100% since any profit incentives would turn factories and stores into sociopaths.

In this book, Lange advocated the use of market tools (especially the neoclassical pricing theory) in economic planning of socialism and Marxism. He proposed that central planning boards set prices through "trial and error", making adjustments as shortages and surpluses occurred rather than relying on a free price mechanism. If there were shortages, prices would be raised; if there were surpluses, prices would be lowered. Raising the prices would encourage businesses to increase production, driven by their desire to increase their profits, and in doing so eliminate the shortage. Lowering the prices would encourage businesses to curtail production in order to prevent losses, which would eliminate the surplus. Therefore, it would be a simulation of the market mechanism, which Lange thought would be capable of effectively managing supply and demand. Proponents of this idea argue that it combines the advantages of a market economy with those of socialist economics.

By this idea, Lange also argued that a state-run economy could at least be as efficient as -— if not more efficient than —- a capitalist or private market economy. He argued that this was possible if the government planners used the price system as if in a market economy and instructed state industry managers to respond parametrically to the state-determined prices (minimize cost, etc.). Lange's argument was one of the pivots of the Socialist Calculation Debate with the Austrian School.

His works provided the earliest model of market socialism.

Of course the big problem socialism will then face when taxing all of the "profits" derived from Lange prices is that managers lose their incentives to be efficient. Why try to work harder to save money when all the profits will be confiscated? I recommend, Linda, that you pass over that stumbling block in socialism, although it was truly one of the worst problems when the Soviet Union was operating under socialism. The factories and stores were notoriously inefficient except where efficient black markets evolved that were (gasp) capitalist in nature.

Change from XBRL to GGRL
The purpose of XBRL is to aid security analysts and investors and creditors in making investment portfolio decisions. Since there are no investment portfolios under socialism, there is no more need for an eXtensible Business Reporting Language as we know it today. However, the CPB may still want to tag transactions to aid in socialism's resource allocations. Accordingly, XBRL will probably give way to an entirely new system of tagging known as Glorious Government Reporting Language tags.

No More Consolidation Accounting
Virtually everything we teach in the Advanced Accounting course will have to be replaced. There will be no equity-exchange mergers and acquisitions. And there will be no profit incentives to purchase and sell subsidiaries. All factory mergers and divorces become flat-out CPB decrees.

No More Accounting for Derivatives and Hedging Activities
Since there are no more futures, forwards, swaps, and options markets, it's pointless to teach accounting for derivatives and hedging activities. Not having to teach FAS 133 and IAS 39 and IFRS 9 should make accounting professors jump for joy.


No More Lease-Versus-Buy Accounting
There really is no more need for Lease-Versus-Buy accounting or even lease accounting in general since the government owns all the assets.


By now I think you get the idea, so I won't belabor my discussion of curriculum changes any further. Socialist schools of accountancy, however, face an even bigger problem. If all workers in an egalitarian system receive identical wages or rations, what is the incentive to study 22 boring courses in governmental accounting and auditing?

That's a problem that socialism theorists have never been able to solve with the Marxist Labor Theory of Value. Presumably a symphony cellist who studies intensely for 14 years in music school should earn the same monthly wage as a brain surgeon who studies intensely for 14 years in medical school. But that may lead to a great over supply cellists and an enormous under supply of brain surgeons.

At this point the pleasant dream of Paul Williams turns into a nightmare.
It may turn out that socialist economies might actually have to pay brain surgeons 1,000 times more than they pay cellists. But that has all sorts of ramifications when a poor cellist living in a tent by a stream looks up to a beautiful dacha at the top of the hill where a brain surgeon lives. This is probably another problem you should avoid in your Socialism Accounting Seminar, although it was an enormous problem in the Soviet Union when top surgeons and elite Communist Party members got all the nice country dachas.

Hence this all may be academic in a purist egalitarian Marxist system where nobody elects to major in boring old accounting or brain surgery unless wage differentials and (gasp) even black market profiteering returns to the socialism economy. There's no need for an accounting curriculum if there are no accounting students. It's much more fun to major in humanities or perhaps not even bother with school. Oh what a nightmare this is truly becoming for any egalitarian purist.


"A Requiem for Marx," by Frank E. Manuel, university professor emeritus at Brandeis University, in the spring issue of Daedalus

For the suffering of Karl Marx the exile, we can feel compassion; for his elaborate theoretical system, benign doubt and perhaps selective approval; for the abominable practices instituted in his name, loathing. A requiem for Marx cannot ignore the iniquities of his offspring -- prophets and messiahs must share the blame for the excesses of their followers -- but the banner that he unfurled need not be interred with his bones. Even a skeptical utopian like myself can still believe in the worth of the guiding principle: from each according to his abilities, to each according to his needs

"Key Insights for Companies With New XBRL Requirements," Ernst & Young's To the Point, April 21, 2011 --- Click Here

Bob Jensen's threads on XBRL are at

Recall that Lehman opted to record sales of poisoned securities in a questionable arms length sale to former employees in what was literally a situation where 100% of the sold securities would be returned at 5% or 8% higher prices.

As Lehman auditors, Ernst & Young is now contending in a lawsuit that they had no choice to account for these as sales under FAS 140 even though that accounting was deceptive for investors and hid financial risks.

The Lehman Bankruptcy Judge stomped down heavily upon Ernst & Young. Links to this report and other media quotations regarding the repo sales disgrace can be found at

A lawsuit against Ernst & Young was brought by the Attorney General of New York and is not pending in court. The SEC ducked this one like a miserable coward.


Ernst & Young
AccountingLink Alerts

29 April 2011

To the Point: Repo accounting amendments finalized

The Financial Accounting Standards Board (FASB) today amended its guidance on accounting for repurchase agreements. The amendments simplify the accounting by eliminating the requirement that the transferor demonstrate it has adequate collateral to fund substantially all the cost of purchasing replacement assets. As a result, more arrangements could be accounted for as secured borrowings rather than sales.

The attached To the Point summarizes what you need to know about the new guidance. It is also available online.


"Fatal Risk: The Must-Read Story Of AIG's Downfall," by John Hemton, Business Insider, April 18, 2011 ---

There are dozens of books on the financial crisis: I have read many of them and the Kindle samples for just about all of them. There are only two I would recommend: those are Bethany McLean and Joe Nocera’s excellent All the Devils are Here and the much more specifically detailed Fatal Risk from Roddy Boyd. Roddy's book is solely concerned with the failure of AIG.

Both books start without any strong ideological preconceptions and let the facts woven into a good story do the talking - and both wind up ambivalent about many of the major players - with many players having human weaknesses (gullibility, delusion, arrogance etc) but committing nothing that looks like a strong case for criminal prosecution. Reading these you can see why there are so few criminal prosecutions from the crisis. And you will also see just how extreme the human failings that caused the crisis are.

Continued in article

Bob Jensen's threads on the credit derivative disaster are at

Bob Jensen's Primer on Derivatives ---

"Litigation Piling Up At Ernst & Young," by Francine McKenna, Forbes, April 26, 2011 ---

Bob Jensen's threads on additional Ernst & Young lawsuits and a big PCAOB fine see

Here’s the speech and slides Francine used for the AAA Public Interest Conference on April 1-2 and Top X list of possible research topics for accounting and audit academics ---

Bob Jensen lists some research ideas at

"Are College Business Majors Slackers (relative to other majors in the college)?" by Louis Lavelle, Business Week, April 20, 2011 ---

Jensen Comment
Or put another way, are business majors and sports basket weaving majors in a race to the bottom?

"Microsoft's Office 365 Hits Public Beta," by Audrey Watters, ReadWriteWeb, April 18, 2011 ---
Also Office 365 Marketplace is also out for Beta testing

Innovative Corporate Performance Management: Five Key Principles to Accelerate Results
by Bob Paladino
ISBN: 978-0-470-62773-0 Hardcover 415 pages November 2010|
Amazon has it priced for under $37 new and $23 used

Jensen Comment
This is a bit too much Harvard Business School-like for me, but it does cover much of what we teach in managerial accounting.

There seem to be a dearth of reviews of this book. I don't know why?

April 19, 2011 reply from Jim Martin

Performance management seems to be a relatively new catch-all term like
cost management, activity-based management etc. I have been following this
concept, or catch-all term for a while. I suspect most of the book can be
found in Paladino's earlier and most recent works mainly in Strategic

Paladino, B. 2007. Five Key Principles of Corporate Performance
Management. John Wiley and Sons.

Paladino, B. 2007. Five key principles of corporate performance
management. Strategic Finance (June): 39-45.

Paladino, B. 2007. Five key principles of corporate performance
management. Strategic Finance (July): 33-41.

Paladino, B. 2007. Five key principles of corporate performance
management. Strategic Finance (August): 39-45.

Paladino, B. 2008. Strategically managing risk in today's perilous
markets. Strategic Finance (November): 26-33.

Paladino, B. 2010. Innovative Corporate Performance Management: Five Key
Principles to Accelerate Results. John Wiley and Sons.

Paladino, B. 2011. Achieving innovative corporate performance management.
Strategic Finance (March): 43-51.

Paladino, B. 2011. Achieving innovative corporate performance management.
Strategic Finance (April): 43-53.

Flip Video is No More ---

"Cisco's Flip Flop and (Mis)Managing the Obvious," by Michael Schrage, Harvard Business Review Blog, April 18, 2011 --- Click Here

"Did Cisco Slip on Flip or Was Flip a Flop?" by Rita McGrath, Harvard Business Review Blog, April 18, 2011 --- Click Here

So riddle me this: A business that generates an estimated $400 million in revenue, with 550 employees, and which sells an iconic product that was regularly praised as a model of innovation, is going to be shut down. In an analysis of Cisco's decision to shut down its Flip video recorder division, the New York Times reported April 12, 2011, that the networking giant had finally given up on a business that, at one point, was destined to bring it to relevance in consumer markets (along with networking gear company Linksys). The company was purchased just two years ago for $590 million.

The story is a familiar one. Large organization swallows up innovative smaller one, resulting eventually in the departure of the acquired company's leadership, complaints that the large organization doesn't understand what the small one is all about, lack of attention and commitment to developing the small company's future technology, and eventual disappearance of the small firm. It happens in technology all the time.

Theories on why Flip ...uh... flopped, abound. Did smartphones with easy Internet access make its functionality obsolete? Is running a consumer business simply not in the DNA of a company whose heart and soul revolve around networking gear for corporate customers? That might be an argument that Geoff Moore would make, in his well known distinction between complex operations and high volume businesses (he's long said it's extremely difficult to house both under a single corporate umbrella). Or maybe analysts just hated Cisco's consumer strategy, and the company struggled for too long to justify the acquisition. Or maybe they concluded that the product had no future and just decided to bail, without even attempting to find a buyer for the business.

One other theory is that, under the parental umbrella, Flip was not really able to continue to develop the string of innovations that would allow it to go beyond being just a small video camera that would make it more relevant to people's lives. People that loved Flip really loved it. And sales were up 15% over the prior year. Flip was also the best-selling camcorder on Amazon. Despite these signs of relevance, the good news was insufficient to keep it from the corporate chopping block.

Whatever the reason, the prognosis for using small-company acquisitions to change the DNA of large, established ones hasn't historically been very good. I guess we'll add the story of Flip to that history.


"Q1 CPA Exam Pass Rates Worst in Three Years ," by Jr. Deputy Accountant Adrienne Gonzalez, Going Concern, April 8, 2011 ---

Jensen Comment
I always read the Jr. Deputy's articles from beginning to end just to find the dirty words. Other readers like me will be disappointed in this article if they are primarily seeking dirty words. Sometimes I have to read through the reader comments she posts to find the dirtiest words. Her Jr. Deputy Accountant Blog dirty word posts are at
The dirtiest words Adrienne can think of is "Bernanke article" which I think she views as tantamount to the fermented vomit of a brainless yak.

Adrienne writes a lot about the CPA examination, although I'm not sure she's ever taken it. In her youth, however, she worked for a company selling CPA review materials. Actually she does have some good ideas about the CPA examination --- such as putting limits on the number of times failing candidates can retake the parts they keep failing.

Risk Management: it’s not rocket science:
It’s more complicated
Framing devices for thinking about risk

Grant's London Investment Conference February 24, 2011
The Dorchester London

"(Francine) McKenna to Debate GT’s (Andy) Bailey," by David Albrecht, The Summa,  April 14, 2011 ---

The annual conference of the Ohio Region of the American Accounting Association is hosting a debate between Francine McKenna (journalist/commentator on the audit industry) and Andy Bailey (Grant Thornton). It is scheduled for Friday, May 13, 2011, in Dublin (Columbus), Ohio. Conference registration is $180 on site.

Jensen Comment
Francine is pretty well known to subscribers of the AECM as a critic of the auditing profession and accounting firms in general ---
She also publishes regularly in her Forbes blog and plays Twick or Tweet on Twitter. I view her as an attack dog who's also a very good writer and knows more about the warts and festering boils of this profession than most anybody in international accountancy.

As a retired accounting professor, Dr. Bailey is a "part-time" Senior Policy Advisor to the National Policy and Strategy Group-Institutional Acceptance at Grant Thornton LLP. ---

My very good friend Andy has been an accounting/AIS professor at various flagship universities, including the Universities of Maine, Purdue, Minnesota, Ohio State, Queensland, Illinois, and Arizona. At Illinois and Arizona he was also the accounting programs director. He also notched his gun as a former Deputy Chief Accountant at the SEC. I gave him his first job at the University of Maine, but then I whisked off for two years in a think tank on the Stanford Campus so that we did not have a lot of interaction together on the Maine campus. Andy is also a former President of the American Accounting Association and former Editor of The Accounting Review and the International Journal of Accounting.

Is is fair to pit an attack dog against a poor guy who can't keep a job?
My sympathies have always been with Andy's ever-loving and faithful wife Irene who, for most of her long-time marriage to Andy, hardly had time to unpack and then repack the boxes. Andy and Irene also have an absolutely brilliant prodigy, Drew, who does advanced  research in physics.

In the Mckenna-Bailey debate on May 13 Francine will no doubt be on the attack with respect to auditing professionalism (read that lack thereof), and I expect Andy to provide some defense from perspectives learned while consulting with Grant Thornton. However, Andy is known as an advocate of accounting profession reforms. In 2008 he gave me permission to serve up one of his long "letters" (actually Andy has never written a short paper or short letter in his life).

Andy Bailey's letter to the Department of the Treasury --- 

Don't expect Andy to mask over the warts in our profession. But I'm sure Francine will bring up some bones that Andy won't like during the debate.

"Conquering the Security Silos," by Jerry Trites, IS Assurance Blog, April 5, 2011 ---

How did I get here? Somebody pushed me. Somebody must have set me off in this direction and clusters of other hands must have touched themselves to the controls at various times, for I would not have picked this way for the world.
Joseph Heller (as he might have described this sate of convergence of the FASB with the IASB)

"IASB / FASB "Convergence" Postponed Again: Tweedie and Seidman March Back to the Future," by James Peterson, re:Balance, April 20, 2011 ---

You might want to download this excellent article while it's still in front of the NYT's new  paywall

"The Logic of Cutting Corporate Taxes," by UC Berkeley Business Professor Laura D'Andrea Tyson, The New York Times, April April 8, 2011 ---
Full Article ---

Corporate taxes –- or rather their absence –- have jumped to the top of the news in recent weeks, even drawing humorous commentary from Jon Stewart and Bill Maher. Many Americans are outraged to learn that some profitable American corporations pay little or no taxes in the United States, especially when corporate profits enjoyed their fastest growth ever in 2010.

Shouldn’t the government raise the corporate tax rate to require corporations to contribute their “fair share” to deficit reduction and to enhance the progressivity of the tax system? The answer is no.

In today’s world of mobile capital, increasing the corporate tax rate would be a bad way to generate revenues for deficit reduction, a bad way to increase the progressivity of the tax code and a bad way to help American workers and their families.

After the 1986 tax overhaul, the United States had one of the lowest corporate tax rates among the advanced industrial countries. Since then, these countries have been slashing their rates both to attract investment by American and other foreign companies and to discourage their own companies from shifting operations and profits to foreign locations offering even lower tax rates.

The resulting “race to the bottom” in corporate tax rates has made the United States a less attractive place for both domestic and foreign investments, and that has encouraged American multinational companies to shift more of their income abroad, in ways permitted by the United States tax code.

The United States now has the highest corporate tax rate of all developed countries –- and is alone in its attempt to impose taxes on the worldwide income of its resident corporations. All other developed countries and most major emerging countries have adopted a territorial system that exempts most foreign income of their resident corporations from taxes.

Continued in article

Laura D’Andrea Tyson is a professor at the Haas School of Business at the University of California, Berkeley, and served as chairwoman of the Council of Economic Advisers under President Clinton.

"Study Finds a Big Gap Between College Seniors' Real and Perceived Learning," by Peter Schmidt, Chronicle of Higher Education, April 11, 2011 ---

Jensen Comment
Students that face licensure examinations shortly after graduating, such as the CPA Examination, Nursing Examination, etc. often purchase review course materials or even enroll in post-graduate licensure examination coaching courses. These review materials and coaching courses can be both informative and misleading. If students find that their college courses left enormous gaps in what they need know for licensing examinations it might be a rude awakening in terms of their perceptions about what they learned for their chosen careers. But they should carefully examine the real intent of curriculum they chose in college and how well the college accomplished the goal set out in that curriculum.

The Other Side of the Coin
If graduates feel that they learned over 90% of what they need to know for their licensing examinations, their perceptions may be misleading about what they should've gotten out of a college degree. College education is supposed to focus on much more than career training. If their particular colleges were strong on training and weak on educating then they may have been short changed for the long haul. For example, if an accounting, nursing, pharmacy, or engineering degree program provides terrific technical training courses for graduates who are lousy writers, terrible public speakers, and who learned almost nothing in color book history, literature, mathematics, and language courses, then there may indeed be a "big gap between real and perceived learning."

Students who scored much higher on their SAT/ACT tests in high school than they did on their GRE or related graduate school admissions tests should question the value of college to their "real learning."

Bob Jensen's threads on higher education controversies are at

"FASB Addresses TDRs (Troubled Debt Restructurings), Heads Up from Deloitte, April 6, 2011 ---

Yesterday, the FASB issued ASU 2011-02, which clarifies when a loan modification or restructuring is considered a troubled debt restructuring (TDR). The accounting for and disclosures about troubled assets (e.g., loans and receivables)2 continue to be important to financial organizations as well as to their investors and regulators. Recent focus has been on modifications3 made to loans. Under U.S. GAAP, when a loan’s terms4 have been modified, the creditor (i.e., the lender) must evaluate whether the modification represents a TDR. Possible effects of a conclusion that a modification is a TDR include the following:

• A lender may need to perform a different impairment measurement analysis.5

• A lender would have to provide additional financial statement disclosures.6

In evaluating whether a modification of a loan represents a TDR, an entity must use judgment to determine whether (1) the debtor (i.e., the borrower) is experiencing financial difficulty and (2) the lender has granted a concession to the borrower. The complexity of this evaluation, coupled with the increasing number of loan modifications, notably for residential mortgages but also for commercial real estate loans during the past year, prompted the FASB to develop additional guidance and clarify existing TDR requirements. The ASU is intended to result in more consistent identification of TDRs by lenders.

Key Provisions

Is a Debtor Experiencing Financial Difficulty?

The ASU amends ASC 310-40 to include the indicators from ASC 470-60 that a lender should consider in determining whether a borrower is experiencing financial difficulties

Continued in article

On Mon, Apr 11, 2011 at 12:28 PM, Ramesh Fernando <>  wrote:

Here is a DBA program for working professionals offered by the Coles College of Business at Kennesaw State University. It is a AACSB accredited university 

An article about the Dean and the DBA program^1816860 

Ramesh Fernando
CMA Candidate (Canada)
Ottawa, Ontario, Canada

April 11, 2011 reply from Bob Jensen

The FAQa page discloses many items that should be carefully considered.

First, the program is not an online program. It is a residency program.

Second, the cost is very high --- nearly $100,000 plus room and board. No tuition relief is given for Georgia residents.

Third, virtually all AACSB schools with accounting doctoral programs have financial aid in a combination of teaching and research assistance that pretty well eliminates tuition costs and defrays much of the room and board cost. I don't think this a atypical DBA program is as generous in its tuition, room, and board allowances (if there are any at all).

This program is a three-year program that is much lighter on research education and hands-on research guidance. It's not at all clear that the accounting programs in major universities will consider graduates from this program to be fully qualified for the rigors of tenure track appointments that have heavy research and publication requirements.

Since virtually all accounting programs in AACSB accredited schools are 4-6 year residency programs with GMAT admission requirements, I think this 3-year program without such requirements will make graduates second class citizens unless they have some wonderful added credentials in government or industry experience such as four-star generals or former CEOs of Fortune 500 companies or PhD degrees in science or humanities prior to entering this program.

I'm always dubious of graduate programs that do not require GRE, GMAT, or equivalent admission test requirements.

It would seem that this program is designed to be a cash cow aimed at continuing education of executives. As such is is more like some of the European executive doctoral programs that do not pretend to compete with rigorous research-oriented doctoral programs. Accordingly, I doubt that graduates will find many opportunities in major U.S. universities having research-oriented tenure track programs in accountancy.

Graduates in this program might have to apply for jobs as PQ faculty rather then AQ faculty. PQ faculty often teach full time without being on tenure tracks.

From a Boston hotel today,
Bob Jensen


April 12, 2011 reply from Dana Hermanson


A colleague passed along the postings about the KSU DBA program, and I wanted to share a few perspectives. I have been teaching in the program for two years, have two of my students at the dissertation stage, and have two more of my students at the end of their first year. I also have taught the broader group of accounting and business DBA students.

When I first became involved with this program, I had some uncertainties about a new program's potential quality level, focus, etc. - concerns similar to some of those in your posting. Those uncertainties have been resolved in a very, very positive manner, such that I feel very good about our program and its potential contribution to accounting academe.

In terms of the program, it is definitely not designed to be like the European programs (continuing ed for executives), but it also is not a traditional 4-6 year PhD program (frankly, the 4-6 year commitment keeps most interested people out of accounting academe). The program is 3 years, probably 30 hours per week, research focused, and designed primarily for people with significant business experience (15-25 years) who want to become AQ faculty at KSU-type schools (or at less research-intensive places). My understanding is that we don’t use the GMAT because it does not tell us much about the academic potential of students who are older (e.g., 40-55 years old).

We already are beginning to place students in AQ, tenure-track faculty positions in AACSB accredited schools - not R1 schools, but places with a balanced emphasis on research and teaching. We believe that this is a segment of the market that is crying out for AQ faculty, as the large PhD schools often serve mainly each others' needs for faculty. In addition, such "balanced" schools appear to greatly value professional experience - both for classroom purposes and for producing relevant research.

I have found the DBA students to be outstanding, far above what I expected. They bring years of experience, know what the relevant questions are, and catch on very quickly. They are generating working papers, and one of my students already has a publication, as well as a dissertation grant from the IIA and a research grant from the IMA. I expect their dissertations to lead to several significant publications, and I am working on other projects and papers with the students as well.

As far as the financial side, the program is expensive, but my understanding is that it's not a cash cow. We are keeping the student #s consistent with our ability to serve them well. We involve both KSU research faculty (in accounting, people such as Audrey Gramling, Divesh Sharma, Vineeta Sharma, Dennis Chambers, Sri Ramamoorti) and Global Scholars in the program. For example, Jeff Cohen at Boston College is serving on a dissertation committee with me, as is Todd DeZoort at the Univ. of Alabama. Both are leading researchers in the auditing field.

I hope this additional information is helpful. The KSU DBA is a new model, and I am very excited to be working in this program. And, I can assure you that I would not be involved in this program if I thought it lacked rigor and quality. I also would have no interest in working in a program that was not focused on producing AQ faculty who will be productive researchers and excellent teachers.


Dana R. Hermanson
Dinos Eminent Scholar
Chair of Private Enterprise Director of Research
Corporate Governance Center
Kennesaw State University Coles College of Business
1000 Chastain Road, Mail Drop 0402 Kennesaw, GA 30144-5591

April 13, 2011 reply from Bob Jensen

Thank you for the update Dana.

May I post your comments on the AECM?

Is financial aid available to attract minority students? The program seems well-suited to those students being helped by the KPMG Foundation since it's designed to be completed in three years.

However, the KPMG Foundation's minority students, along with your targeted-market executives, are not likely to have the mathematics, statistics, and economics pre-requisites for doctoral program research courses.

Do you offer these research preparation courses and does this add to the three years of study? In a traditional 4-6 six year program these quant courses are typically taught in the early years and are often the reason these programs take 4-6 years.

It would also seem that your accounting DBA students must be CPAs or CMAs before they are admitted to the program in order to complete the program in three years. In the typical 4-6 year program students weak in accounting background, such as former math and economics majors, must take undergraduate financial, auditing, and tax courses before truly matriculating into the graduate accounting courses.

Is your program attracting many Asian students who are typically strong in math and weak in US financial, auditing, and tax courses? How long would these applicants typically take to complete your DBA program?


Bob Jensen


Dana's answers are included below (I.m still getting used to my new T-mail system that does its best to hide some replies to messages).

It appears that the KSU DBA program with a concentration in accountancy manages to maintain a three-year target primarily by only admitting candidates who could teach accounting on a PQ basis before earning the DBA, by admitting candidates who are not seeking tenure track positions in R1 research universities (and thereby minimizing the quantitative methods courses and doctoral theses required in other North American accounting doctoral programs), and by targeting executives not in need of financial aid like nearly all accounting doctoral candidates in other North American accounting doctoral programs.

It would appear that this DBA program prepares accounting professors much, much better than the AACSB Bridge Program except for bridge candidates who already have both strong accounting backgrounds plus quantitative methods backgrounds such as CPAs who also have mathematics, statistics, or social science PhD degrees and want to bridge into AQ teaching and research in accounting programs.


April 13, 2011 reply from Dana Heramanson

> >Is financial aid available to attract minority students? >The program seems well-suited to those students being helped by the KPMG >Foundation since it's designed to be completed in three years. >

My understanding is that there is not financial aid offered specifically through the DBA program, but students can go through the KSU Financial Aid office to explore their options. Also, my guess is that the KSU DBA students are, on average, much more senior than the people coming through the KPMG program. However, I will look into this and would welcome the chance to collaborate with KPMG.

> >However, the KPMG Foundation's minority students, along with your >targeted-market executives, are not likely to have the mathematics, >statistics, and economics pre-requisites for doctoral program research >courses. > > >Do you offer these research preparation courses and does this add to the >three years of study? >In a traditional 4-6 six year program these quant courses are typically >taught in the early years and are often the reason these programs take 4-6 >years. >

We have a heavy, hands-on quantitative methods sequence in the early part of our program. All students take this sequence, and it is part of our 3 year program. Joe Hair (a leading quant methods person in marketing, formerly at LSU) has designed this sequence and teaches much of it. In addition, the students get more discipline-specific quant training in the seminars.

To date, the accounting students have gravitated primarily toward auditing and corporate governance research topics, where our faculty is concentrated, and many of the students are pursuing behavioral/experimental research. As a result, the quantitative dimension is less overwhelming than if the students were pursuing traditional financial accounting research targeted at TAR and JAR, which often involves very advanced econometric techniques. I have been careful to communicate to the students the strength of our faculty (mainly auditing and governance but coming on strong in financial with some recent hires) and the challenges of competing at the top-tier level in financial accounting research. I encourage them to think about their backgrounds, professional contacts, etc. and leverage those to produce unique research. This is the strategy I have used personally.

> >It would also seem that your accounting DBA students must be CPAs or CMAs >before they are admitted to the program in order to complete the program in >three years. In the typical 4-6 year program students weak in accounting >background, such as former math and economics majors, must take >undergraduate financial, auditing, and tax courses before truly >matriculating into the graduate accounting courses.

Yes, the students are exceptionally strong in accounting (they certainly know more accounting than I do!). For example, one of the Cohort 1 accounting students is a former CEO and CFO, has an MBA from Columbia Univ., and currently serves as an audit committee chair for a public company. Another Cohort 1 accounting student was a CPA firm partner for many years and has recently served as a bank director and audit committee member. She has taught as a lecturer at a university for the past several years. The third Cohort 1 accounting student has worked in a variety of financial management and systems positions with the University System of Ga. See for additional information on the students. These students have all the practical accounting expertise they need, and we are teaching them to do research on questions of interest to them.

> > >Is your program attracting many Asian students who are typically strong in >math and weak in US financial, auditing, and tax courses? >How long would these applicants typically take to complete your DBA program?

To date, this has not been the profile of our students, as our students are those with 15-25 years of business experience looking to transition into academe (several have been teaching as lecturers in recent years and see the need to become AQ). I would expect that an international student with limited exposure to U.S. accounting would be much better served in a traditional Ph.D. program. Our program is designed for people with significant accounting practice experience.

