New Bookmarks
Year 2011 Quarter 4:  October 1 - December 31 Additions to Bob Jensen's Bookmarks
Bob Jensen at Trinity University

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

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

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

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

 

Choose a Date Below for Additions to the Bookmarks File

2011
December 31, 2011

November 30, 2011

October 31, 2011

 

 

December 31, 2011

Bob Jensen's New Bookmarks December 1-31, 2011
Bob Jensen at Trinity University 

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

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

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

 

Bob Jensen's Pictures and Stories
http://www.trinity.edu/rjensen/Pictures.htm

 

All my online pictures --- http://www.cs.trinity.edu/~rjensen/PictureHistory/

Hasselback Accounting Faculty Directory --- http://www.hasselback.org/




Humor Between December 1-31, 2011 --- http://www.trinity.edu/rjensen/book11q4.htm#Humor123111 

Humor Between November 1 and November 30, 2011 --- http://www.trinity.edu/rjensen/book11q4.htm#Humor113011 

Humor Between October 1 and October 31, 2011 --- http://www.trinity.edu/rjensen/book11q4.htm#Humor103111 

Humor Between September 1 and September 30, 2011 --- http://www.trinity.edu/rjensen/book11q3.htm#Humor093011

Humor Between August 1 and August 31, 2011 --- http://www.trinity.edu/rjensen/book11q3.htm#Humor083111 

Humor Between July 1 and July 31, 2011 --- http://www.trinity.edu/rjensen/book11q3.htm#Humor073111

Humor Between May 1 and June 30, 2011 --- http://www.trinity.edu/rjensen/book11q2.htm#Humor063011 

Humor Between April 1 and April 30, 2011 --- http://www.trinity.edu/rjensen/book11q2.htm#Humor043011  

Humor Between February 1 and March 31, 2011 --- http://www.trinity.edu/rjensen/book11q1.htm#Humor033111 

Humor Between January 1 and January 31, 2011 --- http://www.trinity.edu/rjensen/book11q1.htm#Humor013111 

 

 




I had nothing whatsoever to do with two good news items from Trinity University, so that gives me license to brag.

Trinity's MS in Accounting graduates scored 5th in the Nation on the CPA Examination ---
http://web.trinity.edu/x17476.xml
Bravo Linda, Sankarin, John, Kate and Julie!

My long-time friend, as winner of the Scott All-University Excellence in Teaching Award, gave the Fall Semester Commencement Address. I don't think the video of his talk is posted at this moment, but I will be looking forward to it.
Don holds a PhD from Columbia University and is a Professor of Organization Behavior at Trinity University. He is a retired U.S. Army Colonel and a former Battalion Commander in the Viet Nam War. For years he's also been an extensive consultant to NASA of organizational matters and leadership training.
Bravo Don!
http://www.cs.trinity.edu/~rjensen/temp/VanEynde2011.htm

These two things make me very proud to have been on the faculty of Trinity University for 24 years. I retired in 2006.---
http://www.cs.trinity.edu/~rjensen/PictureHistory/2006RetirementParty/


Update on Will Yancey's Family

My long-time tribute to my former accounting professor and friend Will Yancey is at
http://www.trinity.edu/rjensen/Yancey.htm

Also see Steve Blow's article in the Dallas Morning News, December 18, 2010 ---
http://www.dallasnews.com/news/columnists/steve-blow/20101218-dallas-resident_s-brave-christmas-letter-addresses-irreversible-mistake_of-suicide.ece 

or Click Here

Jensen Comment
As many of you know, Will committed suicide in 2010  He's the father of Michael Yancey, a junior in finance and economics at Trinity University.

His widow, Carol, thankfully included me once again in her holiday letter distribution. She's an excellent writer and sends many news items about her own life in recovery, including a tidbit about Michael's summer internship at financial services giant USAA. She's able to continue living in both their Dallas winter home and Maine summer home. While recovering from an ankle transplant she broke her arm, which she turned into a humor tidbit in her letter.

What stands out most to me in her 2011 letter, however, is her ownership of a new business. Being an male chauvinist pig, I started thinking a sewing shop or something else feminine. Here's what she writes:

A friend of mine gave me a book on being a widow., in which one of the chapters was titled "From Housewife to Mechanic". It was never my intention to take this chapter so seriously! However, I now own a transmission shop in Dallas, TS. I employ six people and we are growing this business daily. We just celebrated our one year anniversary,.

 


Some AICPA Links of Possible Interest

   
Product announcements appearing in SmartBrief are paid advertisements and do not reflect actual AICPA endorsements. The news reported in SmartBrief does not necessarily reflect the official position of AICPA.

 
AICPA Resources

 

"N.C. State University Students Win AICPA Competition (among 98 student teams)," by Michael Cohn, Accounting Today, December 20, 2011 ---
http://www.accountingtoday.com/acto_blog/NC-State-University-Students-AICPA-Competition-61183-1.html

Bob Jensen's threads on Accounting News ---
http://www.trinity.edu/rjensen/AccountingNews.htm


"Foreign Enrollment Surges at (Top) U.S. B-Schools:  When the economic downturn hit, international enrollment at top business schools tanked. Today, it's back up to prerecession levels," by Alison Damast, Business Week, December 19, 2011 ---
http://www.businessweek.com/business-schools/foreign-enrollment-surges-at-us-bschools-12192011.html


"A Christmas List from Grumpy Old Accountants (includes a lump of coal for the FASB)," by Anthony H. Cantanach Jr. and J. Edward Ketz, Grumpy Old Accountants Blog, December 22, 2011 ---
http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/465#more-465


"IESBA Proposes Changes to The Code of Ethics for Professional Accountants to Address Conflicts of Interest," IFAC, December 20, 2011 ---
http://www.ifac.org/news-events/2011-12/iesba-proposes-changes-code-ethics-professional-accountants-address-conflicts--0

Bob Jensen's threads on professionalism in accounting and auditing ---
http://www.trinity.edu/rjensen/Fraud001c.htm


December 27, 2011 comment by Shyam Sunder (Yale)

Shyam Sunder has posted a new comment in IFRS Content, on the post titled "FECE calls for a halt on convergence talks".

To read the 14 comment(s) or to post your own, visit: http://commons.aaahq.org/posts/42322b85c1

posted 7:23 AM by Shyam Sunder
Comment: Paradox of Writing Clear Rules: Interplay of Financial Reporting Standards and Engineering1

Shyam Sunder
Yale School of Management


Abstract
Attempts to improve financial reporting by adding clarity to its rules and standards through issuance of interpretations and guidance also serve to furnish a better roadmap for evasion through financial engineering. Thus, paradoxically, regulation of financial reporting becomes a victim of its own pursuit of clarity. The interplay between rules written to govern preparation and auditing of financial reports on one hand, and financial engineering of securities to manage the appearance of financial reports on the other, played a significant role in the financial crisis of the recent years. Fundamental rethinking about excessive dependence of financial reporting on written rules (to the exclusion of general acceptance and social norms) may be necessary to preserve the integrity of financial reporting in its losing struggle with financial engineering.
JEL Codes: G24; M41
Keywords: Financial Reporting; Financial Engineering; Written Standards; Social Norms; Regulatory Equilibrium

For full text:
http://faculty.som.yale.edu/shyamsunder/Research/Accounting and Control/Presentations and Working Papers/UCSC_2011/UCSC2010-8Dec11Clean.pdf 

Revised Draft Dec. 8, 2011
1 An earlier version of this paper was presented at the conference on Rethinking Capitalism, Bruce Initiative of the University of California at Santa Cruz in April 2010. Corresponding Author. Address: Yale School of Management, 135 Prospect Street, New Haven, Connecticut, 06511, USA. Telephone
+1 203 432 6160 E-mail shyam.sunder@yale.edu.

 

Jensen Comment to the AECM
I am forwarding a new comment by Shyam to one of my posts on the AAA Commons. Note that you can reply on the AECM to his comment even though you must go to this item on the Commons to put a reply to his post on the Commons itself.

Shyam has been a long-time opponent of convergence to IFRS in the United States but, as a highly respected researcher in economics journals as well as accounting research journals, his objections have mainly centered around the potential IASB abuses of its monopoly powers in the setting of global accounting standards ---
http://faculty.som.yale.edu/shyamsunder/Jamal Sunder Stds Dec 14.pdf 

There are many objections to the mountains of standards, interpretations, and bright line rules in both international and domestic accounting standard setting. I think it was Paul Polanski who once noted on the AECM that, in spite of being principles-based in theory, the IASB's standards and interpretations are moving toward a mountain of bright line rules ---
http://www.trinity.edu/rjensen/Theory01.htm#BrightLines 

Denny Beresford is also on record as opposing the build up of exceeding complexity in bright line rules --- "Can We Go Back to the Good Old Days?" by Dennis R. Beresford, The CPA Journal ---
http://www.nysscpa.org/cpajournal/2004/1204/perspectives/p6.htm 

Bob Jensen does not agree with Beresford, Sunder, and others on the issue of bright lines and interpretations.

Firstly, I think the FASB's Codification Database (along with Comperio from PwC) is demonstrating that modern technology allows clients and auditors to deal more efficiently with standards complexity and bright lines.

Secondly, I think the explosion of evidence that clients and their auditors take advantage of loopholes in standards such as the Repo 105/108 principles-based loopholes in FAS 140 that were used by Lehman Brothers and Ernst & Young to put out deceptive financial statements. Taking away the bright lines simply makes it easier for clients and their auditors to deceive the public using more subjective principles-based rules. The Lehman Bankruptcy Examiner is not at all kind to Lehman Brothers or Ernst & Young in this matter ---
http://www.trinity.edu/rjensen/Fraud001.htm#Ernst 

Thirdly, I'm really opposed to having a contract that Client A reports differently than Client B to a significant degree such as when Client A will eventually use IFRS 9 to judge a hedge as being fully effective and Client B will judge the same hedge as being too ineffective to permit hedge accounting relief. IFRS 9 as proposed will really soften effectiveness testing for hedges using derivative financial instruments.

As a matter of fact the leeway given to clients to test hedge effectiveness in the proposed IFRS 9 (now delayed until 2015) is a perfect example of a standard that will lead to great inconsistencies in how given contracts are accounted for differently under principles-based standards.