"CAQ Reacts to SEC’s SOX Section 404(b) Study," Center for Audit Quality, April 25, 2011 ---

The Center for Audit Quality (CAQ) issued the following statement from Executive Director Cindy Fornelli regarding the U.S. Securities and Exchange Commission’s (SEC) Study and Recommendations on Section 404(b) of the Sarbanes-Oxley Act of 2002 For Issuers With Public Float Between $75 and $250 Million, as required by the Dodd-Frank Act:

“I am pleased that the SEC’s Office of the Chief Accountant’s thoughtful study recommends retention of Section 404(b) of the Sarbanes Oxley Act for companies whose market capitalization is between $75 and $250 million. Section 404(b) requires independent auditors to attest to management’s assessment of the effectiveness of its internal controls over financial reporting (ICFR).

The study concluded that costs of Section 404(b) compliance have declined and financial reporting is more reliable when the auditor is involved with ICFR assessments. Importantly, the study found that investors generally view the auditor‘s attestation on ICFR as beneficial. Finally, we are happy to see that there is no conclusive evidence linking the requirements of Section 404(b) to listing decisions of the studied range of issuers.

The CAQ, joined by the Council of Institutional Investors, filed a comment last September with the SEC fully supporting retention of 404(b). We hope this study will effectively discourage further discussions around ways to dilute the investor protections contained in Sarbanes-Oxley.”

Continued in article

Bob Jensen's threads on auditing professionalism ---

Looking back at the events leading up to the 2008 crisis by Michael Burry
Vanderbilt University Chancellor's Lecture
April 5, 2011
Thank you Jim Mahar for the heads up

Jensen Comment
Michael Burry is the physician who anticipated the subprime scandal and made a fortune on short positions.

Bob Jensen's threads on the subprime scandals ---

"Audit quality at risk in Canada, regulator warns," by Janet McFarland, The Globe and Mail, April 18, 2011 ---
Thank you Jerry Trites for the heads up.

Canada’s accounting firms are facing growing pressure from companies to cut their audit fees despite a warning it could lower the quality of financial disclosure.

Brian Hunt, chief executive officer of the Canadian Public Accountability Board, said companies in Europe and the United States have been demanding auditors make significant cuts to their annual fees, and the trend has shown up in Canada since the economic crisis in 2008 and 2009.

“A lot of folks are feeling the company is under pressure, and one way we can save is to reduce the audit fee,” Mr. Hunt said in an interview Monday. “The audit committees [of boards] are just asking for an arbitrary 30- or 40-per-cent cut. … What audit committees have to do is step back and think about what they’re doing.”

Mr. Hunt said CPAB, which inspects Canada’s audit firms annually, has no problem with companies negotiating lower fees in a competitive market, but said some companies have demanded cuts of up to one-third in their annual audit fees, sparking concern that audit quality will suffer.

Audit firms cannot easily slash their services because they must meet acceptable standards or risk being sanctioned by CPAB, Mr. Hunt said. Instead, to absorb the lost revenue they will reduce staff training or hire fewer young auditors.

The result, he said, is that a company’s audit may not suffer in the first year, but quality will degrade over time with reductions in training and staff.

Continued in article

Teaching Case from The Wall Street Journal Accounting Weekly Review on April 22, 2011

Strings Attached to Options Grant for GE's Immelt
by: Andrew Dowell and Joann S. Lublin
Apr 20, 2011
Click here to view the full article on

TOPICS: Corporate Governance, Executive Compensation, Stock Options

SUMMARY: GE granted two million stock options valued at $7.4 million to CEO Jeffrey Immelt one year ago in March 2010. The company now has stipulated that the options will only "...vest if the company successfully boosts its industrial businesses and delivers shareholder returns...that are as good or better than those of the Standard & Poor's 500-stock index...The move underscores [in part] shareholders' increasing clout regarding matters of executive compensation. GE's decision comes ahead of the company's annual meeting next week, when shareholders will cast a nonbinding vote on GE's pay practices."

CLASSROOM APPLICATION: The article is excellent for discussing corporate governance, the annual meeting of shareholders, the proxy process, the incentive value of stock option plans, and the accounting and valuation components of these plans.

1. (Introductory) What are executive stock options? What is the business purpose of awarding options?

2. (Introductory) What is a proxy statement? Access the filing of the proxy statement on the SEC web site at What matters will be decided at the annual GE shareholders' meeting? What information is contained in the proxy statement in relation to these matters?

3. (Advanced) The article states that "GE says" the options granted to Mr. Immelt were valued at $7.4 million in March 2010. How is this value determined? Where does "GE state" the value of these options?

4. (Advanced) Access the filing referred to in the article at On what form was this filing made? On what date? Summarize the contents of the filing.

5. (Introductory) What is the Institutional Shareholder Services (ISS)? What was their initial recommendation to shareholders about the grant of options to Mr. Immelt?

6. (Advanced) Access the filing by GE on the SEC web site at after the company's communication to shareholders that it disagreed with the ISS recommendation. Read the points made by GE, and particularly scroll down to the fourth item regard the option valuation model used by GE versus the one used by ISS. What are the concerns? How does the option pricing formula help to assess the compensation given to Jeffrey Immelt?

Reviewed By: Judy Beckman, University of Rhode Island

"Strings Attached to Options Grant for GE's Immelt," by: Andrew Dowell and Joann S. Lublin, The Wall Street Journal, April 20, 2011 ---

Responding to shareholder criticism, General Electric Co. agreed to put new conditions on two million stock options granted to Chief Executive Jeff Immelt a year ago.

The options, which GE says were valued at $7.4 million when granted in March 2010, will now only vest if the company successfully boosts its industrial businesses and delivers shareholder returns, including stock appreciation and dividends, that are as good or better than those of the Standard & Poor's 500-stock index.

"Some shareholders have expressed the view that additional performance conditions should be applied to Mr. Immelt's 2010 stock option award," GE said in a filing with the Securities and Exchange Commission.

The move underscores the pressure on Mr. Immelt to get the company growing again, as well as shareholders' increasing clout regarding matters of executive compensation. GE's decision comes ahead of the company's annual meeting next week, when shareholders will cast a nonbinding vote on GE's pay practices.

The options grant was unusual for GE, which last granted Mr. Immelt options in 2002 and afterward shifted to equity awards based on measurable performance targets. The company said the 2010 award was intended to "increase the equity-based portion of his compensation" and to express confidence in the CEO.

Institutional Shareholder Services, which advises mutual funds and other shareholders about how to vote on corporate matters, criticized the grant for not being sufficiently pegged to GE's performance.

In light of the new conditions, ISS dropped its objections and recommended that shareholders vote to support GE's pay practices.

Under the new terms, 50% of the options will vest only if the company pulls in cumulative industrial cash flow from operating activities of at least $55 billion between the start of 2011 and the end of 2014. The other half will vest only if GE's total shareholder return is equal to or better than that of the S&P 500 over the same period.

Mr. Immelt is one of just 10 CEOs who got more than one million options last year—including two who received bigger grants than his, according to an analysis of the latest proxy statements by Hay Group for The Wall Street Journal. The consultancy looked at 320 CEOs of major U.S. corporations, of whom 232 received option awards in 2010.

Continued in article

Bob Jensen's threads on FAS 123R are at

"Ernst & Young must face class action over Broadcom's option backdating," by Carol J. Williams, Los Angeles Times, April 14, 2011 ---

A federal appeals court Thursday reinstated a class-action lawsuit filed by Broadcom Corp. investors against Ernst & Young, saying the auditors should have known about an option-backdating scheme at the Irvine tech company.

A lower-court judge had dismissed the case against Ernst & Young after concluding the plaintiffs hadn’t shown that the auditors knew that the value of Broadcom’s stock was probably inflated by the company’s manipulation of its financial statements.

Thursday’s ruling by the U.S. 9th Circuit Court of Appeals in San Francisco reversed that dismissal and scolded Ernst & Young for not acting to stop the $2.2-billion backdating scheme.

Ernst & Young "apparently accepted management at its word, never received requested documentation and issued an unqualified opinion on the accuracy of Broadcom’s financial statements," the 9th Circuit panel ruled in overturning the lawsuit’s dismissal by U.S. District Judge Manuel L. Real in Los Angeles.

Ernst & Young’s audit "amounted to no audit at all," the appeals court said.

A spokesman for Ernst & Young declined to comment on the ruling, saying the firm was still reviewing it.

Continued in article

Bob Jensen's threads on Ernst & Young are at

Teaching Case from The Wall Street Journal Accounting Weekly Review on April 22, 2011

Strings Attached to Options Grant for GE's Immelt
by: Andrew Dowell and Joann S. Lublin
Apr 20, 2011
Click here to view the full article on

TOPICS: Corporate Governance, Executive Compensation, Stock Options

SUMMARY: GE granted two million stock options valued at $7.4 million to CEO Jeffrey Immelt one year ago in March 2010. The company now has stipulated that the options will only "...vest if the company successfully boosts its industrial businesses and delivers shareholder returns...that are as good or better than those of the Standard & Poor's 500-stock index...The move underscores [in part] shareholders' increasing clout regarding matters of executive compensation. GE's decision comes ahead of the company's annual meeting next week, when shareholders will cast a nonbinding vote on GE's pay practices."

CLASSROOM APPLICATION: The article is excellent for discussing corporate governance, the annual meeting of shareholders, the proxy process, the incentive value of stock option plans, and the accounting and valuation components of these plans.

1. (Introductory) What are executive stock options? What is the business purpose of awarding options?

2. (Introductory) What is a proxy statement? Access the filing of the proxy statement on the SEC web site at What matters will be decided at the annual GE shareholders' meeting? What information is contained in the proxy statement in relation to these matters?

3. (Advanced) The article states that "GE says" the options granted to Mr. Immelt were valued at $7.4 million in March 2010. How is this value determined? Where does "GE state" the value of these options?

4. (Advanced) Access the filing referred to in the article at On what form was this filing made? On what date? Summarize the contents of the filing.

5. (Introductory) What is the Institutional Shareholder Services (ISS)? What was their initial recommendation to shareholders about the grant of options to Mr. Immelt?

6. (Advanced) Access the filing by GE on the SEC web site at after the company's communication to shareholders that it disagreed with the ISS recommendation. Read the points made by GE, and particularly scroll down to the fourth item regard the option valuation model used by GE versus the one used by ISS. What are the concerns? How does the option pricing formula help to assess the compensation given to Jeffrey Immelt?

Reviewed By: Judy Beckman, University of Rhode Island

"Strings Attached to Options Grant for GE's Immelt," by: Andrew Dowell and Joann S. Lublin, The Wall Street Journal, April 20, 2011 ---

Responding to shareholder criticism, General Electric Co. agreed to put new conditions on two million stock options granted to Chief Executive Jeff Immelt a year ago.

The options, which GE says were valued at $7.4 million when granted in March 2010, will now only vest if the company successfully boosts its industrial businesses and delivers shareholder returns, including stock appreciation and dividends, that are as good or better than those of the Standard & Poor's 500-stock index.

"Some shareholders have expressed the view that additional performance conditions should be applied to Mr. Immelt's 2010 stock option award," GE said in a filing with the Securities and Exchange Commission.

The move underscores the pressure on Mr. Immelt to get the company growing again, as well as shareholders' increasing clout regarding matters of executive compensation. GE's decision comes ahead of the company's annual meeting next week, when shareholders will cast a nonbinding vote on GE's pay practices.

The options grant was unusual for GE, which last granted Mr. Immelt options in 2002 and afterward shifted to equity awards based on measurable performance targets. The company said the 2010 award was intended to "increase the equity-based portion of his compensation" and to express confidence in the CEO.

Institutional Shareholder Services, which advises mutual funds and other shareholders about how to vote on corporate matters, criticized the grant for not being sufficiently pegged to GE's performance.

In light of the new conditions, ISS dropped its objections and recommended that shareholders vote to support GE's pay practices.

Under the new terms, 50% of the options will vest only if the company pulls in cumulative industrial cash flow from operating activities of at least $55 billion between the start of 2011 and the end of 2014. The other half will vest only if GE's total shareholder return is equal to or better than that of the S&P 500 over the same period.

Mr. Immelt is one of just 10 CEOs who got more than one million options last year—including two who received bigger grants than his, according to an analysis of the latest proxy statements by Hay Group for The Wall Street Journal. The consultancy looked at 320 CEOs of major U.S. corporations, of whom 232 received option awards in 2010.

Continued in article

Bob Jensen's threads on FAS 123R are at

Issues in Computing a College's Cost of Degrees Awarded and the "Worth" of Professors

April 7, 2011 message from Francine McKenna

Huffington Post:
$817 an hour. Are professors worth what they're getting paid? 

Original Tweet:

April 7, 2011 reply from Bob Jensen

Hi Francine

I think the title put on this by Huffington Post is misleading. The "worth" of somebody in a profession must focus as much or even more on the worth of the benefits of that person vis-a-vis the cost. My wife had four (soon to be five) very expensive surgeries from one of the outstanding spine surgeons in the world. We can aggregate the cost of this Boston surgeon's billings, but how in the world would we ever measure his benefit or worth?

Incidentally he's also one of the most important surgical residency teachers in the shadows of the Harvard Medical School. Residents seek him out because he's such a superb teacher. How do we measure the value of his contributions to the future surgeries performed by all the surgical residents who've worked closely with this surgeon?

Similarly we can aggregate the cost of having Dennis Beresford for 14 years at the University of Georgia. But how in the world would we ever measure his "worth?" How do we measure the value of his contributions to all the accounting students who've worked closely with this remarkable professor of accountancy?.

Of course we could also argue that the benefit of 23-year old Ms. Kinder teaching kindergarten in South Chicago is invaluable. About the only way we have of comparing a unique Harvard spine surgeon with a kindergarten teacher is how much it takes to replace them with professionals having comparable skills. I would argue that Ms. Kinder can be replaced for a whole lot less money than my wife's very uniquely qualified spine surgeon.

However, comparing their annual compensation is only a very, very rough way to measure "worth" to society. Like you, I hesitate to conclude that the "worth" of Stanley O'Neal was the $160 million it took to get him out the door. Compensation is confounded by a whole lot of factors other than societal "worth."
"Stanley O'Neal who is leaving Merrill Lynch after giving it a big fat gift of a $8 billion dollar write-off thanks to risky investments. The board just can't help but feed this obesity epidemic. They're giving him $160 million plus in severance for his troubles as he heads for the door. At some point, the nation's corporations, or most pointedly, their corporate boards, will realize throwing money at their CEOs is probably not the best idea"
"Obesity Epidemic Among CEO Pay," The Huffington Post, November 1, 2007 --- 

Related to this is the vexing issue of computing the cost of degrees awarded such as an undergraduate degree in art history versus a PhD in accountancy ---
Issues in Computing a College's Cost of Degrees Awarded ---

Here are my earlier threads on the controversial Texas A&M costing study that focused more on comparing the cost of degrees awarded than the "worth" of Aggie professors like Ed Swanson.or Tom Omer.

Also see ---

Texas A&M Case on Computing the Cost of Professors and Academic Programs

Jensen Comment
In an advanced Cost/Managerial Accounting course this assignment could have two parts. First assign the case below. Then assign student teams to write a case on how to compute the cost of a given course, graduate in a given program, or a comparison of a the cost of a distance education section versus an onsite section of a given course taught by a tenured faculty member teaching three courses in general as well as conducting research, performing internal service, and performing external service in his/her discipline.

From The Wall Street Journal Accounting Weekly Review on November 5, 2010

Putting a Price on Professors
by: Stephanie Simon and Stephanie Banchero
Oct 23, 2010
Click here to view the full article on

TOPICS: Contribution Margin, Cost Management, Managerial Accounting

SUMMARY: The article describes a contribution margin review at Texas A&M University drilled all the way down to the faculty member level. Also described are review systems in place in California, Indiana, Minnesota, Michigan, Ohio and other locations.
CLASSROOM APPLICATION: Managerial concepts of efficiency, contribution margin, cost management, and the managerial dashboard in university settings are discussed in this article.

1. (Introductory) Summarize the reporting on Texas A&M University's Academic Financial Data Compilation. Would you describe this as putting a "price" on professors or would you use some other wording? Explain.

2. (Introductory) What is the difference between operational efficiency and "academic efficiency"?

3. (Advanced) Review the table entitled "Controversial Numbers: Cash Flow at Texas A&M." Why do you think that Chemistry, History, and English Departments are more likely to generate positive cash flows than are Oceanography, Physics and Astronomy, and Aerospace Engineering?

4. (Introductory) What source of funding for academics is excluded from the table review in answer to question 3 above? How do you think that funding source might change the scenario shown in the table?

5. (Advanced) On what managerial accounting technique do you think Minnesota's state college system has modeled its method of assessing campuses' performance?

6. (Advanced) Refer to the related article. A large part of cost increases in university education stem from dormitories, exercise facilities, and other building amenities on campuses. What is your reaction to this parent's statement that universities have "acquiesced to the kids' desire to go to school at luxury resorts"?

Reviewed By: Judy Beckman, University of Rhode Island

Letters to the Editor: What Is It That We Want Our Universities to Be?
by Hank Wohltjen, David Roll, Jane S. Shaw, Edward Stephens
Oct 30, 2010
Page: A16

"Putting a Price on Professors," by Stephanie Simon and Stephanie Banchero, The Wall Street Journal, October 23, 2010 ---

Carol Johnson took the podium of a lecture hall one recent morning to walk 79 students enrolled in an introductory biology course through diffusion, osmosis and the phospholipid bilayer of cell membranes.

A senior lecturer, Ms. Johnson has taught this class for years. Only recently, though, have administrators sought to quantify whether she is giving the taxpayers of Texas their money's worth.

A 265-page spreadsheet, released last month by the chancellor of the Texas A&M University system, amounted to a profit-and-loss statement for each faculty member, weighing annual salary against students taught, tuition generated, and research grants obtained.

Ms. Johnson came out very much in the black; in the period analyzed—fiscal year 2009—she netted the public university $279,617. Some of her colleagues weren't nearly so profitable. Newly hired assistant professor Charles Criscione, for instance, spent much of the year setting up a lab to research parasite genetics and ended up $45,305 in the red.

The balance sheet sparked an immediate uproar from faculty, who called it misleading, simplistic and crass—not to mention, riddled with errors. But the move here comes amid a national drive, backed by some on both the left and the right, to assess more rigorously what, exactly, public universities are doing with their students—and their tax dollars.

As budget pressures mount, legislators and governors are increasingly demanding data proving that money given to colleges is well spent. States spend about 11% of their general-fund budgets subsidizing higher education. That totaled more than $78 billion in fiscal year 2008, according to the National Association of State Budget Officers.

The movement is driven as well by dismal educational statistics. Just over half of all freshmen entering four-year public colleges will earn a degree from that institution within six years, according to the U.S. Department of Education.

And among those with diplomas, just 31% could pass the most recent national prose literacy test, given in 2003; that's down from 40% a decade earlier, the department says.

"For years and years, universities got away with, 'Trust us—it'll be worth it,'" said F. King Alexander, president of California State University at Long Beach.

But no more: "Every conversation we have with these institutions now revolves around productivity," says Jason Bearce, associate commissioner for higher education in Indiana. He tells administrators it's not enough to find efficiencies in their operations; they must seek "academic efficiency" as well, graduating more students more quickly and with more demonstrable skills. The National Governors Association echoes that mantra; it just formed a commission focused on improving productivity in higher education.

This new emphasis has raised hackles in academia. Some professors express deep concern that the focus on serving student "customers" and delivering value to taxpayers will turn public colleges into factories. They worry that it will upend the essential nature of a university, where the Milton scholar who teaches a senior seminar to five English majors is valued as much as the engineering professor who lands a million-dollar research grant.

And they fear too much tinkering will destroy an educational system that, despite its acknowledged flaws, remains the envy of much of the world. "It's a reflection of a much more corporate model of running a university, and it's getting away from the idea of the university as public good," says John Curtis, research director for the American Association of University Professors.

Efforts to remake higher education generally fall into two categories. In some states, including Ohio and Indiana, public officials have ordered a new approach to funding, based not on how many students enroll but on what they accomplish.

Continued in article

Jensen Comment
This case is one of the most difficult cases that managerial and cost accountants will ever face. It deals with ugly problems where joint and indirect costs are mind-boggling. For example, when producing mathematics graduates in undergraduate and graduate programs, the mathematics department plays an even bigger role in providing mathematics courses for other majors and minors on campus. Furthermore, the mathematics faculty provides resources for internal service to administration, external service to the mathematics profession and the community, applied research, basic research, and on and on and on. Faculty resources thus become joint product resources.

Furthermore costing faculty time is not exactly the same as costing the time of a worker that adds a bumper to each car in an assembly line. While at home in bed going to sleep or awakening in bed a mathematics professor might hit upon a Eureka moment where time spent is more valuable than the whole previous lifetime of that professor spent in working on campus. How do to factor in hours spent in bed in CVP analysis and Cost-Benefit analysis? Work sampling and time-motion studies used in factory systems just will not work well in academic systems.

In Cost-Profit-Volume analysis the multi-product CPV model is incomprehensible without making a totally unrealistic assumption that "sales mix" parameters are constant for changing levels of volume. Without this assumption for many "products" the solution to the CPV model blows our minds.

Another really complicating factor in CVP and C-B analysis are semi-fixed costs that are constant over a certain time frame (such as a semester or a year for adjunct  employees) but variable over a longer horizon. Of course over a very long horizon all fixed costs become variable, but this generally destroys the benefit of a CVP analysis in the first place. One problem is that faculty come in non-tenured adjunct, non-tenured tenure-track, and tenured varieties.

I could go on and on about why I would never attempt to do CVP or C-B research for one of the largest universities of the world. But somebody at Texas A&M has rushed in where angels fear to tread.

Bob Jensen's threads on managerial and cost accounting are at 

Bob Jensen's threads on higher education controversies are at



Computing a College's Cost of a College Degree: 
This illustrates problems managerial accountants face when estimating various types of costs in industry

"What Does a Degree Cost?" by Doug Lederman, Inside Higher Ed, May 19, 2009 ---

College tuition prices keep rising. State budgets are stagnant or shrinking. And policy makers, from President Obama on down, are increasingly calling for increases in the number of Americans who get some higher education or training.

Those factors have led more state legislators, trustees and others to argue that, to accomplish the latter goal given the former circumstances, colleges are going to have to lower what they spend to produce the average credential they award. But any discussion of lowering the "cost per degree" must start with a more fundamental question: What does a degree cost to produce now?

That question may be basic, but it is not simple, as a new report from the Delta Project on Postsecondary Education Costs, Productivity, and Accountability makes clear. The paper, prepared by Nate Johnson, associate director of institutional planning and research at the University of Florida, lays out a range of possible approaches to calculating the cost of a college degree and then calculates them using a rich set of data from the State University System of Florida, where Johnson formerly worked.

The paper shows that it is distinctly possible to come up with such a figure, but the wide variation in the numbers -- based on institution type, program, degree level, and other factors -- suggests that the answer will depend in large part on how the question is framed. And that decision is a surprisingly value-laden one, says Johnson. "You frame the question one way if you are only interested in students who graduate, and another way if you want to know the cost for people who go to college and don't complete," he says. "The point is, this is not just a data question. It's a question of what it is that we want from our colleges and universities."

The broad work of the Delta Project and its founder, Jane Wellman, is to analyze the "spending side" of the higher education cost and price picture; the group has released a series of reports that try to document the interplay of colleges' revenues and expenditures, and how those trends affect what they charge to students. The new study, which grew out of Johnson's work in Florida, he says, aims to develop a "common language," if not a common format, for focusing the discussion about how one might measure the cost of a degree in a particular institution, system or state. Toward that end, Johnson proposes several possible ways of calculating the average cost of a degree.

The analyses are based on data showing that the Florida university system incurred an average of $288 in direct and indirect instructional expenditures per credit hour, with wide variation by level ($188 for lower division undergraduate, $537 for master's, etc.), institution ($240 for an upper level undergraduate credit at the massive University of Central Florida, $677 for the same credit at the 700-student New College), and field of study ($159 in family/consumer sciences, $509 for natural resources/conservation). The analysis counts only those expenditures derived from state appropriations and student tuition, excluding endowment and other funds.

The first estimate, which Johnson calls the "catalog cost," calculates what a college would spend to educate a student who fulfills the "catalog requirements" of the average degree to the letter -- no more, no less. (The equation: cost per credit hour x instructional expenditures/credit hours.) The average cost is $26,485, with institutions within the Florida system ranging from $22,440 to nearly double that. Johnson also found significant variation by field because of vastly different requirements and program length, with mechanical engineering averaging $37,870 vs. $27,159 for elementary education.

The catalog method is easily understood, but it "does not reflect actual student behavior," Johnson notes. More accurate in gauging how students actually maneuver through institutions, he writes, is the "transcript method" of cost analysis, in which the total number of credit hours students take are multiplied by the cost per credit hour, and then divided by the number of degrees awarded. The average freshman who entered a Florida system university and graduated in 2003-4 "attempted" 131 credits, including failed or withdrawn courses and subtracting for any AP or dual enrollment courses that reduced their course requirements.

The average "transcript cost," then, was $31,763; converting to 2006 dollars, to make parallel to the figures from the "catalog cost" analysis, Johnson writes, the average figure is $33,672. (The 2003-4 figure for mechanical engineering was $47,257.)

Both the catalog and transcript cost methods factor into the calculation only those costs incurred by students who actually graduate. The third major analysis, "full cost attribution," examines the entire amount that an institution or system spent on instructional purposes to achieve an "aggregate level of degree completion." The equation looks like this: all credits taken at an institution over three years x the three-year average cost per credit hour/three years of degrees.

Not surprisingly, because all courses taken by all students would be allocated to the smaller proportion who actually earned degrees, this produces the highest cost per degree number; $37,757 in 2002-3 dollars, equivalent to $40,645 in 2005-6, Johnson writes. This analysis grows less predictable and valid the more narrowly it is drawn, he adds, because programs with high attrition, or into which many students transfer late in the game, can have their figures drastically altered. The overall high and low for the Florida university system, for example, were $170,831 for "multidisciplinary studies" and $21,473 for parks and recreation, and the variation by degree level was enormous: $33,425 for a law degree, $259,781 for an M.D., and $121,725 for a doctorate.

So which is the most accurate assessment of what a university spends to educate a graduate? The catalog cost of $26,485, the transcript cost of $33,672, or the "full cost" $40,645? The last is "probably closer to an answer" to the question that policy makers are increasingly asking now, about "what would we have to spend to get more graduates," though that assumes that colleges maintained their current enrollment and expenditure levels, he notes.

But the other key point, Johnson says, is that the choice of how you measure cost depends, to an extent, on how you perceive the role of colleges. Using the "full cost" measure, he asserts, more or less says that most of what a university does is designed to educate students, and that "all of those costs could be attributed to the cost of producing college graduates," as overhead, he says.

"If you highly value research or public service," though, "you could almost say that the graduates are free -- a byproduct" of what you spend on those other purposes.

Jensen Comment
See Bob Jensen's threads on "Systemic" problems of accountancy ---
Especially note the problems of joint costing that plague college cost accounting.

Financial Statement Analysis Teaching Case
From The Wall Street Journal Accounting Weekly Review on April 20, 2011

Dollars Flow Back Into Tech
by: Spencer E. Ante and Don Clark
Apr 20, 2011
Click here to view the full article on

TOPICS: Financial Statement Analysis, Interim Financial Statements, SEC, Segment Analysis, Segment Margin

SUMMARY: International Business Machines (IBM) Corp. and Intel Corp. "both saw a big boost in spending from businesses, especially on servers and machines used in corporate data centers." Intel reported a 34% jump in profit and revenue growth of 25%. Questions direct students to these companies' quarterly reports and analysis of results filed on the SEC web site.

CLASSROOM APPLICATION: The article is useful for understanding the process of quarterly earnings filings and the usefulness of segment reporting in analysis of this information.

1. (Introductory) Access the IBM filing on Form 8-K of its managements' discussion of results of operations and financial condition for the first quarter of 2011 available at Note where in the filing is the information obtained for the WSJ article describing these results.

2. (Advanced) Refer again to the IBM 8-K filing. Into what operating segments is IBM organized? How does quarterly information about those operating segments help analysts to assess these quarterly results?

3. (Advanced) Access the Form 8-K filing by Intel on the SEC web site at Into what operating segments is Intel organized? How does the quarterly information about those operating help analysts to assess these quarterly results?

4. (Introductory) How did the stocks of these two companies and the overall stock market react to these earnings announcements?

5. (Advanced) Access the related article. What is the concern expressed by the author, Rolfe Winkler? How does this concern rely on combining financial statement information with other outside information?

Reviewed By: Judy Beckman, University of Rhode Island

A Premature Party for Intel
by Rolfe Winkler
Apr 20, 2011
Page: C14


"Dollars Flow Back Into Tech," by: Spencer E. Ante and Don Clark, The Wall Street Journal, April 20, 2011 ---

Two of the world's largest technology vendors surprised Wall Street by posting surging sales and profits in the first-quarter, and signaled brighter days ahead.

International Business Machines Corp. and Intel Corp. both saw a big boost in spending from businesses, especially on servers and machines used in corporate data centers.

IBM logged the highest revenue growth the company has seen in 10 years, adjusting for currency fluctuations. Its quarterly revenue rose 7.7%, as demand for a new mainframe computer lifted hardware sales 19%.

Intel had a strong quarter, including a 34% jump in profit and revenue growth of 25%. The company benefited from sales of chips used in server systems and other hardware for computer rooms, and revenue rose 32% in that business.

But Intel sales also rose 17% for chips used in personal computers, contradicting estimates by two market research firms last week and a perception that sales of Apple Inc.'s iPad are sapping demand for notebook machines.

"Notebooks are very good," said Paul Otellini, Intel's chief executive, in an interview. While there was some weakness in retail sales in the U.S. and Europe, he said, that shortfall was "more than offset" by better-than-expected results from business and consumer customers in other emerging markets, which include China and Brazil.

Shares of Intel jumped 4.9% to $20.84 in late trading, while IBM shares fell 2.4% to $161.47.

Demand from enterprises was bolstered by comments by corporate technology chiefs, who said they are increasing their focus on mobile products and Web-based services.

Monte E. Ford, chief information officer of AMR Corp., parent of American Airlines, said most of the company's tech spending has gone towards building services that help employees and customers, such as its wireless applications for smartphones and tablets.

"The consumer is dictating where we go and what we are doing," said Mr. Ford, noting AMR's overall budget was similar to last year.

Sales continue to surge for smartphones and gadgets from Apple Inc., which is expected to report a revenue leap of nearly 73% on Wednesday. Chips from Intel and disk drives from Seagate Technology—which Tuesday reported an 82% drop in quarterly earnings—haven't been used much in such products.

But sales of large computers, including the server systems that run websites and other corporate functions, are seeing solid demand as companies set up or expand online applications.

Continued in Article

"Inflation Actually Near 10% Using Older Measure," by John Melloy, CNBC, April 12, 2011 ---

After former Federal Reserve Chairman Paul Volcker was appointed in 1979, the consumer price index surged into the double digits, causing the now revered Fed Chief to double the benchmark interest rate in order to break the back of inflation. Using the methodology in place at that time puts the CPI back near those levels.

Inflation, using the reporting methodologies in place before 1980, hit an annual rate of 9.6 percent in February, according to the Shadow Government Statistics newsletter.

Since 1980, the Bureau of Labor Statistics has changed the way it calculates the CPI in order to account for the substitution of products, improvements in quality (i.e. iPad 2 costing the same as original iPad) and other things. Backing out more methods implemented in 1990 by the BLS still puts inflation at a 5.5 percent rate and getting worse, according to the calculations by the newsletter’s web site,

“Near-term circumstances generally have continued to deteriorate,” said John Williams, creator of the site, in a new note out Tuesday. “Though not yet commonly recognized, there is both an intensifying double-dip recession and a rapidly escalating inflation problem. Until such time as financial-market expectations catch up with underlying reality, reporting generally will continue to show higher-than-expected inflation and weaker-than-expected economic results in the month and months ahead.”

The pay-site and newsletter by Williams, an economic consultant for the last 30 years to companies, has gained a cult following among bloggers hungry to criticize Bernanke these days. The mission statement of the newsletter, according to the site, is to expose and analyze “flaws in current U.S. government economic data and reporting…net of financial-market and political hype.”

Investors are anxiously awaiting the release of March’s CPI reading on Friday. The consensus estimate from economists is for an annual inflation rate of 2.6 percent.

“Given ongoing inflation problems with food and the spreading impact of higher oil-related costs in the broad economy, reporting risk is to the upside of consensus expectation,” said Williams, citing a 10 percent jump in gasoline prices in March, in the note.

“While the federal government would have us believe the numbers are rather tame, our own personal gauge leads us to believe inflation is running between 5 percent to 6 percent annually,” wrote Alan Newman in his latest Crosscurrents newsletter that refers to Williams’ statistics.

Continued in article

"Why People Pay Income Taxes," by Casey B. Mulligan, The New York Times (Economix), April 6, 2011 ---

Millions of taxpayers are filling out their tax returns over the next several days. Economists are still not sure whether taxpayer honesty or fear of the Internal Revenue Service explains why taxpayers’ income reporting is pretty accurate.

¶But with the Treasury spending more than ever, it’s important to know why people pay their taxes and what will continue to motivate them to pay in the future.

¶It’s difficult to get exact numbers on income tax cheating, but I.R.S. studies (read about them and other tax-evasion analysis in Prof. Joel Slemrod’s paper) suggest that reporting of wages and salaries is so high that the Treasury receives 99 percent of what it would if all taxpayers were honest about that income (see Page 2 of this I.R.S. report).

You might think that people pay taxes merely to stay out of trouble with the I.R.S. But 99 percent of people are not audited by the I.R.S., and even the remaining 1 percent are penalized only about 10 percent of the amount underpaid. (The I.R.S. is, however, increasing its audits of the wealthy.)

From a financial point of view, underpaying taxes looks like a high expected return investment: a 99 percent chance of keeping the, say, $10,000 that you underpaid the Treasury and a 1 percent chance of having to pay the $10,000 plus a $1,000 penalty (on average, you get $9,790 for every $10,000 you hold back from the Treasury).

Some economists have tried to reconcile low penalties with high compliance, arguing that people obey the tax laws for non-economic reasons – people want to be honest and pay their share. Or perhaps individuals don’t understand that any one person’s tax payment is not critical to the functioning of our government, while the aggregate of millions of tax payments are.

To the extent that much of the Treasury’s revenue arrives because taxpayers are honest, public policy might not want to take honesty for granted. For example, the Treasury may receive less revenue over time if taxpayers increasingly distrust government because they perceive their tax dollars are wasted.

There’s some truth to the honesty theory (I’ll write next week about a study of integrity and tax compliance), but tax compliance still responds to incentives. When the probability of audit falls, compliance falls.

It’s difficult for the I.R.S. to verify many types of business income: as a result the amount of proprietor, rent and royalty income that is reported is actually less than the amount unreported.

Nanny taxes -– self-employment taxes paid for household employees -– are another type of tax on which many people cheat, and enforcement on this front is weak. Though on this and other tax issues, high-profile people –- like political appointees –- should beware.

Among those whose failure to pay various taxes were widely publicized were Tom Daschle, President Obama’s nominee as secretary of health and human services; Treasury Secretary Timothy Geithner, and Zoe Baird, President Clinton’s nominee for attorney general.

Continued in article

"Who Cheats on Their Taxes?" by Casey B. Mulligan, The New York Times (Economix), April 13, 2011 ---

Jensen Comment
Note that there's a huge difference between "cheating" and playing by the rules to minimize/avoid taxation. Cheating is especially common in trades where cash is paid without filing W-2 or 1099 forms such as paying house cleaners for a few hours work per week, hiring day laborers off the streets, cash tipping, paying guys who plow snow from your driveway, and crime dealings, including drug dealings and prostitution. The IRS has made it increasingly more difficult to under report income. For example, most casinos now withhold taxes from significant winnings, although some players may walk away without reporting small winnings. House cleaners now may want to have their earnings reported for Social Security purposes.

Tax cheating and most financial crimes could be eliminated in a cashless world of all-electronic transfers, but don't hold your breath for our legislators to agree to that solution to crime. Too many of them might might be prevented tax cheating and crime in a cashless society. Smart criminals now are either avoiding bank accounts or laundering money before depositing it into bank accounts.

Tax cheating is much less of a problem in the U.S. than in most other nations such as Greece and Italy where tax cheating is virtually a way of life. Studies show that most U.S. taxpayers have greatly exaggerated fears of full tax audits, which is comes as a delight to tax collectors who better understand the real odds of being audited. Of course there are those pesky partial audits and the things taxpayers can do to increase the odds of a partial audit such as taking a huge deduction for a home office. Many people are likely to overpay taxes out of fear of audits such as people who qualify for more deductions than they actually declare simply to avoid the stress of worrying about letters from the IRS.

The more you make the less income tax you pay

"How to Pay No Taxes Eleven shelters, dodges, and rolls—all perfectly legal—used by America's wealthiest people," by Jesse Dricker, Business Week, April 7, 2011 --- 

For the well-off, this could be the best tax day since the early 1930s: Top tax rates on ordinary income, dividends, estates, and gifts will remain at or near historically low levels for at least the next two years. That's thanks in part to legislation passed in December 2010 by the 111th Congress and signed by President Barack Obama.

"This is clearly far and away the most generous tax situation that's existed," says Gregory D. Singer, a national managing director of the wealth management group at AllianceBernstein (AB) in New York. "It's a once-in-a-lifetime opportunity."

For the 400 U.S. taxpayers with the highest adjusted gross income, the effective federal income tax rate—what they actually pay—fell from almost 30 percent in 1995 to just under 17 percent in 2007, according to the IRS. And for the approximately 1.4 million people who make up the top 1 percent of taxpayers, the effective federal income tax rate dropped from 29 percent to 23 percent in 2008. It may seem too fantastic to be true, but the top 400 end up paying a lower rate than the next 1,399,600 or so.

That's not just good luck. It's often the result of hard work, as suggested by some of the strategies in the following pages. Much of the top 400's income is from dividends and capital gains, generated by everything from appreciated real estate—yes, there is some left—to stocks and the sale of family businesses. As Warren Buffett likes to point out, since most of his income is from dividends, his tax rate is less than that of the people who clean his office.

The true effective rate for multimillionaires is actually far lower than that indicated by official government statistics. That's because those figures fail to include the additional income that's generated by many sophisticated tax-avoidance strategies. Several of those techniques involve some variation of complicated borrowings that never get repaid, netting the beneficiaries hundreds of millions in tax-free cash. From 2003 to 2008, for example, Los Angeles Dodgers owner and real estate developer Frank H. McCourt Jr. paid no federal or state regular income taxes, as stated in court records dug up by the Los Angeles Times. Developers such as McCourt, according to a declaration in his divorce proceeding, "typically fund their lifestyle through lines of credit and loan proceeds secured by their assets while paying little or no personal income taxes." A spokesman for McCourt said he availed himself of a tax code provision at the time that permitted purchasers of sports franchises to defer income taxes.

For those who can afford a shrewd accountant or attorney, our era is rife with opportunity to avoid, or at least defer, tax bills, according to tax specialists and public records. It's limited only by the boundaries of taste, creativity, and the ability to understand some very complex shelters.

Watch the video ---

How to Pay No Taxes ---

Bob Jensen's taxation helpers are at

April 21, 2011 message from Francine

I am flattered that the authors chose to close their paper with my thoughts from a recent Forbes article.


Stanford Closer Look Series

The Resignation of David Sokol: Mountain or Molehill for Berkshire Hathaway? (PDF)

In 2011, David Sokol, CEO of Berkshire Hathaway’s energy subsidiary, purchased $10 million of Lubrizol stock days before recommending that Berkshire Hathaway acquire the firm. Did Sokol’s actions reflect a broad governance failure for the firm? 


Francine McKenna
Managing Editor
@ReTheAuditors on Twitter

"Slippery People: Corporate Governance at Berkshire Hathaway," by Francine McKenna, re:TheAuditors, April 24, 2011 ---

Warren Buffet announced the sudden resignation of his heir apparent, David Sokol, on March 30, 2011. Berkshire Hathaway shareholders, fundamental style value investors, law professors, and the business media have been talking about it ever since. However, Buffett doesn’t want us to question him further and is not willing to say anything more…

I have held back nothing in this statement. Therefore, if questioned about this matter in the future, I will simply refer the questioner back to this release.

The Berkshire Hathaway Annual Meeting is typically a marathon of openness and transparency. Buffet has been known to stay on stage at the revival-style event, this year scheduled for April 30, for up to eight hours. But Berkshire Hathaway has an Achilles heel. Buffett’s storied forthcoming manner is not going to carry over to this case:

Alice Schroeder, author of  “The Snowball: Warren Buffett and the Business of Life”: ORIGINALLY I didn’t think Buffett was going to entertain questions on this subject at the meeting. I think he’ll talk about it for maybe five or ten minutes in a statement at the beginning of the meeting, much of which time will be a recap of what happened. He could then cite litigation as a reason for why he can’t have an open-ended discussion and take questions.

I’ve written several articles about this case because it fascinates me to see an iconic figure stumble. Call it schadenfreude. Or just call it my natural cynicism. Either way, I’m gratified that my first hunch – it’s not a case of insider trading but one of an agent/fiduciary taking advantage of his trusted position to benefit himself first – has been ratified.

On April 4: I wrote, The Gnome of Nebraska: Warren Buffett, Berkshire Hathaway, and Self-Dealingfor Forbes:

When asked by CNBC what he’d learned from the controversy over the transaction, Sokol responded:

“Knowing today what I know, what I would do differently is I just would never have mentioned it to Warren, and just made my own investment and left it alone…”

According to Professor Macey, that’s called “usurping a corporate opportunity,” and it’s a violation of an officer’s duty of loyalty to a corporation.

On April 11, Professor Stephen Bainbridge reconsidered his and others’ idea that this was an “insider trading” case. His reconsideration is based on, reportedly, an email from his co-author Bill Klein.

Professor Bainbridge doesn’t mention that I sent him an email on April 8 in response to his March 30 post discussing the insider trading theory and drawing his attention to my April 4th post at Forbes. I  asked him to consider the possibility that Sokol had “usurped a corporate opportunity” and breached his fiduciary duty to Berkshire Hathaway. Bainbridge never responded to me.

Bainbridge does not expand on the agency, fiduciary duty, and usurpation theories until April 20, after the shareholder derivative lawsuit is filed against Sokol and the Berkshire board for breach of fiduciary duty. The suit also asks for disgorgement of Sokol’s gain on his investment of Lubrizol stock.

In the meantime, I wrote quite a few more more posts at Forbes and on this site, including one about the lawsuit.

My posts and links to my opinions were as follows:

April 4: My first post included this quote:

So, what, you might ask, is wrong with Sokol taking a little bit of the action ahead of his typically successful dealmaking for Berkshire Hathaway?  After all, as he told CNBC, Charlie Munger did it.

Jonathan R. Macey of Yale, in his 1991 article, Agency Theory and the Criminal Liability of Corporations, tells us:

…[C]orporate actors do not engage in criminal activity to benefit the firms for which they work but to benefit themselves. In some, but not all cases, these activities will benefit the firms for which the corporate actors work. But the basic motivation for the behavior is self-interest.

Professor Macey told me he doesn’t think this is an insider trading issue at all unless Sokol failed to disclose his interests and his trading to Berkshire, according to their policies.

I agree.

April 5: I posted here at re: The Auditors about my April 4th post at Forbes with some additional information including a link to Sokol’s interview on CNBC:

Continued in article

Bob Jensen's threads on corporate governance are at

Teaching Case on Preferred Stock Shares, Warrants, and Dividends

From The Wall Street Journal Accounting Weekly Review on April 28, 2011

Deal Journal: Warren Buffett's Profit on GE Investment: $1.2 Billion
by: Shira Ovide
Apr 22, 2011
Click here to view the full article on

TOPICS: Advanced Financial Accounting, Dividends, Financial Statement Analysis

SUMMARY: "In the financial crisis, Warren Buffett loaned out his halo of respectability to prop up sentiment about Goldman Sachs Group, Dow Chemical, General Electric and other blue-chip companies." He invested nearly $3 billion in GE in exchange for preferred stock and warrants issued together.

CLASSROOM APPLICATION: The article is useful to cover a live example of issuing preferred stock and warrants, typically covered in a second semester intermediate financial accounting course. Questions also ask students to access the GE financial statements (2010 Form 10-K on its investor relations web site) to examine the presentation of the stock and warrants in stockholders' equity and the preferred stock dividends deducted in calculating earnings available for common shareholders in the statement of earnings.

1. (Introductory) According the news article, Warren Buffet's Berkshire Hathaway invested $3 billion in GE during the height of the financial crisies. What types of securities did GE issue to Berkshire Hathaway? What are the terms of that issuance?

2. (Advanced) Summarize the accounting for the combined issuance of preferred stock and warrants.

3. (Advanced) Access the GE 2010 annual report available through GE's investor relations web site at Click on Form 10-K 2010, locate the balance sheet and Note 15. Shareowners' Equity. Describe how the preferred stock and warrants issued to Berkshire Hathaway are presented in the GE financial statements.

4. (Introductory) Return to the Statement of Earnings (Income Statement) in the 10-K filing. How are the preferred dividends that are described in the article presented in this statement?

5. (Advanced) Based on the discussion in the article, do you think these dividends have been paid? Comment on the deduction of dividends to determine "Net earnings attributable to GE common shareowners" given your answer to question 3 above.

Reviewed By: Judy Beckman, University of Rhode Island

"Deal Journal: Warren Buffett's Profit on GE Investment: $1.2 Billion," by: Shira Ovide, The Wall Street Journal, April 22, 2011 ---

In the financial crisis, Warren Buffett loaned out his halo of respectability to prop up sentiment about Goldman Sachs Group, Dow Chemical, General Electric and other blue-chip companies. Those bets came with some heavy costs for the companies, and produced handsome profits for the Oracle of Omaha.

GE reiterated today it plans to repay Buffett by October for his $3 billion investment in the conglomerate, an agreement struck in October 2008 when the financial world was coming apart at the seams.

As in other reputation-bolstering investments Buffett made during that stretch, GE agreed to pay the Oracle a 10% annual dividend, or $300 million a year in GE’s case.

The numbers-loving Buffett carried around a coin changer in his schoolboy days, and probably could tell you that his GE dividend amounts to $9.51 a second. (That buys about 41% of a sirloin dinner at Buffett hangout, Gorat’s Steak House.)

When GE pays Buffett back, they will owe him 10% more than he paid, or $300 million on top of his $3 billion payback. Plus, Buffett will have accumulated $900 million in cumulative dividends, assuming GE repays the preferred-stock investment in October. All told, Buffett’s $3 billion investment will generate a total profit of $1.2 billion. Not too shabby.

Now the bad news: Buffett’s investment also entitled him to buy 134.8 million shares of GE common stock at an exercise price of $22.25. With GE stock languishing below $20 a pop, those stock warrants are worthless — for now. But fear not. The warrants were good for five years, and GE shares can always move up and give Buffett an additional windfall (or move down and permanently deny Buffett the cherry atop his sundae of GE profit).

Buffett already has been repaid for other investments he made during the financial crisis, including his purchase of Swiss Reinsurance debt, and his $5 billion preferred investment in Goldman Sachs. And Buffett, with a net worth of $50 billion, has sounded downright downbeat about it.

“Goldman Sachs has the right to call our preferred on 30 days notice, but has been held back by the Federal Reserve (bless it!), which unfortunately will likely give Goldman the green light before long,” Buffett wrote in February, in his annual letter to Berkshire Hathaway investors.

Since then, Goldman has indeed repaid Buffett, who can count roughly $3.7 billion in profits on his investment, including the value of his in-the-money warrants on Goldman stock. His Swiss Re investment padded Buffett’s wallet by roughly $1 billion.

Continued in article

Bob Jensen's threads on accounting theory ---

President Barack Obama signed legislation repealing the expanded 1099 reporting requirements that were enacted last year. The bill was overwhelmingly approved by the House and Senate. The increased information reporting penalties enacted last year were not repealed.

Jensen Comment
I feel a bit sorry for the accounting and software companies that invested heavily in developing software to electronically prepare, aggregate, and submit billions upon billions of 1099 forms --- now that a whisk of our President's pen wipes out those investments. I suspect the IRS also has some defunct investments in software to receive and process those forms that were expected to come in by billions upon billions.

"Wanted: A New Kind of College Business Program --- A Carnegie Foundation study argues that undergraduate business programs must do a better job of giving students a strong grounding in the liberal arts," by William L. Sullivan, Business Week, April 11. 2011 ---

Bob Jensen's threads on our compassless colleges are at

A course illustration of ethics and questionable uses of misleading cost accounting

"Colleges Spend Far Less on Educating Students Than They Claim, Report Says," by Robin Wilson, Chronicle of Higher Education, April 7, 2011 ---

While universities routinely maintain that it costs them more to educate students than what students pay, a new report says exactly the opposite is true.

The report was released today by the Center for College Affordability and Productivity, which is directed by Richard K. Vedder, an economist who is also an adjunct scholar at the American Enterprise Institute and a Chronicle blogger. It says student tuition payments actually subsidize university spending on things that are unrelated to classroom instruction, like research, and that universities unfairly inflate the stated cost of providing an education by counting unrelated spending into the mix of what it costs them to educate students.

"The authors find that many colleges and universities are paid more to provide an education than they spend providing one," says a news release on the report, "Who Subsidizes Whom?"

The report's authors used data from the U.S. Education Department's Integrated Postsecondary Education Data System, or Ipeds, to conclude that more than half of students attend institutions that take in more per student in tuition payments than what it actually costs them to deliver an education.

The chief reason universities inflate the figures on what they spend to educate students, says the report, is that institutions include all of their spending—whether it is directly related to instruction or not—when calculating what it costs them to provide an education. In reality, says the report, depending on the type of institution, it can cost universities much less to educate students than what the institutions bring in through tuition charges.

"This study finds that education and related spending is only a portion of many institutions' budgets," says a news release on the study, "and that many schools spend large amounts on things unrelated to educating students."

The report uses Dartmouth College as a poster child to illustrate the gap between the actual costs of providing an education and what an institution says it spends. On its Web site, the report says, the Dartmouth College Fund maintained that while the institution charged undergraduates about $50,000 each in academic 2009-10, the college actually spent about $104,400 per student. While the center's report notes that Dartmouth indeed spent more over all per student than what it took in through tuition payments, "this does not mean that students are being subsidized because not all of that spending is used toward specifically educational purposes."

For example, says the report, Dartmouth said it spent $37,000 per student on "academic support," $24,000 per student for research, $15,000 for "institutional support," and $12,000 for "student services." But, says the report, "very little of that $88,000 is properly attributed to the cost of providing an education."

A spokesman for Dartmouth said it is legitimate for institutions to count research expenditures as part of instruction. Dartmouth faculty members are "renowned as teacher-scholars who involve their students in their scholarship," said the spokesman. "Discovery of knowledge is a key part of Dartmouth’s fundamental mission and a liberal-arts education."

The report criticizes colleges for stating that they subsidize their students' education, saying "conventional wisdom is often wrong" in that regard.

Continued in article

Bob Jensen's threads on cost accounting are at

Black Swan Theory ---

Video of Interview with Nassim Taleb
"Nassim Taleb on Living with Black Swans," Knowledge@Wharton, April 13, 2011 ---

The KPMG Foundation, under the excellent leadership of Bernie Milano, has spent millions of dollars and other resources in support of minority candidates in accountancy doctoral programs --- Click Here

But in the Masters Golf Tournament the KPMG hat will be on the head of Phil Mickelson rather than Tiger Woods ---

What Do Libya and KPMG Have in Common?

Jensen Comment
Do not take any of this as in any way detracting from the record of the KPMG Foundation in support of minority accounting doctoral candidates. Minority professors provide essential role models for minority students, and we most certainly need more minority professors of accountancy.

"Mapping Novels with Google Earth," Chronicle of Higher Education, April 6, 2011 ---

Jensen Comment
Various accounting student team projects come to mind using the above technology. One could be an accounting history project in which students map important events in early accounting history, some of which are mentioned at

Abacus Techniques by Totton Heffelfinger & Gary Flom.

Articles, Excerpts and Analysis

The Abacus vs.The Electric Calculator

In 1946, a contest held in Tokyo, pitted an abacus against an electric calculator; the abacus won, of course.

Feynman vs. The Abacus

Richard Feynman battles against the abacus; the result is not surprising (if you know Feynman).

Comparing the Chinese and the Mesoamerican Abacus

An analysis contributed by David B. Kelley.

The Roman Hand-Abacus

An analysis contributed by Steve Stephenson.

The Incan Khipu

String, and Knot, Theory of Inca Writing by John Noble Wilford.
Talking Knots of the Incas by Viviano and Davide Domenici.

Lost Tribes, Lost Knowledge

An article about the dangers of forgetting knowledge learned from the past, by Eugene Linden.

All Things Abacus

Additional Abacus Resources

Purchase  or build an abacus  ·  An abacus for your Palm  ·  Books about the abacus  ·  Java applet source code  ·  The Mesoamerican abacus

Resources For Teachers

The abacus in the classroom  ·  Abacus lesson plan  ·  Math and science resources for teachers


High-resolution photos of my abacus collection.

Early History of Mathematics and Calculating in China
The best general source for ancient Chinese mathematics is Joseph Needham's Science and Civilisation in China, vol. 3. In this volume you will learn, for example, that the Chinese proved the Pythagorean Theorem at the very latest by the Later Han dynasty (25-221 CE). The proof comes from an ancient text called The Arithmetical Classic of the Gnomon and the Circular Paths of Heaven. The book has been translated by Christopher Cullen in his Astronomy and Mathematics in Ancient China: The Zhou Bi Suan Jing. Needham also discusses the abacus, or suanpan ("calculating plate").
Steve Field, Professor of Chinese, Trinity University, September 24, 2008
Jensen Comment
Later Han Dynasty ---
Pythagorean Theorem Theorem ---
Pythagorean Theorem (Gougu Theorem in China) History ---
Suanpan ---

A nice timeline of accounting history ---

From Texas A&M University
Accounting History Outline ---

Back in medieval times the charge and discharge statements are very early precedents for fiduciary accounting --- 

An entry which appears on some medieval charge and discharge statements is the respite. This paper shows some of the forms a respite might take and how different ways of accounting for it may affect the balances of those statements. It examines in particular the significance of respites in the building accounts of Tattershall Castle 1434-72 and suggests that the nature of these respites was misinterpreted by Myatt-Price (1966). It concludes by considering Ross's explanation of respites in the fifteenth-century Talbot Household Accounts (Ross 1968)

Bob Jensen's threads on accounting history ---

Accounting History (across hundreds of years)
A Change Fifty-Years in the Making, by Jennie Mitchell, Project Accounting WED Interconnect ---

Papyrus ---
Early accounting records were written on papyrus

Serious Accounting Historians May Find Some Things of Use Here
Advanced Papyrological Information System from Columbia University ---

What was an ancient Greek ploy to combat inflation?
How do you account for interest paid in cabbages during hyperinflation?

"The time has come," the Walrus said,
"To talk of many things:
Of shoes--and ships--and sealing-wax--
Of cabbages--and kings--
And why the sea is boiling hot--
And whether pigs have wings."

Lewis Carroll, The Walrus and the Carpenter ---

"Papyrus Research Provides Insights Into 'Modern Concerns' of Ancient World," Science Daily, October 30, 2010 --- Click Here

Origins of Double Entry Accounting are Unknown

Recall that double entry bookkeeping supposedly evolved in Italy long before it was put into algebraic form in the book Summa by Luca Pacioli  and into an earlier book by Benedikt Kotruljevic.

"A Brief History of Double Entry Book-keeping (10 Episodes) ," BBC Radio ---
Thanks to Len Steenkamp for the heads up

Jolyon Jenkins investigates how accountants shaped the modern world. They sit in boardrooms, audit schools, make government policy and pull the plug on failing companies. And most of us have our performance measured. The history of accounting and book-keeping is largely the history of civilisation.

Jolyon asks how this came about and traces the religious roots of some accounting practices.

Eventually, educators might be able to get copies of these audio files.


October 3, 2009 message from Rick Dull

Benedikt Kotruljevic (Croatian) (Dubrovnik,1416-L’Aquila,1469) (His Italian name was Benedetto Cotrugli Raguseo), who in 1458, wrote "The Book on the Art of Trading" which is now acknowledged to be the first person to write a book describing double-entry techniques? See the American Mathematical Society’s web-site: .

Rick Dull

And so on --- I think you get the idea.