Fourthly, Sunder, Beresford, and other proponents of reduced complexity in accounting standards and interpretations fail to point out the main reason for exceeding complexity in the U.S. Tax Code and its IRS and tax court interpretations. Time and time again the build up in complexity is caused by taxpayers who abuse what started out as as a rather simple tax rule. I think the same thing happens when abusers like Lehman Brothers and Ernst & Young deceptively twist a standard like FAS 140, thereby leading to further complexity in ensuing standards and interpretations.

Time and time again the cause of complexity is what Pogo realized years ago:
"We have met the enemy and he is us."

In any case, I predict that over 99% of the subscribers to the AECM will side with Sunder and Beresford and less than 1% will side with Bob Jensen on this issue. But Jensen will win in the long run as simple principles-based standards become abused even worse than bright line rules are abused.

Jensen still argues for bright line speed limit signs (20 mph, 45 mph, 55 mph etc.) in place of a single principles-based law "Drive at a safe speed in this zone."
http://www.trinity.edu/rjensen/Theory01.htm#BrightLines 


How to Lie/Mislead With Statistics:  Great Graphs on Correlation vs.Causes

"Correlation or Causation? Need to prove something you already believe? Statistics are easy: All you need are two graphs and a leading question," by Vali Chandrasekaran, Business Week, December 1, 2011 ---
http://www.businessweek.com/magazine/correlation-or-causation-12012011-gfx.html

Visualization of Multivariate Data (including faces) --- http://www.trinity.edu/rjensen/352wpvisual/000datavisualization.htm 
 


New Years Day: What channel will carry the IMA versus AICPA faceoff?
"IMA Ready to Compete with AICPA/CIMA Management Accounting Designation," AccountingWeb, December 28, 2011 ---
http://www.accountingweb.com/topic/education-careers/ima-ready-compete-aicpacima-management-accounting-designation

The Institute of Management Accountants (IMA), which has offered the Certified Management Accountant (CMA) credential since 1972 and represents more than 60,000 accountants and financial professionals in business worldwide, is facing "fierce competition" from a new management accounting designation – Chartered Global Management Accountant (CGMA) – that will be launched by the American Institute of Certified Public Accountants (AICPA) and the Chartered Institute of Management Accountants (CIMA) in January 2012, according to Jeffrey Thomson, IMA President and Chief Executive Officer. 
 
AICPA voting members will be automatically eligible for the credential upon verifying three years of qualifying experience. CPAs who are members of both the AICPA and their state CPA society will receive a special discounted annual fee to maintain the CGMA credential. 
 
"While IMA welcomes these organizations' recognition of the important role of management accounting, we have some serious questions about the designation, and we intend to stand up and be counted," Thomson told AccountingWeb in a recent interview. 
 
Thomson has questioned the length of the grandfathering period and the fact that AICPA members qualify without passing a test. He also objected to the automatic enrollment. "It is our understanding that they must opt out of the designation initially."
 
"Management accountants need to be able to make more judgmental analyses," Thomson said. "They need to pursue their credential and pass a rigorous, focused, relevant exam." He pointed out that in addition to passing a two-part exam, CMA candidates must fulfill both an education and experience requirement. 
 
"At IMA, we are not just in the business of increasing our membership, although we are expanding our presence worldwide. We will continue to be focused on our mission, which is to respond to the market and to the needs of organizations and society."
 
"The market and organizations have shown a need for accounting professionals working in business to be prepared to analyze, plan, and budget, and to understand their obligation to investors and their role in preventing fraud. Studies have shown a talent management gap in forward-looking activities among finance professionals. We have an obligation to fill that gap."
 
"We expect finance and accounting personnel will choose to follow a professional management accounting path based on what the market and organizations have said that they need," Thomson said. "Surveys and focus groups have found that financial planners and individuals with knowledge of risk management, performance management, and measurement top the list of people they are looking to hire."
 
"Statistics show that a high percentage of students who graduate with accounting degrees will go into public accounting and perform audits, but after a few years they move into finance departments of companies of all sizes where they are responsible for planning and budgeting. They have learned to analyze historic information, but many will have had only one course in management accounting as part of their undergraduate degree in accounting. Working in public accounting is a great way to start one's career, but an accountant in business still needs to acquire management accounting skill sets," Thomson said.
 
"Working from a strong technical basis, the accountant working in finance needs to be able to go from data to decisions, from information to insights, and sit across the table as a trusted business advisor."
 
"To have a great career, a young professional with an accounting degree needs to develop a well-rounded set of skills, but those skills have value at any stage in a career. I became a management accountant just two years ago after working in telecommunications for over twenty years, ending in a CFO role at AT&T. When I completed the 150 hours of required study for the CMA and passed both parts of the exam, I felt more competent, more rounded."
 
"An aspiring CMA needs to possess the skills to perform:
Looking ahead, Thomson concluded that "the market will determine the future of management accountant credentials. But the market is not as rational as we would like, and it is very forgiving. When an organization has credibility and has reached a critical mass, people do not ask the tough questions, often building in inefficiencies."

Jensen Comment
This may become less relevant when the prestigious accounting designations of the future are Certified Cognitors and Condorsers. In accountics science a mere PhD will no longer cut it. The prestigious accountics scientists will place their proud CEW credentials beside their names --- Certified Equation Writers.

Bob Jensen's threads and cases on managerial accounting are at
http://www.trinity.edu/rjensen/Theory02.htm#ManagementAccounting


"Top B-School Stories of 2011:  2011 brought good news on the MBA job front, with unconventional careers more popular than ever. Plagiarism and cheating marred an otherwise-upbeat year," by Alison Damast and Erin Zlomek, Business Week, December 28, 2011 ---
http://www.businessweek.com/business-schools/top-bschool-stories-of-2011-12282011.html

"Six Predictions for Digital Business in 2012," by Andrew McAfee, Harvard Business Review Blog, December 28, 2011 --- Click Here
http://blogs.hbr.org/hbr/mcafee/2011/12/six-predictions-for-digital-bu.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date

"The 10 Biggest Web News Stories of 2011," by John Paul Titlow, ReadWriteWeb, December 23, 2011 ---
http://www.readwriteweb.com/archives/the_10_biggest_web_news_stories_of_2011.php

"Top 10 Culture-Tech Stories of 2011," ReadWriteWeb, December 19, 2011 ---
http://www.readwriteweb.com/archives/top_10_culture-tech_stories_of_2011.php

"The Top 10 tech trends for 2012," by Pete Cashmore, CNN, December 19, 2011 ---
http://www.cnn.com/2011/12/19/tech/innovation/top-tech-trends-2012/index.html?eref=mrss_igoogle_cnn

"52 Cool Facts About Social Media," http://dannybrown.me/2010/07/03/cool-facts-about-social-media/
Thank you David Albrecht for the heads up on this link

NPR's list of Best Books in 2011 ---
http://www.npr.org/series/142590674/best-books-of-2011

"10 Most Hated Movies of 2011," by Michael Lennon, Wired News ---
http://www.wired.com/underwire/2011/12/movies-we-hated-2011/

2011 In Film: Bob Mondello's Top 10 (Plus 10) ---
http://www.npr.org/2011/12/30/144447920/2011-in-film-bob-mondellos-top-10-plus-10

The Year's Weirdest News Stories ---
http://www.thedailybeast.com/cheat-sheets/2011/12/23/strangest-cheats-of-the-year.html

Wow, this is an Amazon-centric list
"8 Ed Tech Predictions for 2012," by Joshua Kim, Inside Higher Ed, December 22. 2011 ---
http://www.insidehighered.com/blogs/8-ed-tech-predictions-2012

 


Graduates Who Are Happy to Land Minimum Wage Careers
"Little-Known (usually unaccredited) Colleges Exploit Visa Loopholes to Make Millions Off Foreign Students," by Tom Bartlett, Karin Fischer, and Josh Keller, Chronicle of Higher Education, March 20, 2011 ---
http://chronicle.com/article/Little-Known-Colleges-Make/126822/

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

Bob Jensen's threads on diploma mills ---
http://www.trinity.edu/rjensen/FraudReporting.htm#DiplomaMill


Inside Footnotes (advice from and for security analysts) ---
http://www.footnoted.com/inside-footnotes/ 

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


From Deloitte in Tabular Form --- http://www.iasplus.com/standard/1112effective.htm
"NEW AND REVISED PRONOUNCEMENTS AS AT 31 DECEMBER 2011"
The information below is organised as follows:

New or revised standards
Amendments
Interpretations
Other pronouncements.

"FASB, IASB Chiefs Agree New Convergence Model is Needed," Journal of Accountancy, December 6, 2011 ---
http://www.journalofaccountancy.com/Web/20114869.htm

"SEC releases reports on IFRS in practice and US GAAP-IFRS differences," IAS Plus, November 17, 2011 ---
http://www.iasplus.com/index.htm

More Detailed Differences (Comparisons) between FASB and IASB Accounting Standards

2011 Update

"IFRS and US GAAP: Similarities and Differences" according to PwC (2011 Edition)
http://www.pwc.com/us/en/issues/ifrs-reporting/publications/ifrs-and-us-gaap-similarities-and-differences.jhtml
Note the Download button!
Note that warnings are given throughout the document that the similarities and differences mentioned in the booklet are not comprehensive of all similarities and differences. The document is, however, a valuable addition to students of FASB versus IASB standard differences and similarities.

It's not easy keeping track of what's changing and how, but this publication can help. Changes for 2011 include:

  • Revised introduction reflecting the current status, likely next steps, and what companies should be doing now
    (see page 2);
  • Updated convergence timeline, including current proposed timing of exposure drafts, deliberations, comment periods, and final standards
    (see page 7)
    ;
  • More current analysis of the differences between IFRS and US GAAP -- including an assessment of the impact embodied within the differences
    (starting on page 17)
    ; and
  • Details incorporating authoritative standards and interpretive guidance issued through July 31, 2011
    (throughout)
    .

This continues to be one of PwC's most-read publications, and we are confident the 2011 edition will further your understanding of these issues and potential next steps.

For further exploration of the similarities and differences between IFRS and US GAAP, please also visit our IFRS Video Learning Center.

To request a hard copy of this publication, please contact your PwC engagement team or contact us.