One truly valuable research for an accounting history mapping project is the free Accounting Historians Journal archive (although not all of the publications are free online but should be free to students using the hard copy stacks in campus libraries) ---

Using MAAW and Jstor for Accounting History Research ---

Bob Jensen's threads on accounting history --- 

Why the Research Paper Isn't Working
I’m in love with this idea. I have long agreed with
Richard Larson who wrote way back in 1982 that the research paper as taught in college is an artificial genre, one that works at cross-purposes to actually developing respect for evidence-based reasoning, a measured appreciation for negotiating ideas that are in conflict, or original thought. I’m honestly a bit amazed that anyone was surprised by the results of the Citation Project study, also presented at the conference, that found students “skimming the surface.” This is a problem that existed long before the Internet, but has only grown more obvious as students are asked to do more documented expository writing than ever before. (This finding was published in a national study published in the CCCC's journal in 2008; subscription required.)
Barbara Fister, "Why the Research Paper Isn't Working," Inside Higher Ed, April 12, 2011 ---

Bob Jensen's threads on Tricks and Tools of the Trade ---

"Teaching in the Postdoc Space," by Leonard Cassuto, Chronicle of Higher Education, April 17, 2011 ---

Jensen Comment
Teaching postdoc students in formal programs is not common in accounting due to that fact that the shortage of accounting PhD graduates means that virtually all of them find jobs in tenure track positions. Their worry becomes one of getting tenure rather than in getting a job in academe.

But in the humanities and sciences, a undersupply of academic job openings presents all sorts of problems for PhD graduates.

An increasingly popular postdoc alternative for humanities and science graduates is the AACSB's Bridge Program that attempts to provide bridges into business and accounting tenure track positions for prospects who did not earn their doctorates in business or accounting ---

The above article about "Teaching in Postdoc Space" has some good pointers that can be extrapolated into our Bridge Programs.

Were us oldsters from accounting degree programs harder workers and better students than today's accounting graduates?

"Business majors spend less time preparing for class than do students in any other broad field, according to the most recent National Survey of Student Engagement: Nearly half of seniors majoring in business say they spend fewer than 11 hours a week studying outside class."

"Business Educators Struggle to Put Students to Work." By David Glenn, Chronicle of Higher Education, Chronicle of Higher Education, April 14, 2011 ---

Paul M. Mason does not give his business students the same exams he gave 10 or 15 years ago. "Not many of them would pass," he says.

Mr. Mason, who teaches economics at the University of North Florida, believes his students are just as intelligent as they've always been. But many of them don't read their textbooks, or do much of anything else that their parents would have called studying. "We used to complain that K-12 schools didn't hold students to high standards," he says with a sigh. "And here we are doing the same thing ourselves."

That might sound like a kids-these-days lament, but all evidence suggests that student disengagement is at its worst in Mr. Mason's domain: undergraduate business education.

Business majors spend less time preparing for class than do students in any other broad field, according to the most recent National Survey of Student Engagement: Nearly half of seniors majoring in business say they spend fewer than 11 hours a week studying outside class. In their new book, Academically Adrift: Limited Learning on College Campuses, the sociologists Richard Arum and Josipa Roksa report that on a national test of writing and reasoning skills, business majors had the weakest gains during the first two years of college. And when business students take the GMAT, the entry examination for M.B.A. programs, they score lower than do students in every other major.

This is not a small corner of academe. The family of majors under the business umbrella—including finance, accounting, marketing, management and "general business"—accounts for just over 20 percent, or more than 325,000, of all bachelor's degrees awarded annually in the United States, making it the most popular field of study.

Brand-name programs, like the Wharton School of the University of Pennsylvania and the University of Notre Dame's Mendoza College of Business, among a few dozen others, are full of students pulling 70-hour weeks, if only to impress the elite finance and consulting firms they aspire to join. But get much below Bloomberg BusinessWeek's top 50, and you'll hear pervasive anxiety about student apathy, especially in "soft" fields like management and marketing, which account for the majority of business majors.

Scholars in the field point to three sources of trouble. First, as long ago as 1959 a Ford Foundation report warned that too many undergraduate business students chose their majors "by default." Business programs also attract more than their share of students who approach college in purely instrumental terms: as a plausible path to a job, not out of curiosity about, say, Ronald Coase's theory of the firm.

"Business education has come to be defined in the minds of students as a place for developing elite social networks and getting access to corporate recruiters," says Rakesh Khurana, a professor at Harvard Business School who is a prominent critic of the field. It's an attitude that he first saw in M.B.A. programs but has migrated, he says, to the undergraduate level.

Continued in article

Jensen Comment
One of the reasons I did not continue teaching after reaching retirement age is that I got fed up with students who wanted to argue their ways to A-Grades rather than work for those A-Grades.

Bob Jensen's threads on grade inflation are at


David Albrecht was one of the first to come out with a summary of the Senate Hearings

"Live Blog: Role of Accounting Profession in Preventing Another Crisis," by David Albrecht, The Summa, April 6, 2011 ---

This is followed by David's quotations of Adrienne Gonzalez, our Jr. Deputy Accountant who was "just thrilled" to shake Lynn Turner's hand. However, in spite of holding back her usual four letter word nouns and adjectives, Adrienne pretty well summarized the event's outcomes as follows:

If I wasn’t disappointed in the prospects for the profession going into this, I certainly felt that way walking out.

Jensen Comment
The biggest problem is that there's virtually nothing her e to pick up on by the likes of Diane Sawyer, Brian Williams, Jon Stewart, Jay Leno, or David Letterman.

Letterman probably won't even present "10 Best Reasons the Accounting Profession Will Not Prevent Another Another Crisis.."

You can find other "Top Ten" clips by David Letterman by doing a "David Letterman Top 10" search on YouTube.

My politically incorrect favorite is the following:

David Letterman's Ten Reasons Why Men Prefer Guns to Women
This is too politically incorrect to post on the AECM
Besides I don't prefer guns to women.


"Two guilty pleas in NJ in $880 Million Ponzi scheme," Reuters, April 4, 2011 ---

Inside Job: 2010 Oscar-Winning Documentary Now Online --- Click Here

In late February, Charles Ferguson’s film – Inside Job – won the Academy Award for Best Documentary. And now the film documenting the causes of the 2008 global financial meltdown has made its way online (thanks to the Internet Archive). A corrupt financial industry, its corrosive relationship with politicians, academics and regulators, and the trillions of damage done, it all gets documented in this film that runs a little shy of 2 hours.

To watch the film, you will need to do the following. 1.) Look at the bottom of the film. 2.) Click the forward button twice so that it moves beyond the initial trailer and the Academy Awards ceremony. 3.) Wait for the little circle to stop spinning. And 4.) click play to watch film.

Inside Job (now listed in our Free Movie Collection) can be purchased on DVD at Amazon. We all love free, but let’s remember that good projects cost real money to develop, and they could use real financial support. So please consider buying a copy.

Hopefully watching or buying this film won’t be a pointless act, even though it can rightly feel that way. As Charles Ferguson reminded us during his Oscar acceptance speech, we are three years beyond the Wall Street crisis and taxpayers (you) got fleeced for billions. But still not one Wall Street exec is facing criminal charges. Welcome to your plutocracy…

Bob Jensen's threads on the global financial meltdown and its aftershocks are at

Teaching Case on What's Holding Women Back in the Workplace

Video ---

From The Wall Street Journal Accounting Weekly Review on April 15, 2011

View from the Top
by: Alan Murray and Indra Nooyi
Apr 11, 2011
Click here to view the full article on
Click here to view the video on 

TOPICS: Accounting

SUMMARY: The WSJ held a conference for business and government leaders to examine "...what's holding women back in the workplace-and set out an action plan for creating new opportunities." Participants highlighted in the article include Chief Executive of PepsiCo Indra Nooyi; retired Supreme Court Justice Sandra Day O'Connor; Marissa Mayer, the first woman engineer at Google; and actress Geena Davis among other highly accomplished women. The program involved presentation results of research by McKiney & Co. , panel discussions, and presentation of task force recommendations for action to solve issues. The focus of this article is an interview with Indra Nooyi about what she did to get to the top. The article begins with a summary of the McKinsey research essentially saying that " each stage of [corporate] advancement, men have at least twice the odds of advancing as women" and asks, "How the hell did you do it?"

CLASSROOM APPLICATION: The related video is essentially repeated in the printed article, so this video could be used in a classroom viewing followed by the questions. It is a useful discussion for any business class, particularly entry level accounting classes often taken by all business majors or in MBA classes.

1. (Introductory) Ms. Nooyi says that to reach the top, women must obtain P&L management responsibilities as men do. What does the term "P&L" mean? What does it mean to have "P&L responsibility"?

2. (Introductory) What are the functions that Ms. Nooyi says are critical? How do those functions relate to business school education?

3. (Introductory) What does Ms. Nooyi say were her biggest sacrifices to advance has she has?

4. (Advanced) Do you think that the statistics regarding women's advancement in corporate America will change? Support your answer.

5. (Advanced) Do you think this interview and other articles contain important lessons for men as well as women? Explain your answer.

The questions may be discussed in classroom groups following viewing of the Nooyi interview with reporting out, perhaps also including proposed solutions. These solutions then might be compared to the recommendations found in the related WSJ articles covering the conference.

Reviewed By: Judy Beckman, University of Rhode Island

Why Women Rarely Leave Middle Management
by Sue Shellenbarger
Apr 11, 2011
Online Exclusive

From Kindergarten to the Boardroom: The Top Priorities
by WSJ Editors of the Women in the Economy Report
Apr 11, 2011
Page: R7


"View from the Top," by: Alan Murray and Indra Nooyi, The Wall Street Journal, April 15, 2011 ---

Task-force participants at the conference had no end of recommendations for addressing the challenges—and opportunities—facing women in the economy. Give women more bottom-line responsibilities. Hold CEOs accountable. Recruit outside the regular channels. And so on.

To get insight into those issues, The Wall Street Journal's Alan Murray turned to one of the highest-ranking women in corporate America: Indra Nooyi, chairman and chief executive of PepsiCo. Here are edited excerpts from the discussion.

MR. MURRAY: McKinsey research, building on Catalyst research, shows this pipeline in corporate America. The majority of entrants are very high-qualified women—but at each stage of advancement, men have at least twice the odds of advancing as women. How the hell did you do it?

MS. NOOYI: I ask myself that question every day. Especially recently, I've been looking back and thinking about all of the trade-offs and sacrifices I've had to make to get here. My second daughter's going off to college this September, and I say, "My God, I missed so many things about her growing up." Hopefully, my two daughters will be in an environment where it's going to be easier for them.


MR. MURRAY: Are you suggesting that it could have been easier, and you still could have achieved the pinnacle you achieved?

INDRA NOOYI 'The harder the business, the bigger the turnaround, put your hand up and say "I want to do it." '

MS. NOOYI: From a family situation, I wanted it all, and it wasn't easy. But I lucked out in one way. I had a husband who said, "You're going to have true gender equality." He was working, I was working, but we juggled our schedules. I also had tremendous support from the extended family.

On the professional side, I had mentors who gave me feedback. For example, I'm a pretty honest and outspoken person. So, you sit in a meeting and somebody presents a three-year, five-year plan. Typically, a lot of the men in the room would say, "You know, that's very interesting. But maybe you could think about this slightly differently."

I just said, "That's crap. This is never going to happen." I'm sure they were all thinking that, but they were saying it in a much more gentle way. I'd come out of the meeting, and one of the guys would pull me aside and say, "You could have said the thing slightly differently. Maybe not the way I said it. Maybe not the way you said it. There might have been a middle ground."

I was very happy that these mentors stepped up and gave me feedback on how to interact in a world that is predominantly male. How can I keep my authenticity, yet adapt to the environment?


MR. MURRAY: Can you have an example of where you didn't make the compromise on authenticity?

MS. NOOYI: If my kids called in the middle of a meeting, I took the call. I never said, "Mom's not available." I said, "Excuse me, my kids need to talk to me."

The Leaky Pipe

MR. MURRAY: How do you account for the fact that the pipeline is, to use the adjectives that have been used here, leaky, blocked, broken?

MS. NOOYI: I think the pyramid starts narrowing for everybody, but disproportionately for women because the pipeline wasn't as rich as it needed to be coming up.

I think there might be three reasons why that's so. One, just law of numbers, there weren't enough women in the pipeline. Second, as you move up the organization, there are so many trade-offs and sacrifices to be made. Many women opted out. Third is the environment in many companies, because it's more male dominated. It's changing now, but the senior men belong to the older generation who talk differently and act differently.

Let's say Alan Murray made a presentation, and it was awful. The guys would go to Alan Murray, thump him on the back and say, "Alan, buddy, what happened? You screwed up, man." And Alan says, "You think so? Tell me what I did wrong." There's a locker-room conversation that goes on.

When a woman makes a presentation that's not so good, the men say, "She screwed up, God, she did." That's not locker room; that's heckling the woman.

Women need to go to women and say, "Hey, that presentation wasn't very good. Let me tell you how you could have done it better." But there's a reverse problem. When women give women feedback, women don't take it well. So, there's a funny psychological issue we need to address. Women can be better mentors to women, and women should be more willing to accept women mentors.

The Bottom Line

MR. MURRAY: Let's take a look at the list of priorities. Number one was that too many women are in support roles. In order to see women advance to the top, they needed to be put in positions where they could develop responsibility for the bottom line.

MS. NOOYI: Punching the ticket that you've done P&L management makes a huge difference. But roles like finance or HR or marketing are now critical to the functioning of a company. You can actually exert your influence from those roles. So, ask for a P&L role, get it out as soon as you can—and then figure out how to get into a critical function. But make sure that as you do this job, you expand your own definition of that job.

MR. MURRAY: Another recommendation was to hold CEOs accountable for hiring women in the top jobs and making sure pay was at an equal level.

MS. NOOYI: I agree with all of that, especially the pay parity, which is something we can fix right away. The thing to be very careful about, though, is that if you don't fix the issue of getting talented women in the pipeline, you can't fix the top-management issue overnight. That's a formula for disaster. You put women in there, and they don't succeed, and then it's a worse situation for women.


MR. MURRAY: Another idea was to promote women on potential. A phrase that's been repeated around here for the last few days is that men are promoted for potential, and women are promoted on performance. The implication is that there's a higher hurdle that women have to meet.

MS. NOOYI: I think that's changed a lot. The sensitivity, the awareness of these issues is rising, but I think we ought to keep the pressure on. As long as there are no women in the C-suite, these kinds of discussions won't happen.

Continued in article

Bob Jensen's threads on the Glass Ceiling (and in some cases lack thereof in CPA firms) are at

"B-School Research Tackles the Big Questions:  Business school faculty members have been churning out research on green initiatives, terrorism, and happiness," by Francesca Di Meglio, Business Week, March 24, 2011 ---

There's not much credit given here to accounting research, but mention is made of research on vocal intonations of CEOs and CFOs on 1,647 earnings conference calls for 691 companies in 2007, a study by Duke's accounting professors William Mayew Mohan Venkatachalam.

I’m not going to hold my breath waiting for Porter to give some evidence of contrition about his mission to Tripoli. Sir Howard Davies may have resigned as director of the LSE (“The short point is that I am responsible for the school’s reputation and that has suffered”), but being a Harvard professor apparently means never having to say you’re sorry. Perhaps instead the university will find some way to rein in on its professors’ more self-serving ambitions.
David Warsh, "A Recent Exercise in Nation-Building by Some Harvard Boys,", March 27, 2011 ---
Thank you Robert Walker for the heads up.

It was worth a smile at breakfast that morning in February 2006, a scrap of social currency to take out into the world. Michael Porter, the Harvard Business School management guru, had grown famous offering competitive strategies to firms, regions, whole nations.  Earlier he had taken on the problems of inner cities, health care and climate change.  Now he was about to tackle perhaps the hardest problem of all (that is, after the United States’ wars in Afghanistan and Iraq).

He had become adviser to Moammar Khadafy’s Libya.

There at the bottom of the front page of the Financial Times was a story that no one else had that day, or any other – a scoop. It turned out that Porter and his friend Daniel Yergin and the consulting firms which they had respectively co-founded and founded, Monitor Group and Cambridge Energy Research Associates, had been working for a year on a plan to diversify the Libyan economy away from its heavy dependence on oil. Their teams had conducted more than 2,000 interviews with “small- and medium-scale entrepreneurs as well as Libyan and foreign business leaders.” (Both men are better-known as celebrated authors:  Porter for Competitive Strategy: Techniques for Analyzing Industries and Competitors and The Competitive Advantage of Nations, Yergin for The Prize: the Epic Quest for Oil, Money and Power and The Commanding Heights: the Battle for the World Economy.)

The next day Porter would present the 200-page document they had prepared in a ceremony in Tripoli. Khadafy himself might attend. The FT had seen a copy of the report, which envisaged a glorious future under the consultants’ plan. If all went well, it said, then by 2019 – the 50th anniversary of the military coup that brought Col. Khadafy to power – Libya would have “one of the fastest rates of business formation in the world,” making it a regional leader contributing to the “wealth and stability of surrounding nations.”

. . .

We now know that Khadafy’s son bribed his way into his PhD from the London School of Economics (LSE); that Monitor Group had been paid to help him write his dissertation there (much of which apparently turns out to have been plagiarized, anyway); that the Libyan government was paying Monitor $250,000 a month for its services; that, according to The New York Times, Libya’s sovereign wealth fund today owns a portion of Pearson PLC, the conglomerate that publishes the Financial Times and The Economist; that the whole deal quietly fell apart two years later.

Sir Howard Davies resigned earlier this month as director of the LSE after it was disclosed he had accepted a ₤1.5 million donation in 2009 from a charity controlled by Saif Khadafy.

It turns out that Monitor also proposed to write a book boosting Khadafy as “one of the most recognizable individuals on the planet,” promised to generate positive press, and to bring still more prominent academics, policymakers and journalists  to Libya, according to Farah Stockman of The Boston Globe. She did a banner job of pursuing the details she found in A Proposal For Expanding the Dialogue Surrounding the Ideas of Moammar Khadafy, a proposal from Mark Fuller in 2007 that a Libyan opposition group posted on the Web.

Among those enlisted were Sir Anthony Giddens, former director of the LSE; Francis Fukuyama, then of Johns Hopkins University; Benjamin Barber, of Rutgers University (emeritus); Nicholas Negroponte, founder of MIT’s Media Lab; Robert Putnam and Joseph Nye, both former deans of Harvard’s Kennedy School of Government.  Nye received a fee and wrote a broadly sympathetic account of his three-hour visit with Khadafy for The New Republic. He also told the Globe’s Stockman he had commented on a chapter of Saif’s doctoral dissertation. (When The New Republic scolded Nye earlier this month, after Mother Jones magazine disclosed the fee, Nye replied that his original manuscript implied that he had been employed as a consultant by Monitor, but that the phrase had been edited out).

. . .

I’m not going to hold my breath waiting for Porter to give some evidence of contrition about his mission to Tripoli. Sir Howard Davies may have resigned as director of the LSE (“The short point is that I am responsible for the school’s reputation and that has suffered”), but being a Harvard professor apparently means never having to say you’re sorry. Perhaps instead the university will find some way to rein in on its professors’ more self-serving ambitions.

New Book --- Yeah Right!
Harvard Business Review on Making Smart Decisions --- Click Here

Jensen Comment
In Chile the Chicago Boys rebuilt a nation with honor. I Libya the Harvard Boys were apparently less honorable.

And look what a desert swamp we're mired in now!

. . . being a Harvard professor apparently means never having to say you’re sorry

Making Home Affordable ---

Making Home Affordable is a key part of the Obama Administration's effort to help homeowners avoid foreclosure. If you are struggling with your monthly mortgage payments or have already missed a payment, now is the time to take action. Start today by learning more about the options available to you through MHA

Help for Homeowners Facing Foreclosure

Help for Homeowners Struggling With Mortgage Payments

Help for Homeowners Trying to Avoid Mortgage Troubles

Attend an MHA event in your area

Bob Jensen's personal finance helpers ---

"PwC India Affiliates Settle with SEC, PCAOB Over Satyam Audit Failures," By Caleb Newquist, Going Concern, April 5, 2011 ---

The affiliates – Lovelock & Lewes, Price Waterhouse Bangalore, Price Waterhouse & Co. Bangalore, Price Waterhouse Calcutta, and Price Waterhouse & Co. Calcutta – must pay $6 million to the SEC, $1.5 million to the PCAOB and are barred from accepting U.S.-based clients for six months. The SEC fine is the largest ever levied against a foreign-based accounting firm in an SEC Enforcement Action and the PCAOB fine is the largest in the regulator’s history. PW India must also “establish training programs for its officers and employees on securities laws and accounting principles; institute new pre-opinion review controls; revise its audit policies and procedures; and appoint an independent monitor to ensure these measures are implemented.” The SEC’s press release stated that the failures “were not limited to Satyam, but rather indicative of a much larger quality control failure throughout PW India.”

Continued in article

 Jim skillfully tells it like it is in this almost laughable settlement
"The PCAOB Settlement in Satyam: PwC Agrees to Fall on its Pen-Knife," by Jim Peterson, re:Balance, April 6, 2011 ---

. . .

From the PwC perspective, meanwhile, the chance for a cheap exit from a major problem would have been a no-brainer. Consider:

First, an enforcement ding on the Satyam engagements had to be coming, sooner or later. From the PCAOB’s order – which PwC agreed not to contest – the Indian engagement teams on the audits from 2005 through 2008 basically did not:

So a strategic decision not to defend the indefensible indicates early recognition of a step toward sustainable credibility. 

As for the sanctions – PwC’s undertakings on future practice quality, staffing, training and internal oversight are no more than necessary for an enterprise with aspirations to professionalism; the two-year presence of an outside monitor only adds one more stranger to the list of foreign intruders imposed on its Indian practice; and the six-month restraint on new SEC clients runs only to the settling Indian firms, so does not inhibit either the global network or its other Indian affiliates.

And, lastly, the financial impact of the fines on the massive PwC network is no more than a dime added to a roll of nickels.

For good measure, with the week’s news cycle dominated by military activities in Libya and a threatened government shut-down in Washington, and subsidiary attention to post-earthquake Japan’s nuclear hazards and Silvio Berlusconi’s “bunga bunga” trial, the entire story will drop off the media screen in less than no time.

Predictably, critics of the accounting profession who are unwilling to settle for less than the scalps of the Big Four leaders nailed to an enforcer’s door will make their outrage known.

But they will fail to acknowledge that both the regulators and PwC itself are only acting in full accordance with their respective DNA.

So once again, this settlement points up the challenge to the long-term achievability of a valuable, sustainable assurance function, to serve the issuers and users of the financial information of global-scale companies: the terms of the discourse are revealed as hopelessly inadequate.

Bob Jensen's threads on PwC are at

"Earnings effects of personality, education and IQ for the gifted," by Steve Hsu, MIT's Technology Review, April 2, 2011 ---

Thanks to a reader for pointing me to this recent paper by Heckman and collaborators, which makes use of data from the Terman study of gifted individuals (minimum IQ of 135 on the Stanford-Binet).

Of the personality factors, Conscientiousness and Extraversion had the largest (positive) effect on lifetime earnings -- see figures below. See
here for more on Big 5 personality factors and a link to a personality test.

The Effects of Education, Personality, and IQ on Earnings of High-Ability Men

This paper estimates the internal rate of return (IRR) to education for men and women of the Terman sample, a 70-year long prospective cohort study of high-ability individuals. The Terman data is unique in that it not only provides full working-life earnings histories of the participants, but it also includes detailed profiles of each subject, including IQ and measures of latent personality traits. Having information on latent personality traits is significant as it allows us to measure the importance of personality on educational attainment and lifetime earnings.

Our analysis addresses two problems of the literature on returns to education: First, we establish causality of the treatment effect of education on earnings by implementing generalized matching on a full set of observable individual characteristics and unobserved personality traits. Second, since we observe lifetime earnings data, our estimates of the IRR are direct and do not depend on the assumptions that are usually made in order to justify the interpretation of regression coefficients as rates of return.

For the males, the returns to education beyond high school are sizeable. For example, the IRR for obtaining a bachelor's degree over a high school diploma is 11.1%, and for a doctoral degree over a bachelor's degree it is 6.7%. These results are unique because they highlight the returns to high-ability and high-education individuals, who are not well-represented in regular data sets.

Our results highlight the importance of personality and intelligence on our outcome variables. We find that personality traits similar to the Big Five personality traits are significant factors that help determine educational attainment and lifetime earnings. Even holding the level of education constant, measures of personality traits have significant effects on earnings. Similarly, IQ is rewarded in the labor market, independently of education. Most of the effect of personality and IQ on life-time earnings arise late in life, during the prime working years. Therefore, estimates from samples with shorter durations underestimate the treatment effects.

Here are a couple of interesting excerpts from the paper:

... Our third contribution is to show how the effect of personality on earnings varies through-out the men’s working lives. We find that without access to long follow-up data, the estimated effect would be understated. Note that even though the Terman sample has a restricted range of IQ, there is substantial variation in personality. In fact, the Terman men do not differ from the general population in terms of personality.

... note that even when controlling for rich background variables, IQ maintains a statistically significant effect on lifetime earnings. Even though the effect is slightly diminished from the un-controlled association of the first column, it is still sizable. Malcolm Gladwell claims rather generally in his book Outliers that for the Terman men, IQ did not matter once family background and other observable personal characteristics were taken into account. While we do not want to argue that IQ has a larger role for the difference between 50 and 100, for example, than for the difference between 150 and 200, we do want to point out that even at the high end of the ability distribution, IQ has meaningful consequences. [The syntax of this last sentence is strange. Presumably the impact of IQ variation from 50 to 100 (from severely handicapped to average) is larger than for 150 to 200, even though their results show a significant effect even in the very high range.]

Below are some nice figures (click for larger versions). Note the personality factor distribution among Termites was similar to that of the overall population, whereas the IQ range was restricted due to selection. Typical lifetime earnings for this group of exceptionally able men ranged from $2 to $3 million in 2008 dollars.

Continued in article

April 5, 2011 reply from Jim Fuehrmeyer

In my start group in Chicago over thirty years ago, there were six of us who were Sells award winners including the gold medalist. The gold medalist could take a test with the best of them but she couldn’t carry on an intelligent conversation and she lacked the ability to make judgments. Like I tell my students, accounting is not about solving problems; it’s about identifying the problem to be solved. I’m sure some of the smartest PhDs you’ve known in your career ended up being the poorest teachers; being smart doesn’t mean you can communicate your knowledge to others effectively.


Research that equates income levels to predictor factors suffers inevitably to the "criterion problem" discussed  at


No Fooling: Try This One Out With Students (adding sensitivity analysis with interest rates and inflation)
"Slow Compounding," by Floyd Norris, The New York Times, April 1, 2011 ---

American Express has a full-page ad in today’s Times offering a savings account yielding 1.15 percent.

These days that is a good rate, a fact the people of my generation find astonishing. Such amazingly low rates cause great anxiety for those who saved money in the past and now find it yields so little.

I did a little arithmetic. My son is an 18-year-old college freshman. If he puts $100 into such an account now, and rates remain constant, he will have doubled his money in time for his 79th birthday party.

Of course, if you are investing for a child in kindergarten, there is still hope. A $100 investment today would double about the time he or she goes on Medicare.

Bob Jensen's personal finance helpers are at

Is your managerial/cost accounting course largely detached from the real world?

"Book Indicates Wrigley Faithful Care More About Beer Prices Than Winning: Chicagoist ," Chicagoist, April 4, 2011 --- 
Thanks to Jim Mahar for the heads up.

Leave it to a University of Chicago economist to lend credence to the belief that Wrigley Field is a background to being the World's Largest Beer Garden 81 times a year. Booth School of Business Finance Professor Tobias "Toby" Moskowitz is one of the co-authors of the new book Scorecasting. Moskowitz and Sports Illustrated senior writer Jon Wertham analyzed economic data related to baseball at Wrigley Field in relation to attendance and found that, more often than not. the one factor that tended to lead to decreases in attendance was increases in beer prices, even as tickets to Cubs games became more expensive.

Per the University of Chicago magazine;

From 1984 to 2009, “attendance was more than four times more sensitive to beer prices than to winning or losing.” That sensitivity is evident at the concession stand. A beer at Wrigley Field, Scorecasting reports, costs just $5, cheaper than everywhere except at Arizona Diamondbacks and Pittsburgh Pirates games.

Tickets to Cubs games, on the other hand, have followed a different trajectory. Since 1990, prices have increased 67 percent (the league average is 44.7 percent). Only the New York Yankees and the Boston Red Sox command more.

Yet people have continued to pay Wrigley Field’s escalating cover charge, filling the stadium to 99 percent capacity. Across town at US Cellular Field, ticket prices and attendance rise and fall based on White Sox wins and losses, but the same beer will run you a buck-fifty more than at Wrigley.

Continued in the article

Jensen Comment
This illustration might be used to portray the enormous gap between CPV analysis in the real world versus the pathetic simplification assumptions we make for CPV models in our cost and managerial accounting textbooks.

Firstly, the single product models where only one product bears the fixed cost almost never arise in the real world except in maybe for farmers who only grow one crop such as Kansas wheat or Idaho potatoes. But this leaves our students unprepared for the real world where they rarely encounter single-product firms.

Secondly, when we teach multiple-product CPV analysis we make the totally unrealistic assumption that product/sales mix ratios are constant over the relevant range. This leaves our students unprepared for the real world where they rarely encounter fixed product/sales mix ratios even in a relatively narrow relevant range.

The above Wrigley Field CPV problem from the real world illustrates a situation where two products, beer and park seating tickets, share common fixed costs but do so in a complicated way that makes the assumption of a fixed product/sales mix ratio is totally inappropriate. Pricing is especially complicated because at low seating prices we have more patrons who potentially but not necessarily will buy more beer. But at low beer prices we will apparently sell more seating tickets, but this becomes complicated by so many other factors. Demand appears to be more elastic to beer pricing than to ticket pricing according to findings in the above article. Add to this the park attendance complications caused by Cubs rankings in the National League, popularity of certain stars that emerge such a leading home run hitter, weather, unemployment, traffic, parking, and other factors affecting park attendance and beer drinking.

It might be of great value if some accounting professors collaborated to write a case about Wrigley Field CPV analysis leading up to pricing decisions and other variables that we commonly analyze in CPV analysis such as operating leverage.

It might be of great value if readers would tell us how they go beyond the textbooks to prepare students for real world complications of CPV analysis.

Bob Jensen's threads on managerial accounting are at


"Programs that grow the next generation of global leaders," by Dan Black, Americas Director of Campus Recruitment, Ernst & Young, Ernst & Young Faculty Connection, Issue 32, April 2011 ---

Our 141,000 people are part of a global network that spans more than 140 countries, and working effectively in a global marketplace is one of our key priorities. It helps foster our inclusive culture, and promotes global assignments and working on cross-cultural teams. That is why we offer a wide range of programs and experiences for our interns, new hires and early-career professionals to build their global mindsets.

The good news is that today’s college students are the most global generation to date. Research among the attendees of the Ernst & Young 2010 International Internship Conference shows that 88% have traveled outside their home country and 36% have studied abroad. These business leaders of tomorrow are hungry for international experience, and we at Ernst & Young are passionate about providing the tools they need to develop a global mindset.

We begin providing this training long before the students are hired. Our upcoming Emerging Leaders Summit, a pre-internship conference for high-performing college sophomores and juniors, includes workshops designed to build students’ global intellectual, psychological and social capital, the building blocks of a successful global mindset. Opportunities for international geographic mobility begin with overseas assignments in the Global Student Exchange Program, an exciting opportunity for Ernst & Young interns. Internships start in the students’ home office locations, then four weeks abroad at another Ernst & Young office. Participants then return and complete their internship back home. Flights, housing and work visas costs are paid for by Ernst & Young. In addition, Ernst & Young was the only ‘Big Four’ organization to hold an International Intern Leadership Conference in both 2009 and 2010. Attended by nearly 1,400 students from over 13 countries last year, the conference allows students to meet their intern counterparts from around the world, an invaluable first step to creating their global networks.

We are also very excited to announce a new experience geared towards helping our younger employees on their journey towards developing a global mindset. Our Global Exchange Program has been extended to offer second and third-year employees short-term international rotations, allowing more of our professionals to experience geographic mobility earlier in their careers. Already enjoying several years of success in our Europe, Middle East, India and Africa areas, the Americas pilot of this program will link people in our more junior ranks from Brazil, Canada and the US so that they can team internationally on select high-profile clients.

Continued in article

Bob Jensen's Threads on Accountancy Careers ---

Jensen Comment
Stanford University's Graduate School of Business added a globalization program with five new assistant professorships under the leadership of senior professor Condoleezza Rice, PhD

Although Stanford's program is a multidisciplinary business globalization education and research program, that's the nature of such programs in the spirit of Dan Black's article above.

Also new programs on globalization fit nicely into the initiatives undertaken by the new Pathways Commission formed in a joint program of the AAA and the AICPA ---
Search under Bruce Behn for more detailed information about the Pathways Commission, which Bruce now chairs.

His wife is even for sale and marked down at that!
From The Wall Street Journal Accounting Weekly Review on April 8, 2011

A Tax Man Takes Account of His Life
by: Laura Saunders
Apr 05, 2011
Click here to view the full article on

TOPICS: Accounting Education, Personal Taxation, Public Accounting, Tax Accounting, Tax Laws, Tax Planning, Taxation

SUMMARY: The article describes the lifestyle of Doug Stives, a CPA from Red Bank, NJ, who now can enjoy peak skiing season conditions out west after leaving his job as a partner at accounting firm The Curchin Group. His full-time position is now an accounting professor at Monmouth University in New Jersey. All of his accounting and tax practice work is now done as a self-employed contractor reporting on Schedule C.

CLASSROOM APPLICATION: The article is useful for a tax class discussing deductions , particularly on Schedule C, and for any class covering professional accounting work plans.

1. (Advanced) What type of income is reported on Schedule C as attached to U.S. Form 1040?

2. (Introductory) How did Mr. Stives's move from being a partner at an accounting firm to a position as an accounting professor and director of the MBA program at Monmouth University allow him to change reporting of his income on his U.S. Form 1040? Be specific.

3. (Introductory) How did that change in income reporting also change the deductibility of Mr. Stives's travel and other expenses?

4. (Advanced) How could the IRS challenge deductibility of Mr. Stives's travel expenses? Be specific in your description of the theory behind the potential issue.

5. (Advanced) Could you replicate Mr. Stives's approach immediately after college graduation? Explain your answer.

Reviewed By: Judy Beckman, University of Rhode Island

"A Tax Man Takes Account of His Life," by: Laura Saunders, The Wall Street Journal, April 5. 2011 ---

In the thick of tax season, most certified public accountants are chained to their desks grinding out returns.

Doug Stives, a CPA from Red Bank, N.J., went skiing in Utah.

"I always dreamed of coming here for peak conditions," he said in mid-March between runs at Snowbasin Resort.

The trip is among the many perks that have accrued from his decision, in 2006, to become, in effect, The Most Tax-Efficient Man in America. The experiment has led to a new career, frequent travel and obsessive documentation of expenses, such as a $6 hot dog he recently bought in the Philadelphia airport.

The "aha" moment came to him, he says, after a college approached him about a teaching gig and he realized he could put into practice many of the tax strategies he had learned over the decades.

Step One was to change jobs. Mr. Stives had been a partner for 36 years at The Curchin Group, an accounting firm. By accepting an offer to teach tax and accounting courses full-time at the Leon Hess Business School of Monmouth University in New Jersey, he was able to tap into a broad array of tax-free employee benefits not available to him at the firm.

Step Two was the formation of Doug Stives LLC, the separate consulting business to which he attributes an impressive array of expenses. In general, people who are employees and have side businesses are often in the best position to maximize the tax code's benefits, say experts. Mr. Stives calls this "the best of all worlds."

The result, says Mr. Stives, is that while he earns less than 75% of his earlier pay, he takes home almost 90% as much. And he says he reaps another $40,000 a year in tax-free benefits from his college gig. Among other things, the school adds to his 401(k) contribution and provides tax-free, discounted health plans for Mr. Stives and his wife, plus disability insurance. As a partner in the accounting firm, he had to fund such expenses himself.

Not that all is perfect now. One peeve: dealing with what he calls "airline nonsense"—long lines, rising fees and canceled flights. But overall, he says, "my quality of life is so much higher."

His wife of 40 years, Elizabeth Stives, agrees. "We travel so much now for his business," she says. "Next is Lake Tahoe."

Mr. Stives, 64 years old, says he's too miserly to focus solely on maximizing deductions—a practice he calls a "rookie's mistake." In 2010, for example, he spotted a bonanza in "bonus depreciation" for large SUVs used in a business, but didn't need another car. "Sometimes my cheapness overcomes my love of tax savings," he says. "My wife will tell you I got her on sale."

Instead, he says, he uses the tax code's many quirks as the means through which he can live a fuller life.

Continued in article

Bob Jensen's threads on accountancy careers are at

Free Faxing Service
"HelloFax Makes Faxing Painless (Even without a Fax machine)," by Ryan Cordell, Chronicle of Higher Education, April 13, 2011 ---

The very idea of faxing a document seems outdated to me. I suspect that many ProfHacker readers wouldn’t willingly fax something were there any option to submit it electronically. Nevertheless, I find myself needing a fax machine several times a year. What’s more, the things that must be faxed are, inevitably, essential documents: often tied to my finances or academic records.

So I was thrilled when Lifehacker recently posted (yes, Lifehacker again!) about HelloFax, a service that allows you to fax documents straight from your computer. Once you register for an account with HelloFax, you simply type in the destination fax number, upload your document, sign it electronically (if you want to), and send it. HelloFax sends you an email when the fax is delivered (or if the delivery fails). When you log into HelloFax, you can see the status of all of your faxes, and resend faxes that failed.

Since I read Lifehacker’s post, I’ve scanned and then “faxed” three separate documents using HelloFax. Each time the service was easy to use and my documents were delivered safely. With a free account you can send up to 5 pages per month (about all I ever need). HelloFax also offers paid accounts for more frequent faxers.

Continued in article

Bob Jensen's technology bookmarks ---

Sharp Ratio ---

The Sortino Ratio is an adjustment on the Sharpe Ratio in that it only penalizes downside volatility ---
Thanks to Jim Mahar for this April 4, 2011 heads up ---

"Bribery and the Gathering Storm Over Compliance," by Peter J. Henning, The New York Times (DealB%k), April 1, 2011 ---

While insider trading cases have been attracting much of the financial headlines, there is another issue that will have a much greater impact on corporate bottom lines: bribery.

The British Ministry of Justice has announced guidelines for the implementation of the far-reaching Bribery Act of 2010, which goes into effect on July 1. Meanwhile, while the Securities and Exchange Commission is set this month to announce rules required by the Dodd-Frank Act to encourage whistleblowers to disclose information about corporate misconduct, most likely including violations of the Foreign Corrupt Practices Act.

The Bribery Act is sure to drive up the costs of compliance programs for American companies doing business in Britain, while the Dodd-Frank Act’s whistleblower provisions may well render those programs superfluous, even though they will still be required by the Sarbanes-Oxley Act.

The Foreign Corrupt Practices Act prohibits individuals and companies from paying bribes to foreign officials to obtain or retain business in the country. It also requires corporations that file reports with the S.E.C. to maintain accurate books and records in accordance with the accounting rules. The law, first adopted in 1977, has grown in importance over the past decade as the Justice Department, working with the S.E.C., has brought a number of cases against multinational companies for corrupt payments, resulting in millions of dollars of fines and penalties.

Britain’s Bribery Act is broader in some respects than the Foreign Corrupt Practices Act, most importantly applying to any type of bribery, not just payments to foreign officials. The Bribery Act makes a company liable for the actions of those “associated” with a “commercial organization,” including any employee or agent who acts on its behalf, and the organization is strictly liable for any failure to prevent the bribery.

For American companies, a key facet of the Bribery Act is its application to any organization that “carries on a business” in Britain. The Ministry of Justice’s guidance is not particularly helpful on the scope of the law, noting that it would not apply to foreign company that did not have a “demonstrable business presence” in Britain, and that a company is not necessarily liable if it lists its shares on a British exchange or maintains a subsidiary in the country. Rather than explaining what the law does cover, the guidance simply describes what might fall outside the Bribery Act, while noting that the courts will finally decide the issue. This provides little clarity about the scope of the law.

The Bribery Act provides a defense for a company accused of a violation if it can show it had in place “adequate procedures” to prevent an associated person from engaging in bribery, something the Foreign Corrupt Practices Act does not recognize as a basis to avoid liability. The Ministry of Justice outlined six principles for preventing bribery that should guide companies in adopting or expanding a compliance program to help establish a defense to a charge. The principles focus on adequately assessing the risks of a violation and implementing a sufficiently rigorous program of prevention and monitoring.

While almost every publicly traded American company already has a compliance program in place, the potentially broad scope of the Bribery Act is likely to require companies doing any substantial amount of business in Britain to devote even greater resources to preventing bribery of any type, not just that involving foreign officials. Compliance is not cheap, of course, which means the lawyers, accountants and outside consultants who specialize in this field will see an uptick in business.

Continued in article

Bob Jensen's threads on Rotten to the Core are at

Bob Jensen's threads on whistleblowing are at

"The Big Screw Up": An "Ugly" PCAOB Audit Inspection Report of KPMG Bermuda

"Dirty Little Secret Unravels in Bermuda Blunder," by Jonathan Weil, Bloomberg, March 30, 2011 ---

One of the long-standing raps on the auditing profession is that too many of its practitioners suffer from a check-the-box mentality, where rigid adherence to mindless rules obscures their ability to see the bigger picture.

For once, that mindset has worked to investors’ advantage.

Two weeks ago, the Public Company Accounting Oversight Board released its triennial inspection report on the Hamilton, Bermuda-based affiliate of KPMG, the Big Four accounting firm. And it was an ugly one. In one of the audits performed by KPMG- Bermuda, the board said its inspection staff had identified an audit deficiency so significant that it appeared “the firm did not obtain sufficient competent evidential matter to support its opinion on the issuer’s financial statements.”

This being the hopelessly timid PCAOB, however, the report didn’t say whose audit KPMG-Bermuda had blown. That’s because the agency, as a matter of policy, refuses to name companies where its inspectors have found botched audits. It just goes to show that the PCAOB’s first priority isn’t “to protect the interests of investors,” as the board’s motto goes. Rather, it is to protect the dirty little secrets of the accounting firms and their corporate audit clients.

That’s why it gives me great pleasure to be able to break the following bit of news: The unnamed company cited in KPMG- Bermuda’s inspection report was Alterra Capital Holdings Ltd. (ALTE), a Hamilton-based insurance company with a $2.3 billion stock- market value, which used to be known as Max Capital Group Ltd.

One Client

You see, just like their checklist of instructions told them to do, the folks who wrote this report were kind enough to disclose the number of U.S.-listed companies that KPMG-Bermuda had as audit clients at the time it was inspected. That number, the report said, was one.

The report also said the board’s staff conducted their inspection in November 2009, and that the audit deficiency they found was “the failure to perform sufficient procedures to test the estimated fair value of certain available-for-sale securities.” Armed with those data points and some stock- screening software, I quickly found KPMG-Bermuda’s audit report on Alterra’s 2008 financial statements, dated Feb. 19, 2009.

Alterra actually was one of two U.S.-listed companies for which KPMG-Bermuda signed an audit report that year. The other one got acquired before the agency’s inspection work began. And of the two, Alterra was the only one that classified any of its securities as available-for-sale.

Big Screw-Up

It’s when you look at Alterra’s financial statements that the magnitude of KPMG-Bermuda’s screw-up becomes apparent. Available-for-sale securities are the single biggest line item on Alterra’s balance sheet. They represented almost half of the company’s $7.3 billion of total assets as of Dec. 31, 2008, and a little more than half of its $9.9 billion of total assets at the end of last year.

Continued in article

Jensen Comment
We might call this Bermuda Shorts in the auditing profession, but this might be going a bit too far.

Bob Jensen's threads on KPMG's good news and bad news ---

Is it possible to eliminate a $1.5 trillion deficit by increasing rates for taxpayers earning more than $250,000 per year?
Is it possible to eliminate the above deficit by increasing tax rates for all taxpayers?

In theory no to Question 1 and yes to Question 2, but in reality, closing the Federal spending gap with tax rate increases would be a total disaster on the economy to a point where the government might take in less rather than more tax revenue.

Firstly the answer is no unless you more than double what the poor and middle class pay in taxes. And since nearly half the households in the U.S. do not pay any Federal income tax, Congress would probably have to figure how to squeeze blood out of turnips. This would have an extremely adverse impact on middle and lower income families already deep in debt to to pay medical, housing, and education expenses.

Secondly, the answer is no if you anticipate that most taxpayers that have any form of savings would probably stampede to invest in tax free alternatives such as tax free municipal bonds and bond funds. This would be a disaster for business firms seeking capital.

Thirdly, many taxpayers now paying something into the U.S. Treasury would be thrown out of work and impact on the economy would be far worse than the Great Depression of the 1930s.

But if we could wave a magic wand and prevent all the dynamic reactions to tax rate increases, one solution would look something like this --- keeping in mind that all of this is pure fantasy since the dynamic reactions really cannot be prevented. From Paul Caron's TaxProf Blog on April 18, 2011 ---

"Why Aren't The Rich Paying 50 Percent in Income Taxes?" by Nick Gillespie and Meredith Bragg, Reason Magazine, April 8, 2011 ---

"Paul Ryan's Reverse Robin Hood Budget His plan for reducing the deficit isn't 'the only game in town.' It's only the worst," by Alan Blinder," The Wall Street Journal, April 19, 2011 ---

Jensen Comment
Professor Blinder's main criticism is that the Ryan Plan is too long term and does not do enough to reduce the trillions in deficits over the next decade. But like most progressives he offers zero hints as to what will be a "better game in town" to reduce deficits now. Presumably he wants to confiscate the incomes of people now making over $250,000 per year, but he really doesn't want to discuss a proposed game plan for tax increases because he secretly knows this will not be enough to make much difference on the deficits and probably will be highly dysfunctional in terms of unemployment. Secretly he most likely supports his Princeton colleague's, Krazy Krugman's, solution of printing dollars to reduce deficits and pay for  my wife's forthcoming very expensive surgery.

Zimbabwe showed Ben Bernanke, Alan Blinder, and Paul Krugman the way to reduce government deficits. Why can't they convince the rest of us that printing presses are the answer to deficit reduction?

And, if we keep redefining inflation by taking more and more commodities and services out of the calculation, things won't look so bad while were printing $15 trillion dollars for starters.

Eventually, the "Core" CPI might only include empty houses and vacant yachts.

April 20, 2011 reply from Bob Jensen

Hi Louis and Linda,
I probably would never do research on privileged budget items because it is so complicated and confounded with externalities.

When it comes to government spending, one has to first distinguish those budget items that are discretionary versus non-discretionary. To do this we need some type of criterion. One criterion to consider is whether or not a contract would make the item binding in court. As I mentioned previously many retirement contracts allow beneficiaries to take breaches of contract to court, which is why Congress does not mess with cutting military pensions.

There are, of course, gray zones. Presumably Congress can choose to add surtaxes to all pensions that it pays, including military pensions and Social Security. Or it can choose to tax medical benefits that it pays such as taxes on usage of Veterans Hospitals or taxes and higher deductibles on Medicare claims.

Another gray area that makes non-discretionary budget items somewhat discretionary is already being practiced in Medicare. You can keep allowing less and less for medical  services such that claimants can only get cheap and inferior doctors. For example, the surgeon who performed my wife's surgeries three and four under Medicare would not do surgery Number 5 because he stopped accepting any Medicare patients. This means by law that he cannot accept patients who are eligible for Medicare even if they are willing to pay his fees from private funds. May wife had to find another surgeon in another state.

Under the Romney Care "universal" health insurance plan in Massachusetts, some hospitals discovered the plan was not paying enough to cover out-of-pocket expenses, especially malpractice insurance premiums. So those hospitals dropped the services that had the highest malpractice insurance premiums. Read that as meaning that those hospitals dropped obstetrics departments and refused obstetrics services to all women. These women can still find hospitals that offer such services but the distances are further and the lines are longer and the services are not nearly as good in many instances.

Also the outstanding orthopaedic hospital in Boston where my wife now has spinal surgeries dropped its emergency room services. An externality of Romney care was reduced medical services for all patients, including those that have premium medical insurance plans from employers. Those on premium plans have fewer choices for emergency rooms and trauma centers because of Romney Care.

There's a huge difference between General Motors and the government when it comes to budget cutting. General Motors cannot print money and reached a point where it was impossible to meet pension and health care contracts with retirees. In that case the bankruptcy court modified the contracts. In the case of government pensions and medical benefits for retirees, rather than declare bankruptcy our Federal government will probably just print the money needed to honor the contracts. Welcome to Zimbabwe.

Our state governments like California are in more of a bind. State governments might have to declare bankruptcy and have the bankruptcy courts restructure retirement contracts. At one time Canada came close to losing its national government in favor of provincial governments that would, among other things, print their own currencies. This is no longer entirely out of the question for our 50 states in the United States who would like an option to print their own currencies.

As far as "privileges" within government budget items deemed discretionary, the top privileges typically go to public safety. Police, fire, and National Guard budgets are being cut somewhat but they are protected from enormous cuts by fears in the minds of voters.  As far as Federal government military budgets are concerned, an extremely expensive item in budgets is for advanced warfare and defense technology. However, not many voters are willing to fall behind our enemies on warfare technology, including technology for blocking communications --- such as when an unnamed advanced-technology nation allegedly shut down the nuclear centrifuges in Iran.

Another extremely expensive budget item is our CIA, but not many voters will accept CIA budget cuts on the premise that "ignorance is bliss."

It's one thing to point out research about tax increases and spending cuts on a very broad scale, but when it comes to specifics it becomes an explosive debate that can be political suicide. We now have two choices with trillions in budget deficits. We can raise taxes and make huge spending cuts. Or we keep putting off remedies like we've done for the past two decades at reach a point where it's no longer possible to save the patient.

Some professors in ivory towers might think it is possible to totally eliminate our international fighting force in favor of a beefed up domestic police force. But the unfunded expenses of past wars will continue to linger over our heads. And it's questionable how many terror attacks this nation is willing to experience with an impotent international fighting force for prevention of future attacks.

But I really don't want to get into the question of line item budget cuts. This is also probably too explosive for the AECM in terms of politics. We can, however, debate broad issues like whether it's possible to tax ourselves out of trillion dollar deficits with very little serious budget cutting.

Bob Jensen

"How a big US bank laundered billions from Mexico's murderous drug gangs," by Ed Vulliamy, The Guardian, April 3, 2011 ---
|Thank you Robert Walker for the heads up.

As the violence spread, billions of dollars of cartel cash began to seep into the global financial system. But a special investigation by the Observer reveals how the increasingly frantic warnings of one London whistleblower were ignored

On 10 April 2006, a DC-9 jet landed in the port city of Ciudad del Carmen, on the Gulf of Mexico, as the sun was setting. Mexican soldiers, waiting to intercept it, found 128 cases packed with 5.7 tons of cocaine, valued at $100m. But something else – more important and far-reaching – was discovered in the paper trail behind the purchase of the plane by the Sinaloa narco-trafficking cartel.

During a 22-month investigation by agents from the US Drug Enforcement Administration, the Internal Revenue Service and others, it emerged that the cocaine smugglers had bought the plane with money they had laundered through one of the biggest banks in the United States: Wachovia, now part of the giant Wells Fargo.

The authorities uncovered billions of dollars in wire transfers, traveller's cheques and cash shipments through Mexican exchanges into Wachovia accounts. Wachovia was put under immediate investigation for failing to maintain an effective anti-money laundering programme. Of special significance was that the period concerned began in 2004, which coincided with the first escalation of violence along the US-Mexico border that ignited the current drugs war.

Criminal proceedings were brought against Wachovia, though not against any individual, but the case never came to court. In March 2010, Wachovia settled the biggest action brought under the US bank secrecy act, through the US district court in Miami. Now that the year's "deferred prosecution" has expired, the bank is in effect in the clear. It paid federal authorities $110m in forfeiture, for allowing transactions later proved to be connected to drug smuggling, and incurred a $50m fine for failing to monitor cash used to ship 22 tons of cocaine.

More shocking, and more important, the bank was sanctioned for failing to apply the proper anti-laundering strictures to the transfer of $378.4bn – a sum equivalent to one-third of Mexico's gross national product – into dollar accounts from so-called casas de cambio (CDCs) in Mexico, currency exchange houses with which the bank did business.

"Wachovia's blatant disregard for our banking laws gave international cocaine cartels a virtual carte blanche to finance their operations," said Jeffrey Sloman, the federal prosecutor. Yet the total fine was less than 2% of the bank's $12.3bn profit for 2009. On 24 March 2010, Wells Fargo stock traded at $30.86 – up 1% on the week of the court settlement.

Continued in article

Bob Jensen's threads on how the big banks and brokerages are often Rotten to the Core ---

Note that I've closed the March 31, 2011 edition of FraudUpdates ---

Disability Entitlements: Being Declared Disabled has More Benefits Than Working
Between the ages of 0 and 200, disability pay and medical payments go on virtually forever
The system is racked with fraud
Cost averages $1,500 annually for each and every taxpayer in the U.S.
"College Enrollment Fell Slightly in 2010," by Catherine Rampell, The New York Times (Economix(, April 9, 2011 ---

In the worst economic times of the 1950s and ’60s, about 9 percent of men in the prime of their working lives (25 to 54 years old) were not working. At the depth of the severe recession in the early 1980s, about 15 percent of prime-age men were not working. Today, more than 18 percent of such men aren’t working.

That’s a depressing statistic: nearly one out of every five men between 25 and 54 is not employed. Yes, some of them are happily retired. Some are going to school. And some are taking care of their children. But most don’t fall into any of these categories. They simply aren’t working. They’re managing to get by some other way.

For growing numbers of these men, the federal disability program is a significant source of support. Disabled workers — men and women — received $115 billion in benefits last year and another $75 billion in medical costs. (Disability recipients become eligible for Medicare two years after starting to receive benefits.) That $190 billion sum is the equivalent of about $1,500 in taxes for each American household.

Yet disability usually goes unlargely uncovered by the media. Lately, it hasn’t. Motoko Rich of The Times and Damian Paletta of The Wall Street Journal have both written richly detailed articles recently.

Continued in article

You can play amateur psychologist with new revelations from Bernie Madoff behind bars

"From behind bars, Madoff spins his story,"  by David Gelles and Gillian Tett, Financial Times, April 8, 2011 --- 

We are cruising through North Carolina on a foggy morning in late March, heading up to its rural north. Our route takes us through swampland shrouded in a thick mist; spruce trees and an occasional pink dogwood line the interstate. Butner, population 6,391, is our destination.

The town is home to a vast federal prison complex that includes a hospital, a minimum security unit and two medium security facilities. Since July 14 2009, arguably the most notorious inmate at FCI Butner Medium I has been Bernard Lawrence Madoff, the disgraced New York financier who orchestrated a $65bn Ponzi scheme, among the biggest financial frauds of all time. He is prisoner 61727-054.

When the Madoff scandal broke in 2008, a Financial Times reporter learnt that two acquaintances of his were close to the Madoffs and passed along an invitation for any member of the family to speak with the paper. For more than a year, there was silence. Then, early last December, the reporter received an e-mail from Madoff himself. Following sporadic correspondence, and at very short notice, a message came from the prison: Madoff would meet with the FT.

 It is only the second time he has agreed to meet a reporter in prison. But as we drive north, we wonder if this man who built his career on lies will tell us the truth. Or when we get to the prison, will he simply vanish – like all those billions in his Ponzi scheme? Crossing rusted train tracks, we drive a couple of miles and arrive at the main intersection of this one-traffic-light town.

Butner revolves around the prison. Its centre is just a clutch of convenience stores and a petrol station. In search of strong coffee we consult an iPhone: the nearest Starbucks is 18.4 miles away. Instead, we go to a diner and order the classic southern fare of biscuits and grits. The coffee is terrible.

. . .

Exactly when the Ponzi scheme started is actually a matter of dispute. The trustee seeking to retrieve assets for Madoff’s victims, Irving Picard, says the fraud began as early as 1983. But Madoff denies this, telling us that in the 1980s, at least, he was making plenty of legitimate trades. “[The prosecutors] came up with this idea that I came up with this whole legitimate business to come up with this fraud,” he says. “That is wrong. In the end I left $1bn on the table. I had access to any Swiss bank and offshore bank in the world if I had wanted to stash money. But it wasn’t about the money.”

To hear Madoff say it was not about the money strikes us as improbable. He spent lavishly on his lifestyle; after the fraud was revealed, authorities uncovered $75m in a Gibraltar bank account and millions in jewelry and luxury goods. These were reminders of how much Madoff personally had to lose. He was on the board of Yeshiva University and a regular at charity balls in Manhattan. He and Ruth holidayed in Monte Carlo, where she liked to shop.

We ask why he didn’t just hand the money back to investors. After all, he says that in 1992 he was already a fairly wealthy man, since the market-making operation was performing well. “Ego,” he explains. “Put yourself in my place. Your whole career you are outside the ‘club’ but then suddenly you have all the big banks – Deutsche Bank, Credit Suisse – all their chairmen, knocking on your door and asking, ‘Can you do this for me?’

“[I was] under a lot of pressure – a lot,” he mutters. “And I was embarrassed. It was the first time in my life that something hadn’t worked. I was just dumb. Dumb! Starting in the early 1990s there were no trades. It was just paper. But let me tell you,” he adds forcefully. “It looked real.”