Jensen Comment
My favorite comparison topics (Derivatives and Hedging) begin on Page 158
The booklet does a good job listing differences but, in my opinion, overly downplays the importance of these differences. It may well be that IFRS is more restrictive in some areas and less restrictive in other areas to a fault. This is one topical area where IFRS becomes much too subjective such that comparisons of derivatives and hedging activities under IFRS can defeat the main purpose of "standards." The main purpose of an "accounting standard" is to lead to greater comparability of inter-company financial statements. Boo on IFRS in this topical area, especially when it comes to testing hedge effectiveness!

One key quotation is on Page 165

IFRS does not specifically discuss the methodology of applying a critical-terms match in the level of detail included within U.S. GAAP.
Then it goes yatta, yatta, yatta.

Jensen Comment
This is so typical of when IFRS fails to present the "same level of detail" and more importantly fails to provide "implementation guidance" comparable with the FASB's DIG implementation topics and illustrations.

I have a huge beef with the lack of illustrations in IFRS versus the many illustrations in U.S. GAAP.

I have a huge beef with the lack of illustrations in IFRS versus the many illustrations in U.S. GAAP.

I have a huge beef with the lack of illustrations in IFRS versus the many illustrations in U.S. GAAP.

Bob Jensen's threads on accounting standards setting controversies ---
http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting

 

Bob Jensen's threads on accounting theory ---
http://www.trinity.edu/rjensen/Theory01.htm


Among disclosure issues, fair value prompts the most SEC reviews
As of Dec. 19, 2011 the SEC had sent 874 comment letters regarding fair value and estimates of assets and contracts, Audit Analytics reports.

And we were led to believe that fair value accounting for financial instruments entailed little more than reading the closing prices in the financial data tables of The Wall Street Journal.

Yeah right!

"The Big Number: 874," by Maxwell Murphy, CFO.com, December 28, 2011 ---
http://blogs.wsj.com/cfo/2011/12/28/the-big-number-874/?mod=wsjcfo_hp_cforeport

Bob Jensen's threads on fair value accounting controversies ---
http://www.trinity.edu/rjensen/Theory02.htm#FairValue


Richard Sansing's SSRN accountics science (mostly tax) research papers ---
http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=016942


My December 22, 2011 news update from PwC notes the following:

The IASB has issued an amendment to IFRS 9, Financial instruments, that delays the effective date to annual periods beginning on or after January 1, 2015. The original effective date was for annual periods beginning on or after January 1, 2013.

The amendment is a result of the board extending its timeline for completing the remaining phases of its project to replace IAS 39, Financial instruments: Recognition and measurement, (such as impairment and hedge accounting) as well as the delay in the insurance project. In issuing the amendment, the IASB confirmed the importance of applying the requirements of all the phases of the project to replace IAS 39 at the same time.

Read our In brief article for highlights of the IASB amendment.

Regards,

CFOdirect Network team

 


More focus on Intangibles
These are probably the most systemic problems in theory and in financial reporting practice

"Integrated Reporting Essential for Useful Business Reporting," AICPA, December 2011 ---
http://blog.aicpa.org/2011/12/integrated-reporting-essential-for-useful-business-reporting.html

The current model for financial reporting has long been under discussion; investors and other stakeholders want more than a historical look back and one that only focuses on financial measures. They want to see the value companies create through intangible assets too.  Part of the solution is integrated reporting, which provides a holistic presentation of data and brings together the many disparate reports that organizations provide (as opposed to being an add-on to existing reports).
Just last week the comment period closed for the International Integrated Reporting Committee’s discussion paper, Towards Integrated Reporting. As a long-time supporter of the concept of integrated reporting, founder of the Enhanced Business Reporting Consortium and participant in the World Intellectual Capital Initiative, the AICPA submitted a comment letter offering suggestions for the development an international integrated reporting framework.

In the AICPA’s comment letter, it encouraged the IIRC to leverage the preliminary, high-level Enhanced Business Reporting Framework. This framework has been developed through an open-collaborative approach and additional ongoing work efforts by WICI continue to build upon this framework. A new integrated reporting framework should be comprehensive enough so that organizations can find and report the common framework elements that are most relevant to their stakeholders. The elements should also be presented in a way that is comparable across companies and time periods. Finally, the AICPA called upon the IIRC to develop a framework so that standardized integrated reports could be created using data standards, such as XBRL, to improve transparency and provide easy access to and analysis of integrated reporting disclosures.

This is, understandably, a very large undertaking. The IIRC has done an excellent job of exploring existing best practices frameworks; however there will need to be significant involvement from CPAs and CAs with advisory, reporting and auditing backgrounds to develop a robust, verifiable integrated reporting framework covering all relevant content areas. As a starting point, the AICPA has recommended that the IIRC consult with members of the Accounting Bodies Network, of which the AICPA is a member. The AICPA is committed to both fulfilling its role and supporting the IIRC both internationally and through its U.S. efforts.

For more information on integrated reporting and the development of an integrated reporting framework, visit the Enhanced Business Reporting section on AICPA.org.

 

Bob Jensen's threads on accounting for intangibles are at
http://www.trinity.edu/rjensen/theory01.htm#TheoryDisputes


M.I.T. Camera Captures Speed of Light: A Trillion-Frames-Per-Second --- Click Here
http://www.openculture.com/2011/12/mit_camera_captures_speed_of_light.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+OpenCulture+%28Open+Culture%29

Jensen Comment
Imagine being able to view the booked U.S. National Debt in 15 seconds.
And in less than two minutes scientists at MIT can view the entire unfunded U.S. OBSF debt.

 


Audio
Harvard Business Review's 2012 List of Audacious Ideas --- Click Here
http://blogs.hbr.org/ideacast/2011/12/hbrs-2012-list-of-audacious-id.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date


"Freakonomics: What Went Wrong? Examination of a very popular popular-statistics series reveals avoidable errors," by Andrew Gelman and Kaiser Fung, American Scientist, 2011 ---
http://www.americanscientist.org/issues/id.14344,y.0,no.,content.true,page.3,css.print/issue.aspx

The nonfiction publishing phenomenon known as Freakonomics has passed its sixth anniversary. The original book, which used ideas from statistics and economics to explore real-world problems, was an instant bestseller. By 2011, it had sold more than four million copies worldwide, and it has sprouted a franchise, which includes a bestselling sequel, SuperFreakonomics; an occasional column in the New York Times Magazine; a popular blog; and a documentary film. The word “freakonomics” has come to stand for a light-hearted and contrarian, yet rigorous and quantitative, way of looking at the world.

The faces of Freakonomics are Steven D. Levitt, an award-winning professor of economics at the University of Chicago, and Stephen J. Dubner, a widely published New York–based journalist. Levitt is celebrated for using data and statistics to solve an array of problems not typically associated with economics. Dubner has perfected the formula for conveying the excitement of Levitt’s research—and of the growing body of work by his collaborators and followers. On the heels of Freakonomics, the pop-economics or pop-statistics genre has attracted a surge of interest, with more authors adopting an anecdotal, narrative style.

As the authors of statistics-themed books for general audiences, we can attest that Levitt and Dubner’s success is not easily attained. And as teachers of statistics, we recognize the challenge of creating interest in the subject without resorting to clichéd examples such as baseball averages, movie grosses and political polls. The other side of this challenge, though, is presenting ideas in interesting ways without oversimplifying them or misleading readers. We and others have noted a discouraging tendency in the Freakonomics body of work to present speculative or even erroneous claims with an air of certainty. Considering such problems yields useful lessons for those who wish to popularize statistical ideas.

On a Case-by-case Basis

In our analysis of the Freakonomics approach, we encountered a range of avoidable mistakes, from back-of-the-envelope analyses gone wrong to unexamined assumptions to an uncritical reliance on the work of Levitt’s friends and colleagues. This turns accessibility on its head: Readers must work to discern which conclusions are fully quantitative, which are somewhat data driven and which are purely speculative.

The case of the missing girls: Monica Das Gupta is a World Bank researcher who, along with others in her field, has attributed the abnormally high ratio of boy-to-girl births in Asian countries to a preference for sons, which manifests in selective abortion and, possibly, infanticide. As a graduate student in economics, Emily Oster (now a professor at the University of Chicago) attacked this conventional wisdom. In an essay in Slate, Dubner and Levitt praised Oster and her study, which was published in the Journal of Political Economy during Levitt’s tenure as editor:

[Oster] measured the incidence of hepatitis B in the populations of China, India, Pakistan, Egypt, Bangladesh, and other countries where mothers gave birth to an unnaturally high number of boys. Sure enough, the regions with the most hepatitis B were the regions with the most “missing” women. Except the women weren’t really missing at all, for they had never been born.

Oster’s work stirred debate for a few years in the epidemiological literature, but eventually she admitted that the subject-matter experts had been right all along. One of Das Gupta’s many convincing counterpoints was a graph showing that in Taiwan, the ratio of boys to girls was near the natural rate for first and second babies (106:100) but not for third babies (112:100); this pattern held up with or without hepatitis B.

In a follow-up blog post, Levitt applauded Oster for bravery in admitting her mistake, but he never credited Das Gupta for her superior work. Our point is not that Das Gupta had to be right and Oster wrong, but that Levitt and Dubner, in their celebration of economics and economists, suspended their critical thinking.

The risks of driving a car: In SuperFreakonomics, Levitt and Dubner use a back-of-the-envelope calculation to make the contrarian claim that driving drunk is safer than walking drunk, an oversimplified argument that was picked apart by bloggers. The problem with this argument, and others like it, lies in the assumption that the driver and the walker are the same type of person, making the same kinds of choices, except for their choice of transportation. Such all-else-equal thinking is a common statistical fallacy. In fact, driver and walker are likely to differ in many ways other than their mode of travel. What seem like natural calculations are stymied by the impracticality, in real life, of changing one variable while leaving all other variables constant.

Stars are made, not born—except when they are born: In 2006, Levitt and Dubner wrote a column for the New York Times Magazine titled “A Star Is Made,” relying on the research of Florida State University psychologist K. Anders Ericsson, who believes that experts arise from practice rather than innate talent. It begins with the startling observation that elite soccer players in Europe are much more likely to be born in the first three months of the year. The theory: Since youth soccer leagues are organized into age groups with a cutoff birth date of December 31, coaches naturally favor the older kids within each age group, who have had more playing time. So far, so good. But this leads to an eye-catching piece of wisdom: The fact that so many World Cup players have early birthdays, the authors write,

may be bad news if you are a rabid soccer mom or dad whose child was born in the wrong month. But keep practicing: a child conceived on this Sunday in early May would probably be born by next February, giving you a considerably better chance of watching the 2030 World Cup from the family section.

Perhaps readers are not meant to take these statements seriously. But when we do, we find that they violate some basic statistical concepts. Despite its implied statistical significance, the size of the birthday effect is very small. The authors acknowledge as much three years later when they revisit the subject in SuperFreakonomics. They consider the chances that a boy in the United States will make baseball’s major leagues, noting that July 31 is the cutoff birth date for most U.S. youth leagues and that a boy born in the United States in August has better chances than one born in July. But, they go on to mention, being born male is “infinitely more important than timing an August delivery date.” What’s more, having a major-league player as a father makes a boy “eight hundred times more likely to play in the majors than a random boy,” they write. If these factors are such crucial determinants of future stardom, what does this say about their theory that a star is made, not born? Practice may indeed be a more important factor than innate talent, but in opting for cute flourishes like these, the authors venture so far from the original studies that they lose the plot.

Making the majors and hitting a curveball: In the same discussion in SuperFreakonomics, Levitt and Dubner write:

A U.S.-born boy is roughly 50 percent more likely to make the majors if he is born in August instead of July. Unless you are a big, big believer in astrology, it is hard to argue that someone is 50 percent better at hitting a big-league curveball simply because he is a Leo rather than a Cancer.

But you don’t need to believe in astrology to realize that the two cited probabilities are not the same. A .300 batting average is 50 percent better than a .200 average. In such a competitive field, the difference in batting averages between a kid who makes the majors and one who narrowly misses out is likely to be a matter of hundredths or even thousandths of a percent. Such errors could easily be avoided.

Predicting terrorists: In SuperFreakonomics, Levitt and Dubner introduce a British man, pseudonym Ian Horsley, who created an algorithm that used people’s banking activities to sniff out suspected terrorists. They rely on a napkin-simple computation to show the algorithm’s “great predictive power”:

Starting with a database of millions of bank customers, Horsley was able to generate a list of about 30 highly suspicious individuals. According to his rather conservative estimate, at least 5 of those 30 are almost certainly involved in terrorist activities. Five out of 30 isn’t perfect—the algorithm misses many terrorists and still falsely identified some innocents—but it sure beats 495 out of 500,495.

The straw man they employ—a hypothetical algorithm boasting 99-percent accuracy—would indeed, if it exists, wrongfully accuse half a million people out of the 50 million adults in the United Kingdom. So the conventional wisdom that 99-percent accuracy is sufficient for terrorist prediction is folly, as has been pointed out by others such as security expert Bruce Schneier.

But in the course of this absorbing narrative, readers may well miss the spot where Horsley’s algorithm also strikes out. The casual computation keeps under wraps the rate at which it fails at catching terrorists: With 500 terrorists at large (the authors’ supposition), the “great” algorithm finds only five of them. Levitt and Dubner acknowledge that “five out of 30 isn’t perfect,” but had they noticed the magnitude of false negatives generated by Horsley’s secret recipe, and the grave consequences of such errors, they might have stopped short of hailing his story. The maligned straw-man algorithm, by contrast, would have correctly identified 495 of 500 terrorists.

This unavoidable tradeoff between false positive and false negative errors is a well-known property of all statistical-prediction applications. Circling back to check all the factors involved in the problem might have helped the authors avoid this mistake.

The climate-change dustup: Rendering research conducted by others is much more challenging than explaining your own work, especially if the topic lies outside your domain of expertise. The climate-change chapter in SuperFreakonomics is a case in point. In it, Levitt and Dubner throw their weight behind geoengineering, a climate-remediation concept championed at the time by Nathan Myhrvold, a billionaire and former chief technology officer of Microsoft. Unfortunately, having moved outside the comfort zone of his own research, Levitt is in no better a position to evaluate Myhrvold’s proposal than we are.

When an actual expert, University of Chicago climate scientist Raymond Pierrehumbert, questioned the claims in Levitt and Dubner’s writing on climate, Levitt retorted that he enjoyed Pierrehumbert’s “intentional misreading” of the chapter. Referring to his own writings on the subject, Levitt wrote, “I’m not sure why that is blasphemy.” We’re not sure on this point either—we could not find a place where Pierrehumbert described Levitt’s writings in those terms. It is easy to be preemptively defensive of one’s own work, or of researchers whose work one has covered. Viewing alternative points of view as useful rather than threatening can help take the sting out of critiques. And if you’re covering subject matter outside your expertise, it pays to get second—and third and fourth—opinions.

Problems—and Solutions

2012-01MacroGelmanFB.jpgClick to Enlarge ImageHow could an experienced journalist and a widely respected researcher slip up in so many ways? Some possible answers to this question offer insights for the would-be pop-statistics writer.

Leave friendship at the door: We attribute many of these errors to the structure of the authors’ collaboration, which, from what we can tell, relies on an informal social network that has many potential failure points. In the original Freakonomics, much of whose content appeared originally in columns for the New York Times Magazine, the network seems to have been more straightforward: Levitt did the research, Dubner trusted Levitt, the Times trusted Dubner, and we the readers trusted the Times’s endorsement. In SuperFreakonomics and the authors’ blog, it becomes less clear: Levitt trusts brilliant stars such as Myhrvold or Oster, Dubner trusts Levitt, and we the readers trust the Freakonomics brand. A more ideal process for science writing (as shown in the illustration above) will likely look much messier—but it offers the promise of better results.

Don’t sell yourself short: Perhaps Levitt’s admirable modesty—he has repeatedly attributed his success to luck and hard work rather than genius—has led him astray. If he feels he is surrounded by economists more exceptional and brilliant than he is, he may let their assertions stand without challenge. Here it might be good to remember the outsider’s perspective so prized by Levitt: If you find yourself hesitant to ask questions that seem “stupid,” or if you feel intimidated, think of yourself as a “rogue.” Just don’t take it so far that you value your own rogueness over empirical evidence.

Maintain checks and balances: A solid collaboration requires each side to check and balance the other side. Although there’s no way we can be sure, perhaps, in some of the cases described above, there was a breakdown in the division of labor when it came to investigating technical points. The most controversial statements are the most likely to be mistaken; if such assertions go unchallenged, you will have little more than a series of press releases linked by gung-ho commentary and eye-popping headlines. Hiring a meticulous editor who can evaluate the technical arguments is another way to avoid embarrassing mistakes.

Take your time: Success comes at a cost: The constraints of producing continuous content for a blog or website and meeting publisher’s deadlines may have adverse effects on accuracy. The strongest parts of the original Freakonomics book revolved around Levitt’s own peer-reviewed research. In contrast, the Freakonomics blog features the work of Levitt’s friends, and SuperFreakonomics relies heavily on anecdotes, gee-whiz technology reporting and work by Levitt’s friends and colleagues. Just like good science, good writing takes time. Remembering this can help hedge against the temptation to streamline arguments or narrow the pool of sources, even in the face of deadlines.

Be clear about where you’re coming from: Levitt’s publishers, along with Dubner, characterize him as a “rogue economist.” We find this odd: He received his Ph.D. from the Massachusetts Institue of Technology, holds the title of Alvin H. Baum Professor of Economics at the University of Chicago and has served as editor of the mainstream Journal of Political Economy. He is a research fellow with the American Bar Foundation and a member of the Harvard Society of Fellows, and has worked as a consultant for Corporate Decisions, Inc. One can be an outsider within such institutions, of course. But much of his economics is mainstream. And his statistical methods are conventional (which, we hasten to add, is not a bad thing at all!). One of the pleasures of reading Freakonomics is Levitt’s knack for finding interesting quantitative questions in obscure corners, such as the traveling bagel salesman and cheating sumo wrestlers. Often such problems have not been extensively studied or even been noticed by others, and in these cases one is hard-pressed to identify any consensus or conventional wisdom. Often, in the authors’ writing, the “conventional” and the “rogue” live side by side. Chapter one of SuperFreakonomics, for instance, can be viewed either as a clear-eyed quantitative examination of the economics of prostitution, or as an unquestioning acceptance of conventional wisdom about gender roles. In exploring new territory, it’s especially important to be plainspoken about where your assumptions come from and what your primary ideas are.

Use latitude responsibly: When a statistician criticizes a claim on technical grounds, he or she is declaring not that the original finding is wrong but that it has not been convincingly proven. Researchers—even economists endorsed by Steven Levitt—can make mistakes. It may be okay to overlook the occasional mistake in the pursuit of the larger goal of understanding the world. But once one accepts this lower standard—science as plausible stories or data-supported reasoning, rather than the more carefully tested demonstrations that are characteristic of Levitt’s peer-reviewed research articles—one really has to take extra care, consider all sides of an issue, and look out for false positive results.

Continued in article

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

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


SEC chief accountant announces delay in decision on IFRS --- http://www.sec.gov/news/speech/2011/spch120511jlk.htm

But Resistance is Futile ---
http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting


No longer headed down the road less taken
Headed down the popular road of capitulation to the power of the IASB
 

Video: The Road Less Taken
Robert Frost --- http://www.youtube.com/watch?v=vz34R1sTqkM

Oops! What will be the new role of condorsers?
Will FASB condorsers be beached whales left flopping in the sand?
Will this fork in the road to IFRS speed U.S. adoption?
Oh my!
"FASB, IASB Chiefs Agree New Convergence Model is Needed," Journal of Accountancy, December 6, 2011 ---
http://www.journalofaccountancy.com/Web/20114869.htm

The heads of the U.S. and international accounting boards that have been working to resolve standards differences agree that their current convergence process should be replaced by one that is more manageable and effective.

FASB Chair Leslie Seidman said Tuesday at the AICPA National Conference on Current SEC and PCAOB Developments that side-by-side convergence is not the optimal model in the long run. Hans Hoogervorst, chair of the International Accounting Standards Board (IASB), spoke immediately after Seidman at the conference in Washington and echoed her sentiment.

Seidman said FASB would like to work with the IASB to complete the current priority convergence projects on revenue recognition, leasing, financial instruments and insurance. But she said indefinite convergence is not a viable option, politically or practically.