Once the Ponzi scheme was under way, it required a constant influx of new cash. Madoff began taking on clients referred to him by existing ones, who were inclined to keep their money parked with him because of the steady returns. At some point – Madoff never makes it clear exactly when – the real trading ceased altogether, and he began forging trade records for clients. And he says Picower, Chais, Levy and Shapiro – his big four clients – knew something was amiss. “They were complicit, all of them,” he says.

Madoff’s accusations cannot be corroborated. None of the four families has been charged with criminal wrongdoing. Picower is dead, and his estate settled for $7.2bn; his lawyers maintain he was not aware of the fraud. Levy is dead and his family settled for $220m. Chais is dead; his family denies any wrongdoing and has not settled. And Shapiro, the only one still alive, settled for $625m but denies any wrongdoing and has not been accused by authorities of being complicit. In the words of his lawyer, “Mr Madoff is a liar. These latest statements are no more believable than all the other lies that Madoff told his investors and the authorities for decades.”

On its surface, the fraud looked real enough to attract a steady stream of new investors, and not just from the US. According to Madoff, there were rich clients on both sides of the Atlantic eager to use his services to dodge local regulations. In France, for example, wealthy clients initially invested with him in order to avoid rules that prevented them from exporting francs.

“I did it for all of them – so many important people from France and elsewhere,” says Madoff. “That woman from L’Oréal, Christian Dior, so many – I even impressed myself. They came up to my office to meet me. They really wanted to deal with me.” The woman from L’Oréal Madoff refers to is Liliane Bettencourt, one of Europe’s richest women.

The returns on Madoff’s funds were not extraordinarily high, running at about 10 per cent; however, they were steady, which appealed to conservative European investors. Clients were also reassured by the apparently close ties that Madoff enjoyed to respected French and Swiss banks, such as Union Bancaire Privée.

Not everybody in Europe was keen to deal with the fund: Société Générale, for example, stayed away. But most investors seemed impressed by Madoff’s “black box”. Some also suspected that Madoff might be using inside information to give him an “edge”. That added to his allure. “The Swiss thought this – they are the most suspicious of all,” Madoff says, revealing a dislike that may stem from his Jewish heritage and the actions of some Swiss banks in relation to Nazi Germany. “Slimy people.”

In the US, Madoff used his powerful network of contacts across the wealthy Jewish community to lure money. By this time, Madoff had moved into the very heart of the financial “club” he once scorned. He was appointed the chairman of the Nasdaq index, to the board of the Depository Trust & Clearing Corporation, and was vice-chairman of the NASD, his industry’s self-regulatory body.

This did not prevent the regulators from watching him. “In 2002 I had a contact with the SEC, who were concerned that I was front-running,” he recalls, referring to the practice of using insider information to inform trades. “I started laughing to myself – I knew I wasn’t because I wasn’t doing the trades.” Some of his rivals also asked why his returns were so steady. Harry Markopolos, a fund manager, was so suspicious that he filed reports to the SEC in 2000, and again in 2005, suggesting that Madoff was running a Ponzi scheme. “Markopolos was the biggest idiot in the world,” recalls Madoff, displaying his first flash of anger, blinking hard again. “He had a hedge fund that couldn’t make money and his clients abandoned him [so he called the regulators].”

But the regulators did not crack down. “The regulators get calls all the time,” Madoff says. They didn’t investigate “because I had the reputation at the time for being the gold standard. I had all the credibility. Nobody could believe at that time that I would do something like that. Why would I? Stupidity – that is why. But remember that when people asked me about the strategy, it made sense. I was big, credible.”

. . .

As we leave the prison, we are still not sure where the truth ends and his lies begin. What we know is that this is a man who mercilessly ran a Ponzi scheme for at least 16 years, corrupted the financial system, destroyed lives and bankrupted families and charities. Yet, in the flesh, Madoff spins a credible tale of how a renegade entrepreneur ­conquered Wall Street and was drawn into crime by personalities and forces he could not control. It sounds almost convincing; or at least no more absurd than many of the other stories we hear every day in western finance.

The fact that so much of Madoff’s story is so commonplace on Wall Street – the tax shelters, black boxes and mysterious returns – is what allowed him to go undetected for so long. And this is why Madoff has sent chills through investors at every level. If the most sophisticated minds in finance were easily duped through an elementary scheme run by one of their own, how can anyone with money invested in the modern financial system know who to trust? This bedevilling question is why Madoff cannot be ignored, even as he ­languishes in a North Carolina prison.

David Gelles is US media and marketing correspondent. Gillian Tett is the FT’s US managing editor. For expanded coverage and full statements from JPMorgan, UBS, HSBC and Madoff’s prominent clients,
go to

Bob Jensen's threads on Ponzi Schemes Where Bernie Madoff was King are at

Introducing the 1/1/5 rule as another way to avoid Death by PowerPoint in student presentations (April 19, 2011) --- Click Here  

Bob Jensen's threads on PowerPoint are at

Law Professor Paul Caron maintains one of the most popular law school blogs.
On April 3, 2011 Paul listed the previous week's most popular tax paper downloads ---

There is a bit of movement in this week's list of the Top 5 Recent Tax Paper Downloads, with a new #1 paper and a new paper debuting on the list at #5:

1.  [444 Downloads]  The Politics and Policy of the Estate Tax -- Past, Present, and Future, by Michael J. Graetz (Columbia)

2.  [429 Downloads]  The U.S. Federal Income Tax Treatment of Hedge Funds, Their Investors and the Managers, by David S. Miller & Jean Marie Bertrand (both of Cadwalader, Wickersham & Taft, New York)

3.  [371 Downloads]  Overview of Statutory Framework for Federal Wealth Transfer Taxation, by Bridget J. Crawford (Pace)

4.  [252 Downloads]  Exposing the Hocus Pocus of Trusts, by Kent D. Schenkel (New England)

5.  [197 Downloads]  Recent Developments in Federal Income Taxation: The Year 2010, by Martin J. McMahon, Jr. (Florida), Ira B. Shepard (Houston) & Daniel L. Simmons (UC-Davis)

Bob Jensen's taxation helpers are at

"An Honest Services Crisis: Professional Poison and a Chicago Connection," by Francine Mckenna, re:TheAuditors, March 30, 2011 ---

“Where do bad folks go when they die?  They don’t go to heaven where the angels fly.”

This guest post is by Mark O’Connor, CEO and Cofounder of Monadnock Research.

Phyllobates Terribilis, the golden poison dart frog (not to be confused with, or metaphorically associated with Nectophrynoides Deloittei), is the second most toxic creature on earth. Hold him in your hand and you’ll barely feel he’s there. But touch him and your heart will stop within minutes. This little guy normally sports a coat of batrachotoxin, an alkaloid neurotoxin, sufficient to quickly kill up to 10 mature adults. But take him out of his element and he’s just a cute harmless yellow frog – a frog with a latent capability to process poisonous plants and insects, and secrete deadly neurotoxins.

Things are not always as they appear.

Every time I hear allegations of professional services misconduct involving a Chicago accountant, consultant, or lawyer, I send Francine McKenna an email. The title of my first missive on the subject in August 2009 was, “Are You Living at Ground Zero for Criminals in Suits?”

It appears to be a worry that Francine and I share. There also appears to be no other metro area on earth with such a high concentration of indictments and lawsuits in the last 10 years. We can only hope it’s an aberration. In Chicago’s defense, the city is also within an hour’s flight of a corporate headquarters concentration that has few rivals. Professional services is big business in Chicago. I would expect it to be one of the profession’s most active news hubs. I just wish it was better news for clients and the consulting profession.

Our interest at Monadnock Research is primarily consulting and advisory services. The Big Four, off and on, have had some of the largest global consulting practices across most categories. Later I’ll share our view of the unique operational and strategic levers of the Big Four firms. But first I’d like to provide some background on the numbers from a recent piece of our research (Vol IV, No 9), and what I would characterize as today’s “honest services crisis.”

Fiscal 2010 Big Four Consulting and Advisory Services Revenues


Global non-audit advisory services reported by the Big Four firms, including tax, again broke the $50 billion (USD) mark in fiscal 2010 after retreating briefly in 2009, a 3.23 percent increase. Total non-tax advisory services of Deloitte, KPMG, PwC, and E&Y were $27.8 billion, an increase of 8.1 percent over ‘09. Deloitte tops the rankings as the largest global provider of advisory, including tax, with $14.9 billion, edging out PwC’s at a little under $13.3 billion. E&Y was third with $11.19 billion and KPMG finished its fiscal year with $10.72 billion.

Continued in article

Bob Jensen's threads on auditor independence are at

E. RICHARD CRISCIONE, Abraham J. (Abe) Brillofff: A Biography, Studies in the Development of Accounting Thought, Volume 11 (Bingley, U.K.: JAI/Emerald Group, 2009, ISBN: 978-1-84855-588-4, pp. xxi, 258.

Book Review by George Foster, The Accounting Review, September 2010  --- Click Here

Bob Jensen's threads on why it is so sad that Abe Brilloff has not been inducted into the Accounting Hall of Fame ---

What's a financial long bet and how does it win or lose?
What's the distinction between a long bet speculation versus hedge?

From The Wall Street Journal Accounting Weekly Review on April 1, 2011

Hedge Funds Had Bets Against Japan
by: Gregory Zuckerman and Tom Lauricella
Date: Mar 15, 2011 

SUMMARY: The catastrophe in Japan has placed renewed focus on the country's already fragile economy-and brought unexpected profits to investors who have long bet that the nation eventually will be dragged down by its debt problems.


  1. What is a hedge fund? How is a hedge fund different from mutual funds or individual investing? What type of investor would invest in such funds? What are the risk levels involved with investing in hedge funds?
  2. How did these hedge funds 'bet against Japan'? Why did some investors think it wise to invest this way? How has the earthquake in Japan impacted this type of investment?
  3. What were the issues facing Japan before the earthquake? How has the earthquake changed the situation? What is the long-term outlook for business in the country? What are Japan's borrowing levels? How would this impact investment in the country by businesses? By individuals?

"Hedge Funds Had Bets Against Japan," by: Gregory Zuckerman and Tom Lauricella, The Wall Street Journal, March 15, 2011 ---

The catastrophe in Japan has placed renewed focus on the country's already fragile economy—and brought unexpected profits to investors who have long bet that the nation eventually will be dragged down by its debt problems.

In recent years, a chorus of voices has warned that Japan is facing an inevitable crisis to be brought on by a stagnant economy, a shrinking population and the worst debt profile of any major industrialized country.

Hedge-fund managers from Kyle Bass of Hayman Advisors LP in Dallas to smaller firms like Commonwealth Opportunity Capital have made money since the earthquake on long-held bets on Japan's government and corporate bonds.

Though the economic toll of the earthquake is far from clear, the immediate response in the financial markets has been a decline in stock prices, with the Nikkei Stock Average down 7.8% in two days (including Friday, when the quake hit near the end of the trading day). The price for insuring against a default by Japan on its government debt, a popular way to position for a financial crisis in Japan, has jumped. But in a move that runs counter to the expectations of some long-term Japan bears, the yen has strengthened on expectations that Japanese investors and corporations will be buying yen as they bring money home in coming weeks and months.

The price for insuring $10 million of Japanese sovereign debt for five years in the credit-default-swap market soared to $103,000 on Monday, from $79,000 on Friday, according to data provider Markit.

Reflecting the skepticism about Japan's outlook, even before the disaster, the net notional amount of Japanese debt being insured in the swaps market had surged to $7.4 billion from $4.1 billion a year ago, according to data from the Depository Trust & Clearing Corp. through March 4. The number of contracts outstanding has more than doubled.

Fresh DTCC data are due on Tuesday and will include only the early effects of the earthquake.

Credit-default swaps of many corporate bonds have become even more valuable, rewarding those that bet on them. Among the biggest moves was in Tokyo Electric Power Co., owner of the nuclear-power plants crippled by the earthquake.

Commonwealth Opportunity Capital, a $90 million hedge fund in Los Angeles, made a profit of several million dollars on Tokyo Electric on Monday, from an investment of less than $200,000. The annual cost of protecting $10 million of Tokyo Electric's debt jumped to $240,000 on Monday from $40,700 on Friday.

"Nobody wants bad things to happen to people," said Adam Fisher, who helps run Commonwealth Opportunity Capital. He said the firm has been betting against Japanese corporate bonds for two years. "But it shows how fragile that heavily levered nation is; there's very little margin for error."

Betting against Japan has been a losing proposition for many investors for years. Despite all the debt problems, bond prices have continued to move higher partly because deflation, not inflation, has been the concern. Also, domestic investors own most of the government's debt and have been reluctant to sell.

But now, facing at least a short-term hit to the economy from the earthquake and the likely need to issue more debt to pay for reconstruction efforts, Japan is seeing its problems magnified.

"Japan's choices are very, very bad," said John Mauldin, president of Millennium Wave Advisors. "Japan has an aging population, which is saving less, their savings rate will go negative sometime in the next few years at which point they will have to significantly reduce their spending, increase taxes or print money or some combination of the three.

"In the grand scheme of things, does the earthquake technically move it up further? Yes, but they were already well down the path."

Continued in article

Jensen Comment
Note how long positions on national debt are often a losing proposition unless they are hedges. In hedging situations these gains and losses are offset by gains and losses on the hedged items to the extent that the hedging contracts are effective. For example, a hedge fund might invest in U.S. Treasury bonds paying a fixed rate. There is no cash flow risk on interest payments or repayment of the face value of the bonds. However, there is value risk since the price of these outstanding bonds in the financial markets goes up and down daily. The hedge fund can lock in fixed value by entering into a fair value hedge such as by entering into a plain vanilla interest rate swap in which the fixed-amount interest payments are swapped for variable rate payments. The value of the bonds plus the value of the swap is thereby locked into a fixed value for which there is no value risk. However, when hedging value risk the investor has inevitably taken on cash flow risk. It's impossible to hedge both fair value risk and cash flow risk. Investors must choose between one or the other.

Hedging against debt default entire is an extreme form of fair value hedging and is usually done with a different type of hedging contract. Here the investor is not so much concerned with interim interest payments (or interim changes in value due to shifts in market interest rates) as he/she is concerned with possible default on payback of the entire principal of the debt. In other words it's more like insurance against a creditor declaring bankruptcy to get out of repayment of all or a great portion of debt repayment.

Credit Default Swap ---

A credit default swap (CDS) can almost be thought of as a form of insurance. If a borrower of money does not repay her loan, she "defaults." If a lender has purchased a CDS on that loan from an insurance company, the lender can then use the default as a credit to swap it in exchange for a repayment from an insurance company. However, one does not need to be the lender to profit from this situation. Anyone (usually called a speculator) can purchase a CDS. If a borrower does not repay his loan on time and defaults not only does the lender get paid by the insurance company, but the speculator gets paid as well. It is in the lender's best interest that he gets his money back, either from the borrower, or from the insurance company if the borrower is unable to pay back his loan. However, it is in the speculator's best interest that the borrower never repay his loan and default because that is the only way that the speculator can then take that default, turn it into a credit, and swap it for a cash payment from an insurance company.

A more technical way of looking at it is that a credit default swap (CDS) is a swap contract and agreement in which the protection buyer of the CDS makes a series of payments (often referred to as the CDS "fee" or "spread") to the protection seller and, in exchange, receives a payoff if a credit instrument (typically a bond or loan) experiences a credit event. It is a form of reverse trading.

A credit default swap is a bilateral contract between the buyer and seller of protection. The CDS will refer to a "reference entity" or "reference obligor", usually a corporation or government. The reference entity is not a party to the contract. The protection buyer makes quarterly premium payments—the "spread"—to the protection seller. If the reference entity defaults, the protection seller pays the buyer the par value of the bond in exchange for physical delivery of the bond, although settlement may also be by cash or auction. A default is referred to as a "credit event" and includes such events as failure to pay, restructuring and bankruptcy.[2] Most CDSs are in the $10–$20 million range with maturities between one and 10 years.

A holder of a bond may “buy protection” to hedge its risk of default. In this way, a CDS is similar to credit insurance, although CDS are not similar to or subject to regulations governing casualty or life insurance. Also, investors can buy and sell protection without owning any debt of the reference entity. These “naked credit default swaps” allow traders to speculate on debt issues and the creditworthiness of reference entities. Credit default swaps can be used to create synthetic long and short positions in the reference entity. Naked CDS constitute most of the market in CDS. In addition, credit default swaps can also be used in capital structure arbitrage.

Credit default swaps have existed since the early 1990s, but the market increased tremendously starting in 2003. By the end of 2007, the outstanding amount was $62.2 trillion, falling to $38.6 trillion by the end of 2008.

Most CDSs are documented using standard forms promulgated by the International Swaps and Derivatives Association (ISDA), although some are tailored to meet specific needs. Credit default swaps have many variations.[2] In addition to the basic, single-name swaps, there are basket default swaps (BDS), index CDS, funded CDS (also called a credit linked notes), as well as loan only credit default swaps (LCDS). In addition to corporations or governments, the reference entity can include a special purpose vehicle issuing asset backed securities.

Credit default swaps are not traded on an exchange and there is no required reporting of transactions to a government agency. During the 2007-2010 financial crisis the lack of transparency became a concern to regulators, as was the trillion dollar size of the market, which could pose a systemic risk to the economy. In March 2010, the DTCC Trade Information Warehouse (see Sources of Market Data) announced it would voluntarily give regulators greater access to its credit default swaps database

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

"Your Money at Work, Fixing Others’ Mistakes," by Gretchen Morgenson, The New York Times, September 20, 2008 ---
Also see "A.I.G., Where Taxpayers’ Dollars Go to Die," The New York Times, March 7, 2009 ---

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

You tube has a lot of videos about a CDS. Go to YouTube and read in the phrase "credit default swap" ---
In particular note this video by Paddy Hirsch ---
Paddy has some other YouTube videos about the financial crisis.


Bob Jensen's discussion of accounting rules for credit default swaps can be found under the C-Terms at

Credit default swaps turned into a disaster for AIG and the U.S. Government when black swans flew over in 2008 ---

The Commission's Final Report ---
(This report is really more of a misleading whitewash of government agencies and Congress relative to the real causes of the subprime disaster.)

Greatest Swindle in the History of the World ---

Bob Jensen's discussion of accounting rules for credit default swaps can be found under the C-Terms at

IASB Amortised Cost and Impairment Exposure Draft
Letter to the IASB from Deloitte on April 1, 2011 ---

Supplement to Exposure Draft ED/2009/12 Amortised Cost and Impairment Deloitte Touche Tohmatsu Limited is pleased to respond to the IASB’s Supplement to the exposure draft ED/2009/12, Amortised Cost and Impairment (‘the Supplement’).


Forged mortgage paperwork mess: the next housing shock and toxic mold threats?

I have written tens of thousands of tidbits over the years. Aside from my tidbits on wars, deficits/entitlements, and unemployment, I think my most depressing tidbits are on the corrupted real estate deed registries of virtually all counties in the 50 states if America. The major reason for this corruption is that, after the subprime bubble burst in 2008, megabanks and Wall Street brokerage houses lost track of mortgage paperwork on millions of real estate parcels. These banks/brokerages then forged new copies of the mortgages, often with fictitious names of bank officials where the loans originated. When these properties were then foreclosed or otherwise resold to new buyers, the forged mortgages became part of recorded deeds, thereby corrupting the deed registries across the entire United States.

Watch the Video
"Mortgage paperwork mess: the next housing shock?" CBS Sixty Minutes, April 3, 2011 ---

If there was a question about whether we're headed for a second housing shock, that was settled last week with news that home prices have fallen a sixth consecutive month. Values are nearly back to levels of the Great Recession. One thing weighing on the economy is the huge number of foreclosed houses.

Many are stuck on the market for a reason you wouldn't expect: banks can't find the ownership documents.

Who really owns your mortgage?
Scott Pelley explains a bizarre aftershock of the U.S. financial collapse: An epidemic of forged and missing mortgage documents.

It's bizarre but, it turns out, Wall Street cut corners when it created those mortgage-backed investments that triggered the financial collapse. Now that banks want to evict people, they're unwinding these exotic investments to find, that often, the legal documents behind the mortgages aren't there

Continued in article

Deed Registry ---

Mortgage ---

Mortgage Backed Security ---

Collateralized Debt Obligation (CDO) or Structured Asset Backed Security (CABS) ---

Registered deeds keep legal track over the years of all real estate in the United States. Often the owners have taken out mortgages that give lenders priority claims on the real estate ownership when owners default on mortgage lending contracts. It's important to note that names of mortgage investors, along with the property owners, are written into the recorded deeds. Before a buyer purchases real estate the chronological records of recorded deeds on the property are generally searched by legal experts who then certify and sometimes insure that the buyer will have a clear title to the purchased property.

If mortgages referenced in recorded deeds are forged, the recorded deeds are thereby corrupted. Present owners accordingly do not have clear titles to the purchased real estate. This includes John and Jane Doe now living in their home at 123 Main Street. It also includes Fannie Mae, Freddie Mack, Goldman Sachs, Bank of America, JP Morgan, and most of the other megabanks inside and outside the United States. All are waiting for former owners to file lawsuits claiming damages because of forged documents (including lawsuits from owners who simply abandoned their houses because they could not make the mortgage payments and those that got forced out by foreclosure proceedings).

The FDIC claims that probably the only way out of this mess is for the large banks and brokerages who in one way or another are responsible for the document forgeries to pay tens of billions into a "clean up fund" to be administered by the government to make claimants accept cash settlements and relinquish their rights to sue over forged or missing documents. This may be the only way to clear the titles to registered deeds, including the deeds on millions of empty homes that now cannot be sold until the titles are cleared of the forged recorded paperwork.


A Summary of How This Mess Came About

The main cause of this mess roots back to a time when banks and mortgage companies that initially approve mortgage contracts commenced selling all their mortgage investments to downstream investors like Fannie Mae, Freddie Mac, Bear Stearns, Lehman Brothers, Merrill Lynch, and virtually all the large international banks and Wall Street brokerages. Some like Bank of America did not directly buy many of these downstream mortgages but later inherited millions of mortgages such as when Bank of America bought the troubled Countrywide and JP Morgan bought the troubled Wachovia as part of the TARP deals engineered by the U.S. Treasury Department. It took until 2011 for the FDIC to finally mandate that original lenders must retain "some skin" in the mortgages sold downstream (currently at least 5% of the financial risk skin). That was not the case when the subprime bubble burst in 2008.


Another leading cause was the common 1990s practice of issuing subprime interest rate mortgages where interest in the early years was below prime rates with a clause that higher rates would eventually kick in several years down the road. Even current owners were tempted to abandon their fixed rate mortgages and refinance with subprime mortgages with the intent of flipping their homes before the higher rates kicked in with payments they could not afford. The plan was to sell their houses at huge gains and move up the hill to bigger houses and better neighborhoods. All of this was predicated on the assumption that the price bubble in real estate would never burst. But in 2008 it did burst and millions of home owners could no longer make their mortgage payments when the subprime rates gave way to double-digit rates. Low income people defaulted in droves, but higher income people also defaulted. Some very high income people bought mansions on the hill at subprime rates hoping to turn those mansions over for enormous profits as long as housing prices in America kept going up and up. CBS Sixty Minutes captured the essence of what happened when the bubble burst.

CBS Sixty Minutes featured how bad things became when poison was added to loan portfolios. This older Sixty Minutes Module is entitled "House of Cards" ---;contentBody
This segment can be understood without much preparation except that it would help for viewers to first read about Mervene and how the mortgage lenders brokering the mortgages got their commissions for poisoned mortgages passed along to the government (Freddie Mack and Fannie Mae) and Wall Street banks. On some occasions the lenders like Washington Mutual also naively kept some of the poison planted by some of their own greedy brokers.
The cause of this fraud was separating the compensation for brokering mortgages from the responsibility for collecting the payments until the final payoff dates.

First Read About Mervene ---


The eventual downstream owners of these risky subprime mortgages invented a way of diversifying default risk by putting together and selling portfolios of mortgages known as Collateralized Debt Obligation portfolios. Buyers included many wealthy investors in the Middle East and Asia. Forest Gump describes a CDO portfolio as a box of chocolates with mostly small pieces of good mortgages with a few turds thrown in (small pieces of mortgages are likely to go into default by owners who cannot afford their mortgage payments). Note that a CDO portfolio does not 100% of any mortgage investment. Rather it contains like a 1% piece of a mortgage spread over 100 CDO portfolios. This is important because this slicing and dicing shredding of financial risk is where much of the original paperwork got lost.

Mortgage Backed Securities are like boxes of chocolates. Criminals (bankers and brokers) on Wall Street and one particular U.S. Congressional Committee stole a few chocolates from the boxes and replaced them with turds. Their criminal buddies at Standard & Poors rated these boxes AAA Investment Grade chocolates. These boxes were then sold all over the world to investors. Eventually somebody bites into a turd and discovers the crime. Suddenly nobody trusts American chocolates anymore worldwide. Hank Paulson now wants the American taxpayers to buy up and hold all these boxes of turd-infested chocolates for $700 billion dollars until the market for turds returns to normal. Meanwhile, Hank's buddies, the Wall Street criminals who stole all the good chocolates are not being investigated, arrested, or indicted. Momma always said: "Sniff the chocolates first Forrest." Things generally don't pass the smell test if they came from Wall Street or from Washington DC.
Forrest Gump as quoted at

Videos 2 and 3
Inside the Wall Street Collapse
(Parts 1 and 2) first shown on March 14, 2010

Video 2 (Greatest Swindle in the History of the World) ---;contentAux

Video 3 (Swindler's Compensation Scandals) ---;contentAux

 My wife and I watched Videos 2 and 3 on March 14, 2010. Both videos feature one of my favorite authors of all time, Michael Lewis, who hhs been writing (humorously with tongue in cheek) about Wall Street scandals since he was a bond salesman on Wall Street in the 1980s. The other person featured on in these videos is a one-eyed physician with Asperger Syndrome who made hundreds of millions of dollars anticipating the collapse of the CDO markets while the shareholders of companies like Merrill Lynch, AIG, Lehman Bros., and Bear Stearns got left holding the empty bags.


Financial WMDs (Credit Derivatives) on Sixty Minutes (CBS) on August 30, 2009
The free download will only be available for a short while. I downloaded this video (a little over 5 Mbs) using a free updated version of RealMedia --- Click Here

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

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


So where does mortgage/deed forgeries enter into the picture.
It turns out that the Wall Street brokerage houses and megabanks that ended up downstream with the mortgages and then sliced and diced them into new securitization instruments called Mortgage Backed Obligation (MBO) portfolios completely lost track of the millions original mortgage paper work that they were shredding into millions of MBOs. Then when owners defaulted on their original subprime mortgages the megabanks and brokerages, gasp, could not find the original paperwork. Even worse, when responsible homeowners sold their homes and wanted to pay off their mortgages the megabanks and brokerages also could not find the original paperwork.

What's a megabank  to do when new deeds have to be recorded and the current recorded deeds/mortgages cannot be located. What the megabanks essentially did was forge new paperwork. Not wanting to implicate their own employees in this fraud they hired sleazy mortgage servicing companies who in turn hired high school kids at minimum wage to forge thousands of names per hour (including forged notary public signatures). The megabanks now claim they did not know these forgeries were taking place, but if you believe this I've got some ocean front property in Arizona and the Brooklyn Bridge that I would like to sell to those megabanks.

To see how all of this forgery really took place watch the following:

Mortgage paperwork mess: the next housing shock?" CBS Sixty Minutes, April 3, 2011 ---

If there was a question about whether we're headed for a second housing shock, that was settled last week with news that home prices have fallen a sixth consecutive month. Values are nearly back to levels of the Great Recession. One thing weighing on the economy is the huge number of foreclosed houses.

Many are stuck on the market for a reason you wouldn't expect: banks can't find the ownership documents.

Who really owns your mortgage?
Scott Pelley explains a bizarre aftershock of the U.S. financial collapse: An epidemic of forged and missing mortgage documents.

It's bizarre but, it turns out, Wall Street cut corners when it created those mortgage-backed investments that triggered the financial collapse. Now that banks want to evict people, they're unwinding these exotic investments to find, that often, the legal documents behind the mortgages aren't there

Continued in article

So where does this leave us now and why is this so serious?

This leaves us with millions of corrupted deed registries containing references to forged documents. Current owners do not have clear titles to their properties, including megabanks holding corrupted titles to vacant homes.

Currently 13% of all the houses in America are vacant, including millions of double wides in mobile home parks and millions of mansions in every county of the United States. Owners, including megabanks, of these vacant houses do not have clear title do to forged documents. The houses cannot be sold with corrupted titles such that they sit vacant year after year.

Mold takes hold in the walls and ceilings of vacant homes that are not properly cooled and dehumidified in hot summer months and warmed in frigid winter months. The mold spreads more and more until it reaches toxic levels where real estate inspectors will not allow the homes to be sold. The bull dozers have to push through those double wides and even those mansions on the hill.