“As any observer can see, this process is challenging technically and administratively,” Seidman said. “Plus, we appreciate that the IASB, as an international body, must be responsive to the priorities of other countries that have already adopted IFRS.”

Hoogervorst said the IASB’s convergence history with FASB, which dates back to 2002, has been extremely useful in bringing IFRS and U.S. GAAP closer together. But he said that two boards of independently thinking professionals sometimes simply reach different conclusions.

“It’s tempting to just maintain the status quo,” Hoogervorst said. “But for the long term, the status quo is an unstable way of decision making that inevitably leads to diverged solutions or suboptimal outcomes.”

Hoogervorst cited the example of one part of the financial instruments project, offsetting, where FASB and the IASB were aligned initially but ended up in different places. Because of those differences, he said, the balance sheets of many U.S. banks will look much smaller than those of Asian and European banks. U.S. banks are allowed to show net derivatives, while banks in Asia and Europe must present them in gross.

“Through disclosures, we will try to bridge the gap,” Hoogervorst said. “But I doubt that investors in the U.S. or elsewhere will see it as a satisfactory outcome. At the same time, we at the IASB believe that our conclusion is right for investors. I am sure that Leslie would believe the same for the FASB.”

The next step for convergence could be incorporation of IFRS into U.S. GAAP. The SEC’s long-awaited decision on whether and how to incorporate IFRS for U.S. issuers is at least a few months away, based on a speech Monday by SEC Chief Accountant James Kroeker.

The Financial Accounting Foundation (FAF), in consultation with FASB, has sent a letter to the SEC outlining its preferred path for incorporating IFRS into U.S. GAAP. FAF is FASB’s parent organization.

In the letter, FAF Chairman John Brennan described a number of recommended changes to the approach dubbed “condorsement.” The SEC floated the condorsement concept in a work plan released in May as one possible path to IFRS for U.S. public companies.

Continued in article

Bob Jensen's threads on controversies in accounting standard setting ---
http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting

From Wikipedia --- http://en.wikipedia.org/wiki/The_Road_Not_Taken_%28poem%29

"The Road Not Taken" is a poem by Robert Frost, published in 1915 in the collection Mountain Interval. It is the first poem in the volume and is printed in italics. The title is often mistakenly given as "The Road Less Traveled", from the penultimate line: "I took the one less traveled by".

"The Road Not Taken" is a narrative poem consisting of four stanzas of iambic tetrameter (though it is hypermetric by one beat - there are nine syllables per line, instead of the strict eight required for tetrameter) and is one of Frost's most popular works.

I took the one less traveled by,
And that has made all the difference.

cannot be taken literally : whatever difference the choice might have made, it could not have been made on the non-conformist or individualist basis of one road's being less traveled, the speaker's protestations to the contrary. The speaker admits in the second and third stanzas that both paths may be equally worn and equally leaf-covered, and it is only in his future recollection that he will call one road "less traveled by."

The sigh can be interpreted as one of regret or of self-satisfaction; in either case, the irony lies in the distance between what the speaker has just told us about the roads' similarity and what his or her later claims will be. Frost might also have intended a personal irony; in a 1926 letter to Cristine Yates of Dickson, Tennessee, asking about the sigh, Frost replied, "It was my rather private jest at the expense of those who might think I would yet live to be sorry for the way I had taken in life.

Jensen Comment
The road to U.S. adoption of IFRS up to now has been a road less taken by other nations who had little or no say on about road construction of IFRS standards. The U.S. wanted to help pave an uncharted road.

Now the U.S. may simply take the road more heavily traveled by by other nations --- that road of capitulation to the power of the IASB without insistence about putting domestic cobble stones into the road.

No longer headed down the road less taken
Headed down the popular road of capitulation to the power of the IASB


Ernst & Young
To the Point - Support grows for keeping US GAAP but basing future standards on IFRS

The incorporation of IFRS into the US financial reporting system was once again a focus of discussion at the AICPA National Conference on Current SEC and PCAOB Developments in Washington D.C. this week. Representatives from the SEC, FASB and IASB all indicated that the SEC could incorporate IFRS into the US financial system but retain US GAAP. Our To the Point publication tells you what you need to know about these developments.
 

Click Here
 http://www.ey.com/Publication/vwLUAssets/TothePoint_BB2229_IFRSSECConference_8December2011/%24FILE/TothePoint_BB2229_IFRSSECConference_8December2011.pdf

From Ernst & Young on December 15, 2011

December 2011 Financial reporting briefs issued

We have issued the general and industry-specific December 2011 editions of Financial reporting briefs. These publications provide you with a snapshot of the major accounting and regulatory developments that have occurred during the quarter.

The general Financial reporting briefs and the industry-specific editions are available online.

 

 


"Banks use (IFRS) accounting loopholes to inflate profits and bolster bonuses: Gordon Kerr former banker and author of the report calls for radical reform to stop banks investing in risky assets," by Jill Treanor, The Guardian, December 13, 2011 ---
http://www.guardian.co.uk/business/2011/dec/14/banks-accounting-loopholes-profits-bonuses?newsfeed=true

The cited report is at
http://www.adamsmith.org/sites/default/files/research/files/ASI_Law_of_opposites.pdf

 

December 14, 2011 reply from Jim Peters

I looked at the article in detail, the term “loophole” isn’t quite accurate. The issue is fair value accounting and marking derivatives to market, which I wouldn’t call a loophole. It seems the author considers fair value accounting a loophole because banks record profits in their income statements before there is a hard transaction, which is just fair value accounting. He also complained that mark to market accounting allows banks to record assets at market value even if they can’t be sold for that value. I found that a bit confusing because a market value is, by definition, what the market is currently paying for assets. I could imagine a situation where a bank held enough securities that, if sold all at once, might depress the prices. But other than that, the market is supposed to be the arbiter of asset values in free markets. My summary conclusion is that the title of the article and issue raised is intentionally inflammatory to gain readership and really, the underlying issue is old news.

December 15, 2011 reply from Bob Jensen

Hi Jim and Pat,

I think you're both correct in theory, but the problem in Europe is that companies, especially banks, are not being symmetric in the implementation of the fair value rules --- fair values are moved fully upward but not necessarily fully downward. The IASB has objected to a degree (Tweedie sent a ranting protest letter), but eventually the IASB caved in to pressures from the EU to allow over-estimations of tanking bond values and also delayed IFRS 9 implementation until 2015. We might allege, therefore, that the IASB is being somewhat complicit with corporate overstatements of earnings under fair value accounting in an effort to keep the EU in the fold regarding the IASB standards and interpretations.

In the U.S., FAS 157 is somewhat loose about fair value estimation. For a variety of reasons that sound good on paper companies can depart from mark-to-market adjustments and use fair value (Level 3) models that are not clearly defined. The devil is in the details, and I think companies and their auditors can abuse the subjectivity in the rules. Of course Lehman Brothers derivatives value estimates showed us that this could never happen (wink, wink)!
 

"Lehman Examiner Punted on Valuation,"
by Frank Partnoy, Professor of Law and Finance University of San Diego School of Law and author of Fiasco, Infectious Greed, and The Match King
Naked Capitalism, March 14, 2010 ---
http://www.nakedcapitalism.com/2010/03/frank-partnoy-lehman-examiner-punted-on-valuation.html

The buzz on the Lehman bankruptcy examiner’s report has focused on Repo 105, for good reason. That scheme is one powerful example of how the balance sheets of major Wall Street banks are fiction. It also shows why Congress must include real accounting reform in its financial legislation, or risk another collapse. (If you have 8 minutes to kill, here is my recent talk on the off-balance sheet problem, from the Roosevelt Institute financial conference.)

But an even more troubling section of the Lehman report is not Volume 3 on Repo 105. It is Volume 2, on Valuation. The Valuation section is 500 pages of utterly terrifying reading. It shows that, even eighteen months after Lehman’s collapse, no one – not the bankruptcy examiner, not Lehman’s internal valuation experts, not Ernst and Young, and certainly not the regulators – could figure out what many of Lehman’s assets and liabilities were worth. It shows Lehman was too complex to do anything but fail.

The report cites extensive evidence of valuation problems. Check out page 577, where the report concludes that Lehman’s high credit default swap valuations were reasonable because Citigroup’s marks were ONLY 8% lower than Lehman’s. 8%? And since when are Citigroup’s valuations the objective benchmark?

Or page 547, where the report describes how Lehman’s so-called “Product Control Group” acted like Keystone Kops: the group used third-party prices for only 10% of Lehman’s CDO positions, and deferred to the traders’ models, saying “We’re not quants.” Here are two money quotes:

  • While the function of the Product Control Group was to serve as a check on the
    desk marks set by Lehman’s traders, the CDO product controllers were hampered in
    two respects. First, the Product Control Group did not appear to have sufficient
    resources to price test Lehman’s CDO positions comprehensively. Second, while the
    CDO product controllers were able to effectively verify the prices of many positions
    using trade data and third‐party prices, they did not have the same level of quantitative 
    sophistication as many of the desk personnel who developed models to price CDOs. (page 547) 

     

    Or this one:

    However, approximately a quarter of Lehman’s CDO positions were not affirmatively priced by the Product Control Group, but simply noted as ‘OK’ because the desk had already written down the position significantly. (page 548)

    My favorite section describes the valuation of Ceago, Lehman’s largest CDO position. My corporate finance students at the University of San Diego School of Law understand that you should use higher discount rates for riskier projects. But the Valuation section of the report found that with respect to Ceago, Lehman used LOWER discount rates for the riskier tranches than for the safer ones:

    The discount rates used by Lehman’s Product Controllers were significantly understated. As stated, swap rates were used for the discount rate on the Ceago subordinate tranches. However, the resulting rates (approximately 3% to 4%) were significantly lower than the approximately 9% discount rate used to value the more senior S tranche. It is inappropriate to use a discount rate on a subordinate tranche that is lower than the rate used on a senior tranche. (page 556)

    It’s one thing to have product controllers who aren’t “quants”; it’s quite another to have people in crucial risk management roles who don’t understand present value.

    When the examiner compared Lehman’s marks on these lower tranches to more reliable valuation estimates, it found that “the prices estimated for the C and D tranches of Ceago securities are approximately onethirtieth of the price reported by Lehman. (pages 560-61) One thirtieth? These valuations weren’t even close.