Now lawyers are hovering like vultures to commence the lawsuits on behalf of former owners such as owners thrown out of foreclosed houses and new owners who do not have clear titles to properties purchased in good faith ---

The FDIC is proposing a forged document cleanup fund where the megabanks responsible for using forged paperwork put up tens of billions of dollars into a fund to pay off the damaged former owners so that titles can be cleared on millions of homes now having corrupted deeds on file due to those forgeries. It's a little like how the BP fund in being administered for oil spill damages to employees and businesses along the Gulf Coast, only the forged mortgage fund has to be much, much, much larger.

What a mess!

"Auditors negligent in Castor Holdings collapse, judge rules," by Bertrand Marotte, The Globe and Mail, April 15, 2011 --- 
Thank you David Albrecht for the heads up.

A Quebec Superior Court judge has ruled that the auditors for a real-estate-investment company at the centre of a $1.6-billion financial collapse were negligent, ending a 12-year legal battle by investors in Montreal-based Castor Holdings Ltd.

“The whole team at our firm feels incredibly exhilarated,” said Mark Meland of Fishman Flanz Meland Paquin LLP, one of the lead lawyers acting for the investors in Castor, which collapsed in 1992.

“It’s a big, big win.”

Despite the epic length of the case, which is believed to be the longest trial in Canadian history, Friday’s ruling is not likely to be the last word. Prior to the result, both sides said an appeal was expected, no matter who won.

The Castor litigation, which is also believed to be the largest auditors’ negligence case in Canada, could end up having broader implications for the auditing profession across the country.

Many shareholder lawsuits against auditors don't get very far because of previous court decisions that auditors can’t be held professionally responsible for misrepresentations by clients, said Toronto-based forensic accountant Al Rosen.

Friday's decision may help bolster the case for auditors' responsibilities in situations where fraud or other financial irregularities occur, he said.

“I hope it wakes up the rest of Canada, but I'm not expecting any immediate change,” he said. “Perhaps it will encourage lawmakers to pass tougher legislation.”

Castor was the creation of German-Canadian businessman Wolfgang Stolzenberg, who is on the RCMP’s wanted list for alleged fraud and believed to be living in Germany.

Following the collapse, a group of investors – including major European banks, Chrysler Canada Inc.’s pension fund and two Canadian credit unions – filed lawsuits totalling about $1-billion against Coopers & Lybrand, Castor’s auditor, allegedly it failed to properly audit the company.

Their case has dragged on for more than 16 years, 12 of them in court, and included the filing of more than 18,000 exhibits.

In a hefty 752-page decision released Friday, Madam Justice Marie St-Pierre of the Quebec Superior Court ruled that Coopers & Lybrand failed to perform its professional services as auditors, in accordance with generally accepted auditing and accounting standards.

She said Coopers & Lybrand also issued “faulty opinions” concerning Castor’s financial situation.

Continued in article

Jensen Comment
"The judgment concluded that Castor’s audited financial statements for 1988, 1989 and 1990 were materially misstated and misleading, and that Coopers & Lybrand periodically issued other faulty opinions on its financial position from 1988 to 1991."

This judgment reveals how slowly the wheels of justice often move. What would be the benefit versus cost of restating Castor's financial statements for 1988, 1989 and 1990?

Are there any pending cases from the 19th Century or the stock market crash of 1929?

Bob Jensen's threads on PwC are at

Bob Versus Steve on What Needs to Be Done to Improve The Accounting Review


Hi Steve,Kachelmeier

Thank you for stepping out of your customary role as a lurker. I'm glad you took the horse you rode off on and returned to the AECM pasture.

As I recall, you and most other members of the accounting academy do not really understand the origins of the term "accountics" as explained in
“An Analysis of the Evolution of Research Contributions by The Accounting Review: 1926-2005,” bu Jean Heck and Bob Jensen, Accounting Historians Journal, Volume 34, No. 2, December 2007, pp. 109-142. Jean generated the data and I did the analysis.

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

       Charles Sprague, an accounting professor at Columbia University (then called Columbia College), coined the word “accountics” in 1887. The word is not used today in accounting and has some alternative meanings outside our discipline. However, in the early 20th century, accountics was the centerpiece of some unpublished lectures by Sprague. McMillan [1998, p. 11] stated:

These claims were not a pragmatic strategy to legitimize the development of  sophisticated bookkeeping theories. Rather, this development of a science was  seen as revealing long-hidden realities within the economic environment and  the double-entry bookkeeping system itself. The science of accounts, through  systematic mathematical analysis, could discover hidden thrust of the reality of  economic value. The term ‘accountics’ captured the imagination of the members  of the IA, connoting advances in bookkeeping that all these men were experiencing.

By 1900, there was a journal called Accountics [Forrester, 2003]. Both the journal and the term “accountics” had short lives, but the belief that mathematical analysis and empirical research can “discover [the] hidden thrust of the reality of economic value” (see above) underlies much of what has been published in TAR over the past three decades. Hence, we propose reviving the term “accountics” to describe the research methods and quantitative analysis tools that have become popular in TAR and other leading accounting research journals. We essentially define accountics as equivalent to the scientific study of values in what Zimmerman [2001, p. 414] called “agency problems, corporate governance, capital asset pricing, capital budgeting, decision analysis, risk management, queuing theory, and statistical audit analysis.”

       The American Association of University Instructors of Accounting, which in December 1935 became the AAA, commenced unofficially in 1915 [Zeff, 1966, p. 5]. It was proposed in October 1919 that the AAA publish a Quarterly Journal of Accountics. This proposed accountics journal never got off the ground as leaders of the AAA argued heatedly and fruitlessly about whether accountancy was a science. A quarterly journal, The Accounting Review, was subsequently born in 1925, with its first issue published in March 1926. However, its accountics-like attributes did not commence in earnest until the 1960s.

       Practitioner involvement, in large measure, was the reason for changing the name of the association to the AAA by removing the words “of University Instructors.” Practitioners interested in accounting education participated actively in AAA meetings. TAR articles in the first several decades were devoted heavily to education and to accounting issues in particular industries and trade groups. Research methodologies were mainly normative (without mathematics), case study, and archival (history). Anecdotal evidence and hypothetical illustrations ruled the day. The longest serving editor of TAR was the practitioner Eric Kohler, who solely determined what was published in TAR between 1929 and 1943. In those years, when the AAA leadership mandated that TAR focus on the development of accounting principles, publications were oriented to both practitioners and educators [Chatfield, 1975, p. 4].

       Following World War II, practitioners outnumbered educators in the AAA [Chatfield, 1975, p. 4]. Leading partners from accounting firms took pride in publishing papers and books intended to inspire scholarship among professors and students. Over the years, some practitioners, particularly those with scholarly publications, were admitted into the Accounting Hall of Fame founded by Ohio State University. Prior to the 1960s, accounting educators were generally long on practical experience and short on academic credentials, such as doctoral degrees.

       A major catalyst for change in accounting research occurred when the Ford Foundation poured millions of dollars into the study of collegiate business schools and the funding of doctoral programs and students in business studies. Gordon and Howell [1959] reported that business faculty in colleges lacked research skills and academic esteem when compared to their colleagues in the sciences. The Ford Foundation thereafter provided funding for doctoral programs and for top-quality graduate students to pursue doctoral degrees in business and accountancy. The Foundation even funded the publication of selected doctoral dissertations to give doctoral studies in business more visibility. Great pressure was also brought to bear on academic associations like the AAA to increase the scientific standards for publications in journals like TAR.



       A perfect storm for change in accounting research arose in the late 1950s and early 1960s. First came the critical Pierson Carnegie Report [1959] and the Gordon and Howell Ford Foundation Report [1959]. Shortly thereafter, the American Assembly of Collegiate Schools of Business introduced a requirement requiring that a certain percentage of faculty possess doctoral degrees for business education programs seeking accreditation [Bricker and Previts, 1990]. Soon afterwards, both a doctorate and publication in top accounting research journals became necessary for tenure [Langenderfer, 1987].

       A second component of this perfect storm for change was the proliferation of mainframe computers, the development of analytical software (e.g., early SPSS for mainframes), and the dawning of management and decision “sciences.” The third huge stimulus for changed research is rooted in portfolio theory, discovered by Harry Markowitz in 1952 as the core of his dissertation at Princeton, which was published in book form in 1959. This theory eventually gave birth to the Nobel Prize-winning Capital Asset Pricing Model (CAPM) and a new era of capital market research. A fourth stimulus was the availability of the CRSP stock price tapes from the University of Chicago. The availability of CRSP led to a high number of TAR articles on capital market event studies (e.g., earnings announcements on trading prices and volumes) covering a period of nearly 40 years.

       This “perfect storm” roared into nearly all accounting and finance research and turned academic accounting research into an accountics-centered science of values and mathematical/statistical analysis. After 1960, there was a shift in TAR, albeit slow at first, toward preferences for quantitative model building – econometric models in capital market studies, time series models in forecasting, advanced calculus information science, information economics, analytical models, and psychometric behavioral models. Chatfield [1975, p. 6] wrote the following:

   Beginning in the 1960s the Review published many more articles by non- accountants, whose contribution involved showing how ideas or methods from their own discipline could be used to solve particular accounting problems.  The more successful adaptations included matrix theory, mathematical model building, organization theory, linear programming, and Bayesian analysis.

TAR was not alone in moving toward a more quantitative focus. Accountics methodologies accompanied similar quantitative model-building preferences in finance, marketing, management science, decision science, operations research, information economics, computer science, and information systems. Early changes along these lines began to appear in other leading research journals between 1956-1965, with some mathematical modeling papers noted by Dyckman and Zeff [1984, p. 229]. Fleming et al. [2000, p. 43] documented additional emphases on quantitative methodology between 1966 and 1985. In particular, they noted how tenure requirements began to change and asserted the following:

   The Accounting Review evolved into a journal with demanding acceptance standards whose leading authors were highly educated accounting academics who, to a large degree, brought methods and tools from other disciplines to bear upon accounting issues.


Challenge to You Steve
Now that the AECM has you back, I would like to offer you a challenge as the outgoing Senior Editor of The Accounting Review:

1. I think it would be very interesting to have someone with your outstanding reputation to examine all the articles published in TAR over the past 20 years and identify those (with some documented evidence) that had a significant impact on the practice/profession of accountancy and auditing. As an example, I would suggest Eric Lie's study of option backdating that won the 2007 AAA Notable Contributions to  Accounting Award even though it was published in Management Science and not an accounting journal. The research also resulted in Eric becoming one of Time Magazine's Top 100 Most Influential People in the World. Eric is probably the only accounting, finance, or business professor in history to make the Top 100 list reserved for important people like President Obama and Lady Gaga.

2.  In relation to Task 1 above, it would be interesting to identify those articles that should've had more impact or will eventually have more impact, in your opinion, on the practice/profession of accountancy and auditing.  I cannot think of a single person more suited for this type of review than you Steve.

Keep in mind that your review will face critical tests by Bob Jensen, Paul Williams, Bob Kaplan, Steve Zeff, Sue Ravenscroft, Jagdish Gangolly, Ken Merchant, and various others.

Accountics Controversies
On the subject of accountics, I think many accounting faculty, students, and practitioners of all political persuasion find common ground for criticism of accountics research but the reasons vary.

Paul Williams believes deeply in the self-serving Conspiracy Theory that the quants, many of them not even well-versed in accounting, literally took over the R1 universities, the leading accounting research  journals, the doctoral programs, the American Accounting Association, and to some extent the AACSB itself. He also believes they succeeded beyond their wildest dreams.

Some of the objections of Paul Williams and Jagdish Gangolly are summarized at 
Paul has also published on this topic in some of the publications listed at 
(he's much better looking than the unfortunate picture shown in the above document)

I am less inclined to accept the "conspiracy theory" as much as I would call it a "Epidemiology Theory" that applies to both professors of accounting and finance as well as many economists. The evolution of the rise of the accountics monopoly is summarized at  
Also see the Granof and Zeff summary at  

Bob Kaplan really hit the nail on the head in his plenary address in August 2010 in San Francisco. I was pleased to overhear you inviting Professor Kaplan to submit his remarks to The Accounting Review (while you were still the Senior Editor) --- 

Bob Kaplan Said It Best With His Epidemiology Analogy
Sophisticated mining of large epidemiology databases is important in medical school research, but it only constitutes five percent or less of the research conducted in medical schools. Most of the research in medical schools. Medical schools are more focused on the micro-level research of improving medical such as improving how to transplant a pancreas or to reconstruct a badly damaged spine.

Now why do I call it a "Epidemiology Theory" rather than a "Conspiracy Theory."
The greatest contribution scientists make comes from where they "labor" in their laboratories generating data and testing theories and hypotheses. Accounting and finance "scientists" do not collect data in laboratories for capital markets research using mostly macro databases purchased from data generating corporations such as the CRSP databases, the Compustat databases, the AuditAnalytic databases, etc.

Epidemiology Theory = identify a sophisticated mathematical and statistical model and then seek out hypotheses suitable to study purchased data to fit the model irrespective of the value of the ultimate findings in the world. The result is the glorification of accountics research on the basis of the tractors rather than the harvests. It's much more difficult to find an important problem in the world and then build a model (tractor) to attack a problem of genuine interest to the practicing accounting profession, creditors, and equity investors.. 

In the R1 top accounting schools, unlike medical schools, epidemiology-like studies (read that studies rooted in purchased macro databases) constitutes perhaps 80% of the research with another 19% focused on highly artificial behavioral experiments that fail to excite the world of practicing accountants. Bob Kaplan argues that most (say 99%) of the academic accounting research published in our leading accounting research journals is really not focused on the needs of the profession and is of little interest to practicing professionals. Although he does not say so, I would probably exclude some of the AIS research, XBRL research, and tax research from this broad generalization.

The bottom line is that accounting research schools are not serving the research needs of the profession in the same manner that medical schools and other professional schools are serving the research needs of their professions.

Hence accounting and finance "scientists" really did not have to "labor" very hard in laboratories in order to generate their data. The behavioral accountants had to generate data but they most often took easy routes such as using student surrogates for decision makers. Analytic accountants simply assumed whatever was necessary to construct complicated mathematical models built on quicksand.

The problem with

This is not to say that accountics researchers were lazy in all respects. They worked very, very hard at building their tractors to farm their data using purchased seed for data. But the problem was that when it came time for harvest, the accountics farmers' contributions were mostly in developing innovative parts for their tractors. That was where their creative contributions were mostly centered. Their harvests were trivial and/or otherwise uninteresting because researchers just could not figure out how to study really interesting problems.  For example, it would be really interesting to work hand-in-hand with the new healthcare law to build cost models and AIS software that excite the corporate world facing the uncertainties of health care costs under the new legislation.

In fact, nearly all their harvests turned out, and continue to turn out, in TAR, JAR, JAE, and CAR are so uninteresting that even accountics researchers do not usually  find accountics research outcomes to be interesting enough to exactly  replicate. Unlike their colleagues in the physical sciences, the social sciences, and even business management, accountics researchers replicate their findings so infrequently that calling accountics researchers "scientists" is really a sick joke. Accountics researchers assume that once one study is published it is truth that does not need to be challenged or is not important enough to challenge --- 

An thus accountics researchers are selling research outcomes that almost nobody is interested in in terms of the outcomes. Other accountics researchers pour over the results and cite the research publications a great deal, but their interest is in the tractors and not the harvests.

The accounting profession has epsilon interests in the rather naive and simplistic findings in TAR, JAR, and JAE. Accountics researchers have great interest simply because they know that they must use the complicated tractors to pull themselves into job offers from top universities, promotions, tenure, and income. But it's the tractors that are doing the pulling rather than the harvests.

You, Steve, have been the most wonderful journal editor in terms of willingness to correspond privately with me. You've made many efforts to show me where an accountics study was, at least in some sense, replicated. You've tried to show me where real-world experimental subjects were used rather than students and where the findings should be of interest to the profession.

But your evidence is far from overwhelming Steve. I take credit, along with Paul Williams, Bob Kaplan, Steve Zeff, Sue Ravenscroft, Jagdish Gangolly, and various others, for directing your attention to the issue of lack of replication of accountics studies and lack of interest in the accountics harvests.

I should spend more time improving the above message before hitting the Send Button, but my Erika is nagging me to get the burlap and mulch winter blankets off her many roses. Uncovering roses is a bit like accountics research --- both are prickly tasks.

Welcome Back to the AECM Kotter

April 28, 2011 reply from

Wow -- a pretty long post there, wouldn't you say Bob?  Assuming that AECM
subscribers do not want to read a 1,153 line reply to your 1,153 line post,
I'll try to keep this succinct and just hit the big points.

1.  "Accountics"

>As I recall, you and most other members of the accounting academy do not
>really understand the origins of the term "accountics" as explained in
>“An Analysis of the Evolution of Research Contributions by *The Accounting
>Review:* 1926-2005,” bu Jean Heck and Bob Jensen, *Accounting Historians
>Journal*, Volume 34, No. 2, December 2007, pp. 109-142. Jean generated the
>data and I did the analysis.



As I acknowledeged about a year ago, I do understand that you did not
invent the term "accountics," and that its origins were not intended to be
sarcastic or perjorative.  I also understand the rich history that followed
the first use of that term, as aptly summarized in your article.
Nevertheless, I assert that your persistent use of the term "accountics"
apart from its historical context carries a sarcastic or perjorative
connotation in a contemporary context.  You say that The Accounting Review
publishes accountics.  I say that The Accounting Review publishes
accounting research.  The difference is that I sense your preference
for "accountics" is to convey the notion that the research we publish is
overly narrow and quantitative.  I do not share that view.


2.  Bob's challenge

>*Challenge to You Steve *

>Now that the AECM has you back, I would like to offer you a challenge as
>outgoing Senior Editor of *The Accounting Review*:
I think it would be very interesting to have someone with your
>outstanding reputation to examine all the articles published in TAR over
>past 20 years and identify those (with some documented evidence) that had a
>significant impact on the practice/profession of accountancy and auditing.

That does indeed sound like an interesting project, though I have limited
time to pursue it.  I seem to recall that some task force somewhere was
doing exactly this.  Maybe someone out there knows the specifics?  As for
me, most of my evidence is admittedly anecdotal, like the Hunton and Gold
study (TAR, May 2010) I referenced at last year's AAA meeting that changed
the way a major accounting firm implements fraud brainstorming.

More generally, however, I submit that we are too hard on ourselves
regarding the direct relevance of our research to change practice.  Like
the substantial majority of accounting professors, I directly impact scores
of future practitioners each year.  I call them "students."  In my auditing
classes this spring, I have directly incorporated the following research
studies, among others:
* Lennox and Pittman (TAR, 2010):  Evidence that when the UK went to a
voluntary system for audits of privately held companies in 2004, companies
that continued to secure audits saw their credit ratings improve, whereas
companies that discontinued auditing saw their credit ratings worsen.
* Goodwin and Gul (TAR, 2009):  Companies with more short-term debt,
ceteris paribus, actually are LESS risky to audit, as measured through
audit fees (helps me to explain the second-order effects of audit risk).
* Kachelmeier and Messier (TAR, 1990) and Messier, Kachelmeier, and Jensen
(AJPT 2001):  Rather than using statistical decision aids in an input-
output manner, auditors back into statistical parameters to rationalize
smaller sample sizes.
* Bowlin (TAR, 2010):  Auditors who back off "low risk" areas in terms of
unintentional errors entice companies to put the fraud in those areas, such
that those areas do not remain "low risk" for long (e.g., HealthSouth).
* I could name a few others, but I promised I would keep this brief.  I
think you get the point.  I impact practice by using research to help
future practitioners become better auditors.

3.  Critical tests


>Keep in mind that your review will face critical tests by Bob Jensen, Paul
>Williams, Bob Kaplan, Steve Zeff, Sue Ravenscroft, Jagdish Gangolly, Ken
>Merchant, and various others.


I get enough critical tests from two individuals known as Reviewer A and
Reviewer B, so thanks, but no thanks.


4.  Bob baits Paul one more time:


>Paul Williams believes deeply in the self-serving Conspiracy Theory that
>quants, many of them not even well-versed in accounting, literally took
>the R1 universities, the leading accounting research  journals, the
>programs, the American Accounting Association, and to some extent the AACSB

Some months back, Paul told me to "never, ever, ever call it a conspiracy
theory."  And there you go and do so yourself.  Paul, if you're reading
this, I didn't do it.

5.  Maybe Bob ought to look at The Accounting Review more often.

>Bob Kaplan really hit the nail on the head in his plenary address in August
>2010 in San Francisco. I was pleased to overhear you inviting Professor
>Kaplan to submit his remarks to The Accounting Review (while you were still
>the Senior Editor) ---

Um, Bob -- we published that in the March 2011 issue.  Where have you been?

6.  Bob's familar "replications" mantra:


>In fact, nearly all their harvests turned out, and continue to turn out, in
>TAR, JAR, JAE, and CAR are so uninteresting that even accountics
>do not usually  find accountics research outcomes to be interesting enough
>to exactly  replicate. Unlike their colleagues in the physical sciences,
>social sciences, and even business management, accountics researchers
>replicate their findings so infrequently that calling accountics
>"scientists" is really a sick joke.


I don't think we'll ever converge our thoughts on this one Bob, but the key
term in your call for "exactly replicating" research is the
word "exactly."  To borrow an analogy I have used before (which in turn I
stole from Nobel laureate Vernon Smith), if you want to replicate my
assertion that it is currently 3:58 p.m., I submit that a poor replication
is to ask to see my watch and verify that my watch says it is 3:58 p.m.  A
far better replication is for you to look at your own watch, which might
(presumably) say that it is currently 4:58 p.m.  Then you would try to
reconcile the difference, which might lead to your discovery that we are in
different time zones.  That's called an incremental contribution.  Those
sorts of replications happen all the time, and we publish them regularly.

7.  Bob's oversimplification:


 Accountics researchers assume that once
>one study is published it is truth that does not need to be challenged or
>not important enough to challenge ---


I disagree.  We publish articles all the time that challenge prior
assertions.  That's how science progresses.  To say that accounting
research is without controversy or challenge within the literature is a
gross oversimplification, as any reasoned perusal of the contemporary
literature will reveal.

8.  Bob's olive branch to Paul:



>But your evidence is far from overwhelming Steve. I take credit, along with
>Paul Williams, Bob Kaplan, Steve Zeff, Sue Ravenscroft, Jagdish Gangolly,
>and various others, for directing your attention to the issue of lack of
>replication of accountics studies and lack of interest in the accountics



I again return to the irony that, for all the political bickering between
you and Paul W. that apparently has led Paul to swear off future
participation in AECM, you find such common ground in criticizing
accounting research.  As I said before (though with an embarrasing typo in
the word "aisle"), if we could get both aisles of Congress to find the same
common ground you have offered to Paul on your disdain for what you call
accountics, then maybe accounting research could really make a difference.
It might even help folks to find a way to balance the budget without
raising taxes or cutting needed programs.


9.  Bob realizes that he has typed 1,153 lines:


>I should spend more time improving the above message before hitting the
>Button, but my Erika is nagging me to get the burlap and mulch winter
>blankets off her many roses.

And my editorial assistant and students are nagging me to do my job.  Gotta

10.  Bob's peace offering:

Welcome Back Kotter


Steve's reply.

No promises on that Bob.  These replies can get pretty time consuming, and
time is a precious commodity.  Also, I did promise Paul W. last August that
I would butt out and let him have the last word, and I hate to rush back in
just because Paul has become disillusioned.  Fair is fair.  I'll continue
to read posts from time to time and will reply if I think I have something
to say, but I will not be dragged into a dysfunctional mud slinging contest
like last summer.

Best regards,


Hi Steve,Kachelmeier,

Thank you for the very fast and informative reply.

I also thank you for accepting my challenge. I think the references that you listed in your reply are probably the only references published in TAR that are of possible interest to practitioners.

A study I that I would really like to see conducted would be to generate a random sample of AICPA members (I don't really care if portion of those sampled also teach accounting). Each member of the sample would then be cold called to answer the following questions:

  1. Can you recall any TAR, JAR, or JAE articles published over the past two decades?
  2. Can you recall any TAR, JAR, or JAE article so published that impacted the practice of accounting?
  3. Can you recall any prize-winning AAA Notable Contribution to the Accounting Literature book or article?

I would then like to compare the outcomes of the above study with an identical cold calling study of a random sample of AAA members.

My priors are that the cold calling outcomes in both studies would be similar to what happened when Katie Couric asked Vice Presidential Candidate Sarah Palin to identify the Supreme Court decisions that disappointed Candidate Palin ---
You must watch the last half of the clip to see an example of what my proposed cold calls might sound like.

Let me say that I'm well aware of when TAR published Professor Kaplan's plenary session remarks, because I instantly alerted the AECM to both the availability of Kaplan video in August 2010 and the TAR publication of those remarks in March 2011. I view this Kaplan commentary as significant for its content and for what I assume is a rare TAR Senior Editor invitation to publish a commentary that does not pass through the usual double blind refereeing process.

Disconnect between what the TAR Senior Editor and Associate Editors define as "accounting research" versus the TAR Referees
I think it is first of all important to note the apparent disconnect between what the TAR Senior Editor and Associate Editors (herein called "editors") define as "accounting research" and what the team of 500+ TAR reviewers will in fact accept for publication in TAR. Our accounting doctoral programs over the past three decades may have produced a generation of cyborgs that rarely accept certain subsets of "accounting research" in TAR's double blind refereeing process.

Here's a quotation from then TAR Senior Editor Steve Kachelmeir replying to a message I wrote about the dearth of commentaries and discussions published in TAR ---

No, no, no! Once again, your characterization makes me (Steve Kachelmeir) out to be the dictator who decides the standards of when a comment gets in and when it doesn’t. The last sentence is especially bothersome regarding what “Steve tells me is a requisite for his allowing TAR to publish a comment.” I never said that, so please don’t put words in my mouth.

If I were to receive a comment of the “discussant” variety, as you describe, I would send it out for review to two reviewers in a manner 100% consistent with our stated policy on p. 388 of the January 2010 issue (have you read that policy?). If both reviewers or even the one independent reviewer returned favorable assessments, I would then strongly consider publishing it and would most likely do so. My observation, however, which you keep wanting to personalize as “my policy,” is that most peer reviewers, in my experience, want to see a meaningful incremental contribution. (Sorry for all the comma delimited clauses, but I need this to be precise.) Bottom line: Please don’t make it out to be the editor’s “policy” if it is a broader phenomenon of what the peer community wants to see. And the “peer community,” by the way, are regular professors from all varieties of backgrounds. I name 574 of them in the November 2009 issue.

Steve Kachelmeier

Hence it just so happens that many submissions that the TAR editors will be put out for review as accounting research do not pass the double blind refereeing process. My operating definition is that, except in rare instances, TARs referees will not accept any submission that is not an accountics submission. My operating definition of an accountics submission is one that contains mathematical equations and/or statistical inference tests. A few years back I had my graduate assistant pour through every article in TAR for the past two decades and classify each article that was not an accountics article. The listing of non-accountics articles was very short.

Here's what I concluded is the way TAR refereeing process has really worked for more than two decades:

- TAR editors filter out submissions deemed not to be accounting research or not being worthy of double blind refereeing
= Subset of submissions sent out for double blind refereeing

- Exact scientific replications of studies published in TAR--- replications that are rarely even sent to TAR referees for double blind refereeing
- Accounting research field studies rarely accepted by TAR referees
- Accounting research surveys rarely accepted by TAR referees (even if they contain statistical inference tests)
- Accounting research case method studies rarely accepted by TAR referees
- Accounting research commentaries/discussions rarely accepted by TAR referees
- Accounting research history studies rarely accepted by TAR referees
- Submissions that do not contain mathematical equations and/or statistical inference tests --- submissions rarely accepted by TAR referees
= Subset of accountics submissions that TAR referees deem eligible for publication in TAR

- Accountics submissions deemed not worthy of publication in TAR by referees
+ AIS submissions that pass through a special set of AIS referees for TAR (these are very infrequent submissions)
+ Certain tax and law submissions that pass through a special set of specialist referees for TAR (these are very infrequent submissions)
+ Memorial articles about selected deceased accounting educators and practitioners
+ Submissions invited by TAR editors that do not pass through the usual double blind refereeing process
+ Conference proceedings published by TAR that do not pass through the usual double blind refereeing process
= Set of articles published by TAR over the past two decades

Not only can't I recall a single exacting scientific replication being published by TAR, I can't recall a single publication in TAR, JAR, JAE, or CAR that was ever deemed worthy as an exacting replication by independent accounting researchers. There have been assorted replications that have not been exacting in a scientific sense --- such as extensions of capital markets studies that tend to confirm or deny some earlier published studies, but since the replications were not exacting the original authors tend to deny criticisms of their original work.  I can't recall a single exacting scientific published  replication of a published behavioral accounting experiment.

Can anybody recall a single TAR, JAR, or JAE author who admitted to errors discovered by other researchers in subsequent replication studies?

As a cynic, I might suggest a gaming strategy where some errors are made intentionally in a study that got accepted by TAR, JAR, or JAE. Then the authors can get a second hit in TAR, JAR, or JAE by subsequently writing about their errors and oversights. Hey two hits are better than just one. But that does sound a bit too unethical even for accountics researchers.

The following is from the 2010 TAR Annual Report published by then Senior Editor Steve Kachelmeier:

Table 3, Submissions and Acceptances by Subject Area and Method, Journal Year Ending May 31, 2010, continued

Panel B: Submissions and Acceptances by Method Primary Research Method


Submissions Representing Unique Manuscript Files with Decisions


Percentage of Total Submissions


Acceptances and Conditional Acceptances


Percentage of Total Acceptances


Analytical 42 6.8% 7 11.1%
Empirical-Archival 457 74.3% 40 63.5%
Experimental 86 14.0% 13 20.6%
Field and Case Study 8 1.3% 2 3.2%
Survey 15 2.4% 1 1.6%
Other 7 1.1% 0 0.0%
Total 615 100.0% 63 100.0%

Jensen Comment
Because of the high numbers publications of field studies, case studies, survey studies, and other studies published in other accounting research journals we know that such these types of accounting research studies are prolific.

My contention is that over the past three decades that are very few submissions of field studies, case studies, survey studies, and other studies because authors of such studies now consider submitting such "accounting research" studies to The Accounting Review to be a waste of time and submission fee money. This is entirely the point being made by Bob Kaplan and Zeff/Granoff ---

Hence when Steve Kachelmeier claims that TAR publishes "accounting research" then I think he needs to be more specific as to what types of "accounting research" is rarely submitted and published in TAR. TAR most certainly is not friendly to all types of accounting research.


Now let's compare Kachelmeier's above  2010 table with the following table written by TAR Senior Editor Gary Sundem's table of submitted manuscripts (1982-1986)::

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

292          General Empirical

172          Behavioral

135          Analytical modeling

119          Capital Market

  97          Economic modeling

  40          Statistical modeling

  29          Simulation

The following is a quote from an earlier 1993 President’s Message by Gary Sundem,

Although empirical scientific method has made many positive contributions to accounting research, it is not the method that is likely to generate new theories, though it will be useful in testing them. For example, Einstein’s theories were not developed empirically, but they relied on understanding the empirical evidence and they were tested empirically. Both the development and testing of theories should be recognized as acceptable accounting research.
"President’s Message," Accounting Education News 21 (3). Page 3.

"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

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]

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

A Must Read Document
The Commission on Accounting Higher Education:
Pathways to a Profession
Charting a National Strategy for the Next Generation of Accountants
Established by the American Accounting Association (AAA) and the American Institute of CPAs (AICPA)

Draft: August 3, 2010

I hope some creative AECM and CPA-L threads emerge on this topic. In particular, I hope this document stimulates academic accounting research that is more focused on the needs of the business world and the profession (which was the main theme of Bob Kaplan’s outstanding plenary session on August 4 in San Francisco).

Note that to watch the entire Kaplan video ---
I think the video is only available to AAA members.

Also note the AAA’s new Issues and Resources page ---


In Conclusion
As I acknowledged about a year ago, I do understand that you did not
invent the term "accountics," and that its origins were not intended to be
sarcastic or pejorative.  I also understand the rich history that followed
the first use of that term, as aptly summarized in your article.
Nevertheless, I assert that your persistent use of the term "accountics"
apart from its historical context carries a sarcastic or pejorative
connotation in a contemporary context.  You say that The Accounting Review
publishes accountics.  I say that The Accounting Review publishes
accounting research.  The difference is that I sense your preference
for "accountics" is to convey the notion that the research we publish is
overly narrow and quantitative.  I do not share that view.

Jensen Reply
I will gladly stop using the term "accountics" when you provide me with a better term for that subset of "accounting research" that TAR mostly publishes. TAR most certainly does not encourage authors to submit manuscripts covering some subsets of accounting research methodology.

As another challenge for some subscriber to the AECM I would like to see a listing of all articles in TAR over the last 20 years that do not contain a single equation or a single statistical inference test. Perhaps then we can help Steve come up with a better term than "accountics" to describe the subset of accounting research that TAR referees find acceptable to a significant degree.

I do thank you Steve for being the most communicative TAR Senior Editor in recent history.

And I thank you for being my friend.

April 29 reply from Steve Kachelmeier

Hi Bob --

I could try to refute your third round of points, mainly by questioning
whether what an association journal publishes should be driven by editorial
fiat vis-a-vis a fair evaluation of the submissions we receive by peer
reviewers in the areas of those submissions.  I think you know my views on
this.  But more importantly, in the very eloquent words of Jagdish Gangolly
(from his post on this thread yesterday), "I think on any public forum it
is important at some stage for the debaters to agree to disagree. Once that
point has been reached it is perhaps best to move on."

I agree to disagree and move on.

Take care,


April 30, 2011 reply from Bob Jensen (on my birthday)

Thanks Steve Steve Kachelmeier,

I know you are very busy winding down your senior editorship of TAR and your courses for this semester. Thank you for taking the time and trouble to counterpoint my points.

Readers interested in Steve's earlier replies to my questions can go to:
Appendix 5:  "Steve Supports My Idea and Then Douses it in Cold Water" 

One of the most noteworthy rebuttals to Steve's positions can be found in:
"Accounting Scholarship that Advances Professional Knowledge and Practice," by Robert S. Kaplan, The Accounting Review, March 2011, pp. 367-383
I recommended this article to the AECM at the time it was published and gave a glowing account of the Kaplan Video that was made available at the AAA Commons in August 2010.

Someday I would really like to see Steve present counterpoints to the Kaplan article. Other accountics professors in the world seem to have ignored it.

The one point that I raise for which Steve has no answer is that to get an article published in The Accounting Review in the past two decades that is not an accountics paper is harder than passing a camel through the eye of a needle. An accountics paper is one that contains mathematical equations and/or statistical inference tests.

Just to confirm my position for the nine recent editions of TAR, I scanned all the articles from January 2010 to May 2011. All articles are accountics articles. No article without equations and/or statistical inference tests has passed through the double blind refereeing of TAR in 2010 and to date in 2011 except for Kaplan's article cited above for March 2011. But this hardly counts since it was an AAA Annual Meeting Presidential Address and did not have to pass throughTAR's double blind reviewing process. If it had done so, I suspect that it too would have been rejected by the TAR referees.

It will be interesting if TAR will remain an accountics-only journal under the forthcoming editorship of Harry Evans.

In its Editorial Policy, The Accounting Review does invite commentaries that will be subjected to double blind refereeing. I would have to dig much deeper into TAR's history to find a commentary that passed TAR's double blind refereeing filter.

My recommendations for making TAR more scientific are discussed at 
Therein I propose some ways to encourage replication of TAR articles that are now virtually accepted as TRUTH without being subjected to replication or commentary.

Steve argues that this is not the case, but he has no counterpoint for over 98% of the articles published in TAR over the past two decades. Those articles were accepted by the accounting academy as TRUTH  or they were were simply ignored as not being worthy of replication.

Have a good rest this summer Steve. You've earned a rest, and I do fully recognize that being Senior Editor of TAR requires long hours of volunteer labor, heavy stress when dealing with contentious authors and referees, and for several past editors has been truly hazardous to health. I'm very glad your survived your years of service to TAR and to the accounting academy.

And after your rest, I hope you will carefully read or re-read the articles cited at 

Bob Jensen

April 30, 2011 Challenge to Bob Jensen from Steve Kachelmeir

I will try to keep this brief, but I cannot simply ignore what you
characterize as a "noteworthy rebuttal," although my reading of Kaplan
(2011) doesn't leave me with that impression at all.  Rather than
defensively indulge your continual bashing of what we publish under your
hand-waiving generalization of "accountics," here is a challenge I have
for you.  Please cite the five most prominent specific examples
of "accounting scholarship that advances professional knowledge and
practice" that you think TAR should have published over the last ten years
but did not (or would not) publish because TAR is so narrow and insistent
on equations.

The ground rules are simple.  First, I ask that you not cite commentaries
about accounting research.  Rather, I want to see actual articles that
advance professional accounting knowledge and practice, as advocated by
Bob Kaplan and interpreted by you.  Second, the cites should be actual
articles published in other (presumably more open minded) academic
journals within the last ten years -- please don't cite relics from
several decades ago.  I presume that these contemporary articles exist,
because you often assert that those who write them are simply intimidated
against submitting to TAR, so they presumably go elsewhere with their
insights.  For each of your five examples, it would be helpful to have a
sentence indicating the article's meaningful impact on the profession in
terms of advancing professional knowledge and practice.  Ideally,
practicing CPAs would have heard of your examples and would have been
influenced by them in their practice of accounting.  It would also be
helfpul to have a sentence explaining your reasoning as to why TAR would
not have considered the article, were it to be submitted to TAR.

Again, keep it to contributions published in 2001 and later -- that gives
you ten full years.  So Bob Kaplan's proposals of the balanced scorecard
and activity-based costing do not qualify, and in any event, TAR has
published several articles on both of those topics over the last decade
and earlier.

Feel a little like Sarah Palin, Bob?  Maybe not -- I'm looking forward to
your reply.


April 30, 2011 reply from Bob Jensen

Hi Steve,
Since I'm preparing to make three trips to Boston starting tomorrow, I will have to do this quickly without really preparing (a Sarah Palin) in that sense since I'm not going to take time to carefully prepare.

I will simply list five from the set of my all time favorites that I think TAR referees would've rejected. Some of my all time favorites were accountics papers that I think TAR referees would've published had the paper been submitted to TAR. For example, Eric Lie's AAA Award winning paper was published in Management Science, but I think that it would've sailed through the double blind TAR review process. I will not list my favorites like this.

Number One
My all time favorite is Bob Kaplan's paper which TAR did publish, but no thanks to the TAR referees. I think those accountics TAR referees would've rejected this paper like they did reject the award winning (we even got a monetary prize) paper by Heck and Jensen eventually published by the Accounting Historians Journal).

"Accounting Scholarship that Advances Professional Knowledge and Practice," by Robert S. Kaplan, The Accounting Review, March 2011, pp. 367-383
 I recommended this article to the AECM at the time it was published and gave a glowing account of the Kaplan Video that was made available at the AAA Commons in August 2010.
This paper is important because it stresses the how top accounting research journals have virtually ignored the needs of the accounting profession while playing in Plato's cave. I think this is the best accounting research paper published in the past three decades even though I do not agree with some of the garbage remarks of Kaplan about fair value models.

Number Two
Virtually all research publications of Abe Brilloff, most of which were published by Barons. These were great non-accountics detections of accounting and auditing flubs. There was not a ghost in hell chance that TAR referees would've published these highly creative non-accoutics research articles:


E. RICHARD CRISCIONE, Abraham J. (Abe) Brillofff: A Biography, Studies in the Development of Accounting Thought, Volume 11 (Bingley, U.K.: JAI/Emerald Group, 2009, ISBN: 978-1-84855-588-4, pp. xxi, 258.

Book Review by George Foster, The Accounting Review, September 2010  --- Click Here

Number 3
One of my all time favorites is a case study published in Issues in Accounting Education. Since it was a case study it had a miniscule (epsilon) chance of being accepted by TAR's accountics referees.

I also liked this paper because it showed the idiocy and inconsistencies of mathematical model valuations of the firm vis-à-vis more subjective valuations by valuation experts. Valuation experts usually roll their eyes when somebody mentions "academic" valuation models like rooted only in the past financial statements, such as Residual Income Models, Free Cash Flow Models, and Modified IRR models:

"Questrom vs. Federated Department Stores, Inc.:  A Question of Equity Value," May 2001 edition of Issues in Accounting Education, by University of Alabama faculty members Gary Taylor, William Sampson, and Benton Gup, pp. 223-256.

In spite of all the sophistication in models, it is ever so common for intangibles and forecasting problems to sink the valuation models we teach.  I have more to say about intangibles at 

A question I always ask my students is:  What is the major thing that has to be factored in when valuing Microsoft Corporation?

The answer I'm looking for is certainly not product innovation or something similar to that.  The answer is also not customer loyalty, although that probably is a huge factor.  The big factor is the massive cost of retraining the entire working world in something that replaces MS Office products (Excel, Word, PowerPoint, Outlook, etc.).  It simply costs too much to retrain workers in MS Office substitutes even if we are so sick of security problems in Microsoft's systems.   How do you factor this "customer lock-in" into a Residual Income or FCF Model?  Our models are torpedoed by intangibles in the real world.


Number 4
Nearly all the TAR articles on employee option valuations are rooted in the Black-Scholes Model, but the BS model for employee stock options is truly BS since it overvalues employee fears that options will tank before they will be exercised. I know you have a cynical attitude toward normative "accounting research" published in the Journal of Accountancy, but the practical lattice model proposed in the following JA paper beats all the previous TAR publications on options valuation all to hell as far as valuation of employee stock options is concerned.

I personally think this JA publication would've been flat out rejected by TAR referees.

"How to “Excel” at Options Valuation," by Charles P. Baril, Luis Betancourt, and John W. Briggs, Journal of Accountancy, December 2005 ---
This is one of the best articles for accounting educators on issues of option valuation!

Research shows that employees value options at a small fraction of their Black-Scholes value, because of the possibility that they will vest underwater. ---

Also see "Toting Up Stock Options," by Frederick Rose, Stanford Business, November 2004, pp. 21 --- 


Number 5
My Number 5 choice is really a book, but I think that each and every chapter of the book would be rejected by TAR referees if they were submitted to TAR as articles. I first learned of this book from Miguel at my beloved Simoleon Sense blog:

Purportedly a Great, Great Book on Value Investing
From Simoleon Sense, November 16, 2009 ---

OMG Did I Die & Go To heaven?
Just Read, Applied Value Investing, My Favorite Book of the Past 5 Years!!
Listen To This Interview!

I have a confession, I might have read the best value investing book published in the past 5 years!

The book is called Applied Value Investing By Joseph Calandro Jr. In the book Mr. Calandro applies the tenets of value investing via (real) case studies. Buffett, was once asked how he would teach a class on security analysis, he replied, “case studies”.  Unlike other books which are theoretical this book provides you with the actual steps for valuing businesses.

Without a doubt, this book ranks amongst the best value investing books (with SA, Margin of Safety, Buffett’s letters to corporate America, and Greenwald’s book) & you dont have to take my word for it. Seth Klarman, Mario Gabelli and many top investors have given the book a plug!

Here is an interview with the author of the book, Applied Value Investing ( I recommend listening to this). Who knows perhaps yours truly will interview him soon.



A fellow blogger and friend will soon post a review of this book (hint: Street Capitalist!).

I timed myself Steve. From the time I read your challenge (I've been outside cleaning out my pond)  to me to the time I hit the Send button on this message it took six minutes (about as close to a Sarah Palin cold call as I could get). There are of course many other references that I can think of that are equally suited for the challenge. But since you wanted only five and a speed reply, I submit the above five to meet your challenge.

By the way I thought of these references in less than a minute. The other five minutes was spent trying to look up the exact citations.

Thanks for the interesting challenge.

Now the ball is in your court to find five TAR articles that would be more of relevance to practitioners.

Bob Jensen


Hi Steve,

Perhaps in my haste I misunderstood part of the challenge. I thought it was to be to find examples of my favorite publications that I'm 99% certain that TAR referees would've rejected.

Number One

Kaplan's paper published in 16 pages is more than a commentary and, at least in part, is a research paper on fair value measurement and another section on risk measurement. Because these sections do not have equations you probably do not consider them research.

Kaplan's paper also has a section entitled "Accounting Research 1968-2010," but because that's accounting history you probably don't consider it research because it is historical research. Sadly this section does not have equations. Sigh!

In total, I consider Kaplan's paper to be more of an accounting history research paper than a commentary. Commentaries generally have a more narrow focus and are often a critical review of a particular publication or person.


Number Two

All right since you exclude the works to Abe Brillofff to be before 2001 to be eligible, let me choose one great piece of work after the Year 2000.

How about
Brillofff, A. J. 2002. Beyond the Brilovian critique: A Brilovian rejoinder. Accounting and the Public Interest (2): 94-96.

I'm not certain that the above particular article has a traceable impact to practice, but the similar works of Brillofff over the years have had more impact on practice than TAR. For example, I doubt that a change in corporate share prices on the NYSE can be traced to the release of a single TAR paper.  If so, I'd like to hear about it.


Number Three

Even if this was a case published in IAE, is accounting education research excluded from publication in TAR just because it is in the area of education?

Actually this case is written more like a research case.

I stick buy my contention that this is a research article that would not stand a chance of being published in TAR because it was a case. Yipes, it even has equations. But if the equations are in a case the TAR referees would probably reject the submission.


Number Four

Immediately after I hit the first Send button I sent out a second version with the citation.

I personally think this JA publication would've been flat out rejected by TAR referees.

"How to “Excel” at Options Valuation," by Charles P. Baril, Luis Betancourt, and John W. Briggs, Journal of Accountancy, December 2005 ---
This is one of the best articles for accounting educators on issues of option valuation!

Research shows that employees value options at a small fraction of their Black-Scholes value, because of the possibility that they will vest underwater. ---


Number Five

I did not realize that you would be so picky about whether the research was published in a chapter of a book versus an article other than a TAR article.

John Read ---

I still stick by the case book I placed in Number 5. This is great research and is highly regarded by finance professors as well as investors and analysts.


Number Five Alternate

If you insist on having an alternate for Number Five, I choose the Heck and Jensen paper below:
“An Analysis of the Evolution of Research Contributions by The Accounting Review: 1926-2005,” (with Jean Heck), Accounting Historians Journal, Volume 34, No. 2, December 2007, pp. 109-142.

This is an accounting history research paper that was flatly rejected by TAR, But it won a monetary prize from the Accounting Historians Journal so that must count for something.

And I have had enough feedback from practicing accountants (many of whom are on the CPAs-L listserv) to know that it has had a fair amount of practitioner readership around the world.


End Note
If I don't reply to your messages quickly, it's because my wife will be having her 14th heavy duty spine surgery on May 12 (to replace some rods, hooks, bone fusions, cables, and screw)s. Tomorrow we leave on our first of three trips to Boston, and my attention will be diverted from the AECM of a few weeks.

This will no doubt be a relief to many AECM subscribers now busy with grading final exams and term projects.


Bob Jensen



April 29, 2010 reply from Dan Stone

A few thoughts on this interesting exchange:

Topic #1: Replications in accounting research

Although I think Bob is right -- there are very few published replications in accounting research -- here is a very interesting and well-done one, which I very much enjoyed reading:

Smith Bamber, L., T.E. Christensen, and K.M. Gaver, Do we really `know' what we think we know? A case study of seminal research and its subsequent overgeneralization. Accounting, Organizations and Society, 2000. 25(2): p. 103-129.

Topic #2:

Here are three excellent Accounting Review papers, all of which are relevant to both accounting practice and are strong scholarship:

Carpenter, T.A., Audit team brainstorming, fraud risk identification, and fraud risk assessment: Implications of SAS no. 99. Accounting Review, 2007. 82(5): p. 1119-1140.

Lynch, A.L., U.S. Murthy, and T.J. Engle, Fraud Brainstorming Using Computer-Mediated Communication: The Effects of Brainstorming Technique and Facilitation. Accounting Review, 2009. 84(4): p. 1209-1232.

Hunton, J.E. and A. Gold, A Field Experiment Comparing the Outcomes of Three Fraud Brainstorming Procedures: Nominal Group, Round Robin, and Open Discussion. Accounting Review, 2010. 85(3): p. 911-935.

Thanks to the editors (senior and otherwise -- including Steve K), authors, and reviewers for creating this set of excellent work. Now let's do what we can to see much more work, with relevance to both practice and theory, published in (if possible) or out (if needed) of accounting journals.


Dan Stone
Univ. of Kentuck


Another Dan Stone Reply (regarding finding research articles relevant to practitioners)

Gosh this isn't much of a challenge. Have a look at AOS over the past 10 years for high-quality research that deeply engages with the professional practice of accounting.


Dan Stone

May 1 reply from Steve Kachelmeier


So your reply to the challenge to identify specific research examples that have directly impacted the practice of accounting is "anything in AOS"? I have nothing against AOS and won't try to dispute your claim that AOS articles are broadly relevant to practice, but if one wants to generalize to that degree, I certainly could say the same for The Accounting Review and many other journals. For a more detailed analysis that doesn't just laud "see anything in <name of my favored journal>," I recommend reading Moehrle et al., "The Impact of Academic Accounting Research on Professional Practice: An Analysis by the AAA Research Support Task Force," Accounting Horizons, December 2009, pp. 411-456. Those authors did an outstanding job identifying a 15-page reference list of practice- relevant academic research studies, with several recent specific examples that have impacted the practice and regulation of accounting from The Accounting Review and other "accountics" journals. If one adds to that the studies that can indirectly impact future practice through our teaching (as Bob J. did with one of his examples), the list is quite impressive indeed.

Dan, let me say in closing that I do appreciate your earlier post that cited three recent TAR articles you found relevant. I especially agree with you that Hunton and Gold (TAR, May 2010 issue) is about as practically relevant as one can get. The results of that study changed the way a major public accounting firm implements fraud brainstorming.


Steve Kachelmeier


May 3, 2011 reply from Jim Martin

Although nearly all management and accounting journals are accessible by
issue through various data base providers (JSTOR, Proquest, etc.), I provide
an alphabetical listing of articles and place them into topic bibliographies
as well. The idea is to provide a more convenient way to search for articles
by author, by journal, and by topic than searching one issue at a time.
MAAW's TAR bibliography stops at the five year wall for JSTOR links
(1926-2005), but the AOS bibliography is fairly current 1976-2010.
Links to the these and other Journal Bibliographies are on the following

Bob Jensen's threads on the sad state of accounting doctoral programs ---

How did academic accounting research become a pseudo science?

Bob Jensen's threads on the accountics history of The Accounting Review ---
An Analysis of the Contributions of The Accounting Review Across 80 Years: 1926-2005 ---

I have two accountics questions that I don't have time to answer due to Erika's pending heavy duty spine surgery this month. I also don't want to challenge Steve with these questions since he has good reason for a summer break when coming off the stressful senior editorship of The Accounting Review (TAR).

Besides, I doubt whether Steve wants the answer to Question 1 made public.

My Question 1
Among all the accepted submissions that were most likely double blind refereed in TAR between May 31, 1991 and May 31, 2011, what proportion were not accountics articles?

I define an accountics article as one that contains mathematical equations and/or statistical inference tests.

Please exclude articles published in TAR that are suspected of not passing through double blind reviews.
These include the following:

1.  AAA Plenary Session papers such as those TAR publications of Kaplan, Hopwood, and Palmrose.
2.  Memorial articles
3   Articles by TAR Editors or authors acting in official capacities such as AAA staff and committee chairs.


My Question 2
Can anybody recall a single TAR, JAR, or JAE author who admitted to errors discovered by other researchers in subsequent replication studies?
Or put another way, is there a TAR, JAR, or JAE author who no longer considers the findings as truth subject to cautions admitted in the article?

Jensen Comment on Briloff and Bias Against Publishing Anecdotal Evidence

Anecdotal Evidence --- 

I think a bias toward accountics articles came about after the 1950s as a reaction against anecdotal evidence in the new age of scientific research in accounting, finance, and business. An individual piece of anecdotal evidence, such as any one of Abe Briloff's Barron's cases, is terrible evidence for many broader questions. One of the main problems is that anecdotal evidence can be cherry picked to "prove" a broader point..


Accordingly, I think that after 35 years of publishing normative research, case method (anecdotal), and historical (often anecdotal)  research, The Accounting Review (TAR) editors and referees over reacted in avoidance of normative, case, and history studies in favor of accountics research. One might argue that many analytical TAR studies using mathematics were glorified normative or anecdotal fictions, but I will avoid this issue at the moment. It might be best for the moment to to think of accountics research as empirical research subjected to statistical inference testing.


For example, suppose we had a working hypothesis that Big Eight accounting firms are letting a serious number of audit clients get away with GAAP violations because the firms are favoring client relations over investors. Such a hypothesis, in my viewpoint, is not amenable to scientific research. It is amenable to anecdotal research, but anecdotal research pointing to poor quality Big Eight audits, where errors may have arisen due to non-independence, can be cherry picked.


Exhibit A in my first comment is the entire set of Barron's articles published by Abe Briloff, mostly in the 1970s. Professor Briloff and his student assistants poured over thousands of financial statements in search of accounting and auditing flubs of Big Eight accounting firms. He and his team found many real doozies. As George Foster pointed out in a JAR article, Briloff's reputation became so huge that Briloff's Barron's articles were impacting NYSE stock prices.


In turn the Big Eight firms allegedly declared war on Professor Briloff by lobbying the AICPA to dirty his reputation ---


Any single one of Abe's articles is virtually an anecdotal case study and was cherry picked in the sense that Abe did not write about the many, many times he could find nothing wrong with financial statements audited by Big Eight firms. But one-by-one his anecdotal negative evidence began to pile up that Big Eight firms were seriously allowing bad things in audits getting clean opinions by the Big Eight.


The bottom line is that Abe Briloff was perhaps the first researcher to knock the sickeningly arrogant Big Eight audit firms off their high horses regarding quality of and independence of Big Eight audits. For this he almost got his CPA license revoked.


E. RICHARD CRISCIONE, Abraham J. (Abe) Brillofff: A Biography, Studies in the Development of Accounting Thought, Volume 11 (Bingley, U.K.: JAI/Emerald Group, 2009, ISBN: 978-1-84855-588-4, pp. xxi, 258.

Book Review by George Foster, The Accounting Review, September 2010  --- Click Here


My point is that there are just some things that are not amenable to scientific/accountics research. It is then where accumulated anecdotal evidence from a succession of case studies begins to take on more importance.


Anecdotal evidence is very important for discovering possible hypotheses to be studied scientifically.

The following is a quote from an earlier 1993 President’s Message by Gary Sundem,

Although empirical scientific method has made many positive contributions to accounting research, it is not the method that is likely to generate new theories, though it will be useful in testing them. For example, Einstein’s theories were not developed empirically, but they relied on understanding the empirical evidence and they were tested empirically. Both the development and testing of theories should be recognized as acceptable accounting research.
"President’s Message," Accounting Education News 21 (3). Page 3.


My main main point in this first comment is that there is great value from anecdotal case studies and history studies that now get rejected by TAR referees because these referees no longer value the importance of case studies and history research to scientific research.


Jensen Comment on Valuation in the Real World

As a second example of where TAR referees now go wrong is in the area of valuation, particularly equity valuation and real estate valuation. TAR referees have repeatedly glorified authors of theoretical valuation models such as Residual Income models, Free Cash Flow models, and modified IRR valuation models. But professionals who actually do valuations in the real world tend to either laugh at such models or use them only in a very small way to the valuation process in practice.


One problem with valuation research in the real world is that it is typically anecdotal research. Each company's equity or each building is so unique and so confounded with intangibles, that it's very difficult to scientific research on valuation vis-a-vis analytical research such as case method research.


But TAR referees now have such a bias against publishing case studies that TAR just does not publish articles on how valuation takes place in the real world.


This is why I consider the following quotation from Simoleon Sense so important:


Purportedly a Great, Great Book on Value Investing
From Simoleon Sense, November 16, 2009 ---

OMG Did I Die & Go To heaven?
Just Read, Applied Value Investing, My Favorite Book of the Past 5 Years!!
Listen To This Interview!

I have a confession, I might have read the best value investing book published in the past 5 years!

The book is called Applied Value Investing By Joseph Calandro Jr. In the book Mr. Calandro applies the tenets of value investing via (real) case studies. Buffett, was once asked how he would teach a class on security analysis, he replied, “case studies”.  Unlike other books which are theoretical this book provides you with the actual steps for valuing businesses.

Without a doubt, this book ranks amongst the best value investing books (with SA, Margin of Safety, Buffett’s letters to corporate America, and Greenwald’s book) & you don't have to take my word for it. Seth Klarman, Mario Gabelli and many top investors have given the book a plug!

Here is an interview with the author of the book, Applied Value Investing ( I recommend listening to this). Who knows perhaps yours truly will interview him soon.



A fellow blogger and friend will soon post a review of this book (hint: Street Capitalist!)


Hell would probably freeze over before TAR referees would accept any of the anecdotal cases written by Joseph Calandro if Calandro were to submit any one of these cases to TAR or an article on the history of real world valua