    Ultimately, the examiner concluded that these problems related to only a small portion of Lehman’s overall portfolio. But that conclusion was due in part to the fact that the examiner did not have the time or resources to examine many of Lehman’s positions in detail (Lehman had 900,000 derivative positions in 2008, and the examiner did not even try to value Lehman’s numerous corporate debt and equity holdings).

    The bankruptcy examiner didn’t see enough to bring lawsuits. But the valuation section of the report raises some hot-button issues for private parties and prosecutors. As the report put it, there are issues that “may warrant further review by parties in interest.”

    For example, parties in interest might want to look at the report’s section on Archstone, a publicly traded REIT Lehman acquired in October 2007. Much ink has been spilled criticizing the valuation of Archstone. Here is the Report’s finding (at page 361):

    … there is sufficient evidence to support a finding that Lehman’s valuations for its Archstone equity positions were unreasonable beginning as of the end of the first quarter of 2008, and continuing through the end of the third quarter of 2008.

    And Archstone is just one of many examples.

    The Repo 105 section of the Lehman report shows that Lehman’s balance sheet was fiction. That was bad. The Valuation section shows that Lehman’s approach to valuing assets and liabilities was seriously flawed. That is worse. For a levered trading firm, to not understand your economic position is to sign your own death warrant.

    But as I said in previous messaging on this thread, the issue in this thread is the problem that EU banks are now marking assets fully upward for fair value changes but are not always marking assets fully downward for tanking asset values. Tom Selling's post hits that problem nail directly on the head of the nail:
    http://accountingonion.typepad.com/theaccountingonion/2011/08/peeling-the-onion-on-the-accounting-for-greek-bonds.html

  • Bob Jensen's threads on creative accounting and earnings management are at
    http://www.trinity.edu/rjensen/Theory02.htm#Manipulation


    I would like to nominate Tom Selling as the AECM's Losing Cause Man of the Year --- a True Champion of Losing Causes
    Tom has thrown his support for losing causes both in:
    AECM messaging --- http://listserv.aaahq.org/cgi-bin/wa.exe?A0=AECM&X=17BC0C4A6D4F75CE5D&Y=rjensen%40trinity.edu
    and in his Accounting Onion Blog --- http://accountingonion.typepad.com/

    2011 has been his banner year ever in championing major losing causes.

    I intend my nomination  to be a compliment to Tom rather than any sort of insult

     

    Losing Cause 1 --- Fending Off the Takeover (Convergence) of US GAAP by the International Accounting Standards Board
    Tom has never accepted that international standards will replace domestic accounting standards in the United States. He never felt that convergence was a fait accompli ever since the IOSCO Agreement in July 1995. In that agreement, the New York Stock Exchange (NYSE) went along with an IOSCO promise to accept international standards of listed companies provided the IASB (then called the IASC) put some teeth in its milk toast accounting standards.

    Since the IOSCO Agreement, the road has been slow and arduous for the IASB in getting all member nations to go along with slowly emerging tougher and tougher standards culminating in IAS 39 (soon to be IFRS 9 in 2015) that's still being resisted by the European Union. Meanwhile the FASB has been a willing partner with the IASB in helping to rewrite international standards in what is now known as the Convergence Project. FASB board members seem willing to accept their new roles as condorsers.

    The takeover of US GAAP by the IASB is fait accompli because all the people that count applaud such a takeover. Domestic corporations like the idea of softer principles-based international standards replacing the thousands of bright line hard rules in present U.S. GAAP. Multinational corporations really like the idea of only having one set of accounting standards to deal with year after year. Large auditing firms and the AICPA are salivating over being able to bill companies for IFRS training programs and materials and software.

    The only serious, albeit ineffectual, resistance to IASB takeover of U.S. GAAP has been perpetrated by a few powerless academics like Tom Selling (now a full-time consultant), Shyam Sunder, Ray Ball, David Albrecht, and Bob Jensen. Among these protesters, Tom Selling is our persistent champion.

    However, in a matter of months the SEC will choose in favor of international standards and academic and professional resistance to international standards will be ancient history.

     

    Losing Cause 2 --- Mandatory Rotation (Term Limits) of Audit Firms
    In 2011 the PCAOB put mandatory audit firm rotation out for discussion. The response from the business community and auditing firms has been overwhelmingly negative to the idea.

    Partly as a result of the many letters protesting the idea of mandatory rotation, the PCAOB is leaning toward forgetting about the idea.
    "PCAOB Chair takes aim at auditors' controls testing and says mandatory rotation could be difficult," Reuters, November 11, 2011 ---
    http://www.reuters.com/article/2011/11/11/us-auditor-watchdog-doty-idUSTRE7A95XQ20111111

    The academic community remains largely silent on the issue, but when push comes to shove I suspect that most accounting professors, like me, see more costs than benefits of audit firm rotation even though rotation of the auditor partners themselves on audits is a current practice supported by almost all academics.

    Tom Selling remains the lone voice in favor of mandatory audit firm rotation --- Click Here
    http://accountingonion.typepad.com/theaccountingonion/2011/12/im-for-auditor-term-limits-but.html
    Tom proposes something like seven-year term limits before a corporation has to change its audit firm.

     

    Losing Cause 3 --- Financial Statements Entirely Based on Replacement Costs
    For nearly 100 years, some leading academics have advocated some type of current cost or value replacement of the historical cost basis of accounting. Historical cost never pretended, as repeatedly noted by AC Littleton, to be valuation accounting. Some leading academics pushed for valuation accounting. In 1929 John Canning started the ball rolling for current (replacement) cost accounting with is sometimes called "entry value" accounting in spite of the fact that it is really cost accounting with arbitrary depreciation and depletion formulas rather than "value accounting." In 1939 Kenneth McNeal commenced the ball rolling for exit value accounting where a buildings, vehicles, and factory machinery will be valued at what they can sell for in yard sales rather than amortized historical costs.

    In the 1990s both the IASB and FASB adopted standards requiring the replacement of historical costs of financial instruments with "fair values" based on current trading market prices of those instruments. But we're now discovering that interpretations that fair value declines be "permanent" rather than transitory market movements are causing some chagrin among financial instrument fair value accounting advocates who want to see Greek bonds written down to almost nothing.

    And, except in isolated instances, fair value accounting is not yet required for operating assets. Exit value accounting is required for non-going concerns where it becomes more likely that the operating assets of a non-going concern will be sold off piecemeal in yard sales. Replacement costs were required for operating assets in the short-lived FAS 33 1980s experiment that went down in flames.

    From an academic standpoint the literature on value accounting has probably been more focused upon the bad features (e.g., goodwill accounting) of historical cost accounting rather than the convincing research that some type of "value" accounting justifies the cost of generating annual financial statements on a "value" accounting basis. Thousands of pages of academic research journals were devoted to sermons on the evils of historical cost accounting. But preachers like John Canning, Kenneth McNeal, Ray Chambers, Bob Sterling, Edgar Edwards, Phillip Bell, and others became less convincing as accountics science research emerged in the 1990s showing that historical cost accounting really did have value for both earnings forecasting and stock price forecasting. Nobody lamented when the FASB's experiment for requiring supplemental current (replacement) cost statements was terminated as not having sufficient benefits to justify the costs of generating current cost data.

    John Canning's current (replacement) cost baton has now been passed to Tom Selling. Like John Canning, Tom advocates that business firms spend tens of billions of dollars annually shifting from traditional historical cost reporting of operating assets to replacement costs. The problem is that replacement cost advocates can point to zero research convincing us that the benefits of such drastic changes in financial statements justify the costs.

    But if his replacement cost advocacy ever gets some traction, Tom Selling will have some powerful allies. Real estate appraisers will jump at the chance to earn billions annually appraising factory buildings, office buildings, retail stores, malls, hotels, farm land, ranch land, etc. Engineers will be ecstatic over new jobs estimating what portion of new technology systems (such as ERP systems) are really replacements of old technology systems. Audit firms will probably jump on the band wagon of having audit fees soar through the roof. Lawyers will dance in the streets when they are able to sue corporations and audit firms for misleading value estimations.

    But there's one very powerful group in society that will not dance in the streets --- the business firms that will have to pay the added tens of billions of dollars for their audited financial statements. And these business firms own the most representatives in the U.S. House and Senate. Hence, Tom's advocacy of replacement cost accounting for operating assets is dead before it's even led up to the starting gates.

     

    Nevertheless, I would like to nominate Tom Selling as the AECM's Losing Cause Man of the Year ---
    a True Champion of Losing Causes

    I intend my nomination to be a compliment to Tom rather than any sort of insult. Tom frequently interjects clever reasons for resisting the IASB takeover of U.S. GAAP. Tom presents some good reasons why audit firms should be rotated. His arguments for replacement cost accounting are probably his weakest arguments because there's just no convincing research that the cost of verifiable replacement cost numbers justifies the benefits of such numbers.

    But Tom never gives up!

    Hence I nominate him for the AECM's Losing Cause Man of the Year --- a True Champion of Losing Causes.

    December 30, 2011 reply from Tom Selling

    Bob,

    Bob, I have strong views and I don’t expect everyone to agree with all of them.  I appreciate the compliment, especially coming from you.  However, I need to make it clear that I see nothing in this to joke about – however well-meaning the joking might be.  Here’s why (and be forewarned—I am not going to mince my words):

     

    ·         From the standpoint of my personal economics, my truculence and candor have done me more harm than good.  Why do I persist?  I honestly can’t tell you why, because I believe that such introspection would be more self-serving than informative. I prefer to let my actions speak for themselves. 

    ·         You state that the academic community remains largely silent on the issue of mandatory audit firm rotation, but I say that the academic community has remained (with few exceptions) silent on all of these issues that you inaccurately characterize as “lost causes” --  IFRS, auditor rotation and independence, and crappy accounting standards.  I never dreamed that academics as a group would prove themselves to be such milquetoasts at such a critical juncture for society and especially the profession on which we claim to have a unique and valuable perspective.  I can’t know what I would have been writing and saying if I were still a faculty member somewhere, but I would like to think that my training and upbringing would not have permitted me to stifle strongly-held points of view that directly affect my teaching and/or research activities.  The  academic accountant who denies having strong viewpoints on at least one of these topics that you inaccurately characterize as “lost causes,” should be asking themselves what the heck they do actually think about!   

    ·         As to costs and benefits on each of the causes you mention, you seem to focus on incremental costs (like amounts paid for experts to make various estimations); and I focus on avoidable costs because I believe they are many times larger: 

    o   The vast amounts spent on auditors and accountants need only be a small fraction of the amounts that are currently incurred.

    o   The amounts of shareholder value destroyed because of “earnings management” and similar games that executives play can be stupefying if you think of the role that financial reporting played in Enron, Worldcom, GM, Lehman, S&Ls in the 1990s, financial institutions over the last few years, just to name a few. 

    ·         There is plenty more value waiting to be destroyed by crappy accounting and auditing, and I can’t believe how few academics act as if they are indifferent to the opportunity to try and prevent it from happening.  Bob, you may not agree that replacement cost accounting is the answer, but surely you see that financial reporting has many more and far more unsightly warts than simply goodwill accounting!  The financial reporting system we have is not analogous to the result of some Darwinian evolutionary process of natural selection.  It is -- in the words of a former FASB member, and despite (or perhaps because of) all of the supportive research on information content, value relevance, etc. -- a  “garbage truck.” 

    I’ve said my peace.  Happy New Year to you, Erika, and everyone who reads my rants on AECM!

     

    Best,
    Tom

     

    Thomas I. Selling PhD, CPA
    Weblog:
    www.accountingonion.com
    Website: www.tomselling.com
    Email:
    tom.selling@grovesite.com
    Tel: 602-228-4871 (mobile)

    December 30, 2011 reply from Bob Jensen

    Hi Tom,

    Thanks for the informative response.

    I never intended my nomination to be the least bit humorous. I think I implied in the tidbit that I thought you were dead serious even when I view the issues as "lost causes." The only issue that will probably be a lost cause in the near future will be convergence to international standards --- I think that's a done deal waiting to be announced by the SEC. If I were Pat Walters I'd be chilling the champagne already.

    Audit firm rotation may keep rearing up over the years, but I think if it comes to a head it will probably be in Europe where the atmosphere for the Big Four auditing firms is more hostile. Rather than audit firm rotation, however, Europe may insist on downsizing the largest auditing firms before it insists on audit firm rotation. Part of this is complicated by hostility toward the United States. Recall how hostile Europe was about Microsoft's alleged repression of competition from European competitors.

    On Issue 3, verifiable and accurate replacement cost numbers for operating assets are  just too expensive in my viewpoint relative to unknown and unmeasureable benefits. The major expense may well come from appraisers and engineers more than auditors reviewing assumptions, but the auditors are going to insist upon quality replacement cost numbers and herein lies the expense to clients.

    One of the failings of FAS 33 is that it allowed cheap-shot replacement cost numbers and investors and analysts just were not interested in the outcomes.

    Would investors and analysts have been more interested in FAS 33 numbers if they had been quality numbers costing billions of dollars for appraisers and engineers? Perhaps. But I don't think analysts and investors care much about the replacement costs of operating assets if there's a low probability in going concerns that these will be replaced in the near future. And they are not particularly interested in fair values if fixed operating assets like hotels and earth movers have very low probability of being disposed of in present operations. Analysts might be interested in the disposal values only when disposal becomes a genuine alternative, but the standards already allow this type of exit value accounting for assets awaiting disposal.

    Your argument that replacement costs should have some value in terms of stewardship accounting. But investors and analysts are more interested in the "value in use" of  complex sets of operating booked and unbooked assets..

    To my knowledge replacement cost theorists have never researched the costs and benefits of generating costs and benefits of grouped operating assets that are not being considered for disposal. In part this is due to being unable to measure the covariance (synergy) values above and beyond the replacement costs of individual machines and buildings, More importantly replacement cost researchers bail out when it comes to measuring interactive (synergy) value in use of unbooked intangible assets and liabilities that we cannot begin to value such as the synergy values of a work force in a factory or the human capital value of R&D workers.

    In any case Tom, I hope you will continue to be a driving force for causes you believe in in your professional career. And I hope you will be open to debates from others who do not side with your positions. At the moment you seem to be quite open to debate. I will continue to help you when I can and argue with you when I don't agree.

    Your gravestone might read that nobody can accuse Tom Selling of not trying.

    My gravestone might read that Bob Jensen never ducked out of a good fight.

    Neither one of us would be very good diplomats or mere lurkers on the AECM.

    Respectfully,
    Bob Jensen

     


    Question
    Even if it's impossible for the Victoria's  Secret store in a Galleria Mall to ever own that cube of air space, will the CPA auditor's insist that the retail outlet owns the store and most others like for accounting purposes?

    Answer
    Honestly, I'm not now sure, especially unless we know more about cancellation clauses that companies like Victoria's Secret may insist upon in future lease negotiations. I don't think this new lease standard will be a poster child for accounting standard neutrality. But then there are a lot of others that are lesser candidates for poster children --- with FAS 123R leading the way.

    "FASB, IASB Make Progress in Convergence Project on Leasing," Journal of Accountancy, December 16, 2011 ---
    http://www.journalofaccountancy.com/web/20114910.htm

    In one of their most important convergence projects, FASB and the International Accounting Standards Board (IASB) have reached tentative decisions on aspects of the treatment of leases in financial reporting.

    How to account for leases is one of four remaining major areas in which FASB and the IASB are trying to reach convergence in standards.

    The boards issued the initial exposure draft on leases in August 2010. In July, the boards announced a decision to re-expose a revised proposal. The boards intended to complete their deliberations in the third quarter of this year, with hopes of publishing a revised exposure draft shortly afterward.

    That draft has yet to emerge. But the boards announced tentative decisions with regard to leases as a result of their joint meetings this week.

    On cancellable leases, the boards tentatively decided that the lease proposals should apply only to periods when enforceable rights and obligations exist. Cancellable leases would be defined as short-term leases if the initial noncancellable period, combined with any notice period, is less than one year.

    These standards would exist for leases that:


    The IASB tentatively decided that a lessor should recognize rental income on a straight-line basis or another systematic basis if that basis more closely represents the pattern of earnings from the investment property, according to a FASB summary of the joint board meeting.

    FASB’s tentative decision follows a similar path, but only for lessors that are not investment property entities or investment companies.

    According to FASB’s summary of the discussions, the boards also tentatively decided that a lessor with leases of investment property that doesn’t fall within the scope of the receivable and residual approach should recognize only the underlying investment property on its statement of financial position. Accrued or prepaid rental income should be recognized as well.

    Continued in article

    Bob Jensen's threads on lease accounting are at
    http://www.trinity.edu/rjensen/Theory02.htm#Leases


    "The Most Satisfied Business School Graduates," Forbes, December 5, 2011 --- Click Here
    http://www.forbes.com/sites/kurtbadenhausen/2011/12/05/the-most-satisfied-business-school-graduates/?feed=rss_home

    The best teaching universities according to RateMyProfessor ---
    http://www.ratemyprofessors.com/topLists11/topLists.jsp


    "Who Are the Top Technology Innovators in Higher Education?" by Marc Parry, Chronicle of Higher Education, December 12, 2011 --- Click Here
    http://chronicle.com/blogs/wiredcampus/who-are-the-top-technology-innovators-in-higher-education/34638?sid=wc&utm_source=wc&utm_medium=en

    This is only at the nominating stage at this point.
    It is, however, informative to read the nominations already listed as comments to the above article.
    I liked Paul Miller's nomination and try very hard year after year to serve accounting like Tom Bruce serves law.

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


    Marian E. Koshland Integrated Natural Sciences Center at Haverford College
    Biography of an Experiment --- http://www.haverford.edu/kinsc/boe/

    The Biography of Experiment Series is an ongoing cooperative effort between students and faculty at Haverford College to expose undergraduates to the stories behind influential manuscripts in the Natural Sciences.

    Posted on this site are excerpts of original manuscripts, each of which has been annotated by undergraduates who have spent a semester critically evaluating the work and assessing the authors’ own perspectives.

    By including their interviews with primary investigators, links to background information, and tips for understanding and critically interpreting data, these undergraduates have developed a unique pedagogical tool that should enhance their peers ability to navigate and understand the primary literature. Developing scholars will benefit from their colleagues’ insights as they are invited to explore the living history of a scientific inquiry.

    Jensen Comment
    Some of these are great learning modules for students in experimental science. Most of the cases are in the natural sciences.

    However once case involves the psychology of prediction: 
    On the Psychology of Prediction (Daniel Kahneman and Amos Tversky), 1973 ---
    http://www.haverford.edu/kinsc/Biography/Psych/Armstrong/BOEhome.htm
    This is one of the classic works that led to a Nobel Prize for Professor Kahneman

    These resources might be especially useful to accounting students seeking to know what went wrong with accountics science ---
    http://www.trinity.edu/rjensen/theory01.htm#WhatWentWrong

     


    Accounting Doctoral Program Behavioral Experimentation

    December 2, 2011 reply from Bob Jensen to Dan Stone

    Hi Dan,

    You may want to take a look at the terrific BYU database of of information about accounting doctoral programs ---
    http://www.byuaccounting.net/mediawiki/index.php?title=University_Information

    Your question is really not clear, because there are core courses in statistics, econometrics, and probability theory in virtually all accounting doctoral programs in AACSB accredited universities. In other words, it is not usually possible to avoid studying econometrics by choosing a behavioral track or non-quantitative beyond the core requirements. Michigan State many years ago had no required core courses, but I'd bet my shirt that MSU now has some core courses that require econometrics, statistics, and probability theory.

    Various programs have archival versus behavioral tracks versus other tracts (e.g., accounting history at Ole Miss. and Case Western)  beyond the core requirements. For example, look at Question 14 about Cornell University that is made public on a BYU site ---
    http://aaahq.org/temp/phd/StudyMaterials/Questions/CornellUniv.pdf

    BYU has a unique masters program (called a PhD Prep Track) to prepare accounting students for admission into accounting doctoral programs (this Prep Track program won an AAA Innovation in Accounting Education Award) ---
    http://www.byuaccounting.net/mediawiki/index.php?title=So_you_want_to_get_a_Ph.D.?

    You may want to take a look at the terrific BYU database of of information about accounting doctoral programs ---
    http://www.byuaccounting.net/mediawiki/index.php?title=University_Information

    Related to this are issues of why most accounting doctoral students these days prefer archival research to other types of research, which accounts somewhat for the domination of archival research professors and courses and databases in accounting doctoral programs.

    Some of the reasons are given below:

    Respectfully,
    Bob Jensen

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


    "Technology 2012 Preview: Part 1 Experts explain what should be at the top of your tech wish list for the new year,"  by Jeff Drew,  Journal of Accountancy, November 2011 ---
    http://www.journalofaccountancy.com/Issues/2011/Nov/20114310.htm

    Bob Jensen's neglected threads on accounting software ---
    http://www.trinity.edu/rjensen/Bookbob1.htm#AccountingSoftware

    December 3, 2011 message from Rick Newmark

    For collaboration tools, we used Sharepoint in our intro to MIS course, which is required for all business students. Since we adopted Pearson products, Pearson provided with the full version of Sharepoint and 200 access codes. Students can rent the ebook for 180 days on Coursesmart for $24 (list price of hard copy is $56). My techphobic students struggled with learning Sharepoint, and all of us, I included, did take some time to get the hang of it. I think Sharepoint makes a great tool for an AIS course because students have to make many security/control/access decisions for their own group sites. For example, what kind of permissions do you grant to various people/groups? How are you going to control access to documents? Are you going to use check-out/check-in for documents or are you going to let multiple people edit simultaneously?

    I am going to use it in my graduate AIS course next semester for the reasons stated above and because they will likely use Sharepoint or some other set of collaboration tools in their professional careers.

    Rick Newmark

    Bob Jensen's somewhat neglected threads on accounting education software can be found at
    http://www.trinity.edu/rjensen/Bookbob1.htm#AccountingSoftware


    Credit Scoring Models in the U.S. --- http://en.wikipedia.org/wiki/Credit_score_%28United_States%29

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

    "A Credit Score That Tracks You More Closely," by Tra Siegel Bernard,  The New York Times, December 2, 2011 --- Click Here
    http://www.nytimes.com/2011/12/03/your-money/credit-scores/corelogics-new-credit-score-exposes-even-more-of-your-financial-life.html?_r=1

    Anyone who has recently applied for a mortgage knows that lenders are already looking much more closely at your financial affairs. But soon, they’ll be able to easily delve into the deepest recesses of your financial life, accessing information that never before appeared on your credit report.

    This week, a company called CoreLogic introduced a new type of credit file, which is based on the giant repository of consumer data it maintains on just about everything that most of the traditional credit bureaus do not: missed rental payments that have gone into collection, any evictions or child support judgments, as well as any applications for payday loans, along with your repayment history.

    The new report also includes any property tax liens and whether you’ve fallen behind on your homeowner’s association dues. It may reflect that you now owe more than your house is worth or if you own any other real estate properties outright. It also is supposed to catch mortgages made by smaller lenders that the big credit bureaus may have missed.

    The idea, CoreLogic says, is to provide lenders with more details about prospective borrowers, supplementing what they already know through the more traditional credit reports furnished by the big three credit bureaus, Equifax, Experian and TransUnion. Moreover, CoreLogic has formed a partnership with FICO — the provider of one of the most popular credit scores used by lenders — which will formulate a new consumer score based on the new data.

    Perhaps it’s not surprising that a company decided to pull together this information, since much of it is already publicly available. But because it comes on top of all the other information that’s being collected about you — your exact location at every minute, where you’ve been on the Web — you can’t help but feel that some of these companies know more about your activities than your spouse.

    While the CoreScore credit report became available to all types of lenders on Wednesday, the actual score, which will be ready in March, is being created specifically for mortgage and home equity lenders, though it could eventually be developed for other types of credit.

    For many consumers, the files are likely to reveal black marks that previously went undetected, which may damage an otherwise clean record. But the companies contend that it works both ways: The added information could help consumers with thin credit files by illustrating positive behaviors elsewhere, say making timely rent payments.

    So why now? Clearly, the two companies saw a business opportunity. Lenders, who just a few years back looked the other way, remain particularly skittish about mortgage lending and are looking for more information about prospective borrowers’ ability to pay their debts.

    “Lending is very constrained and origination volumes need to grow to make for a profitable mortgage business,” said Joanne Gaskin, director of product management global scoring at FICO. “So lenders are looking for ways to expand, but to expand safely.”

    An estimated 100 million American consumers will have a CoreScore credit report, while more than 200 million people have traditional reports from the big three bureaus. Though the new information can influence a lender’s decision, the new score isn’t replacing the classic scores used in the automated mortgage underwriting systems kept by Fannie Mae, Freddie Mac or the Federal Housing Administration, which buy or back the vast majority of mortgages (though CoreLogic said it has let the agencies know what it is doing). But the added information may sway a lender to charge you more (or less) in interest on a mortgage. Lenders of all stripes, including auto lenders, have access to the reports, and they will be marketed to employers and insurers, too.

    Ms. Gaskin said that FICO was still tweaking the credit score’s formula. But the next step is to build something that will try to get even deeper inside your financial mind: The company plans to create a more sophisticated tool that will predict how you might behave under different loan terms.

    The reason all of this is such a big deal, according to John Ulzheimer, president of consumer education at SmartCredit.com, is that CoreLogic already has major inroads with many lenders. When lenders want to pull your credit file, they go to a company like CoreLogic, which collects all three reports from the traditional bureaus, cleans them up a bit and merges them into a more user-friendly report. “They already have this massive market of mortgage companies that buy these credit reports from them,” he said. “It’s not like they have to go out and convince the companies to work with them.”

    Continued in article

    Bob Jensen's threads on FICO Scores ---
    http://www.trinity.edu/rjensen/FraudReporting.htm#FICO


    "Regulators propose credit rating alternatives," by David Clarke, Reuters, December 7, 2011 ---
    http://www.reuters.com/article/2011/12/07/us-financial-regulation-fdic-idUSTRE7B61IG20111207

    U.S. banking regulators on Wednesday released their first proposal for replacing the work of much-maligned credit rating agencies in the rules that govern bank capital requirements.

    The 2010 Dodd-Frank financial oversight law bans any reliance on credit rating agencies, such as Moody's Corp and McGraw-Hill Cos' Standard & Poor's, in banking rules but regulators have struggled to come up with an alternative.

    Until a replacement is found, it will be difficult for the United States to begin implementing new international capital requirements such as Basel III.

    The Federal Deposit Insurance Corp board on Wednesday voted to put out the alternatives for comment through February 3.

    The credit rating alternatives proposal released on Wednesday would only directly affect a rule to update capital requirements regarding risks posed by banks' trading books. This rule applies only to the largest U.S. banks such as JPMorgan Chase, Goldman Sachs and Citigroup.

    The credit rating proposal is expected, however, to lay the groundwork for a rule to be released next year on how to get rid of references to credit ratings in all bank capital rules.

    That rule will affect banks of all sizes.

    Among the alternatives proposed on Wednesday are using the assessments produced by the Organisation for Economic Co-operation and Development on the fiscal health of individual countries as a marker for assessing the risk of sovereign debt held by banks.

    For certain assets, market indicators - such as stock price volatility - would be used to measure risk.

    The amount of capital that would have to be held against securitizations would, in part, depend on the risk of the assets that make up the different parts, or tranches, of the security.

    REGULATOR ANGST

    How to assess the risk of assets is key to determining how much capital banks should hold to guard against financial shocks that could sink an institution and roil the economy.

    Credit rating agencies have been pilloried for not recognizing the risk of such things as mortgage backed securities leading up to the 2007-2009 financial crisis, though Dodd-Frank Congress sought to eliminate their official use by bank regulators.

    Still, the directive is one of the rare parts of Dodd-Frank that regulators have openly pleaded with Congress to change.

    Their argument has been that while reducing a reliance on credit ratings agencies is sensible, completely casting aside their work is troublesome because good alternatives are not readily available.

    That plea has fallen on deaf congressional ears.

    On Wednesday, regulators said they have made their best effort to comply with the law but noted they are entering unchartered territory.

    "The approaches that are being proposed are intended to be simple and easily implemented, but they are relatively novel," Acting Comptroller of the Currency John Walsh said.

    With this in mind officials said they will carefully review all the feedback they receive.

    Regulators were under pressure to move forward with the alternatives now because the rule governing capital requirements for trading books is supposed to be in place early next year.

    In response to the 2007-2009 financial crisis regulators from across the world agreed to update their capital guidelines to better take into account the risks posed by such things as securities made up of mortgages, which played a key role in the meltdown.

    This update for trading books is known as Basel 2.5.

    Continued in article

    Bob Jensen's threads on credit rating company scandals leading up to having to bail out Wall Street companies that bought and sold poisoned collateralized debt obligations (CDOs) ---
    http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze


    James Madison wrote disapprovingly in 1792 of “a government operating by corrupt influence, substituting the motive of private interest in place of public duty” where eventually “the terror of the sword, may support a real domination of the few, under an apparent liberty of the many.”

    "The corporations that occupy Congress," by David Coy Johnston, Reuters, December 20, 2011 ---
    http://blogs.reuters.com/david-cay-johnston/2011/12/20/the-corporations-that-occupy-congress/

    Some of the biggest companies in the United States have been firing workers and in some cases lobbying for rules that depress wages at the very time that jobs are needed, pay is low, and the federal budget suffers from a lack of revenue.

    Last month Citizens for Tax Justice and an affiliate issued “Corporate Taxpayers and Corporate Tax Dodgers 2008-10″. It showed that 30 brand-name companies paid a federal income tax rate of minus 6.7 percent on $160 billion of profit from 2008 through 2010 compared to a going corporate tax rate of 35 percent. All but one of those 30 companies reported lobbying expenses in Washington.

    Another report, by Public Campaign, shows that 29 of those companies spent nearly half a billion dollars over those three years lobbying in Washington for laws and rules that favor their interests. Only Atmos Energy, the 30th company, reported no lobbying.

    Public Campaign replaced Atmos with Federal Express, the package delivery company that paid a smidgen of tax — $37 million, or less than one percent of the $4.2 billion in profit it reported in 2008 through 2010.

    For the amount spent lobbying, the companies could have hired 3,100 people at $50,000 for wages and benefits to do productive work.

    The report – “For Hire: Lobbyists or the 99 percent” – says that while shedding jobs, the 30 companies are “spending millions of dollars on Washington lobbyists to stave off higher taxes or regulations.”

    These and other companies have access to lawmakers and regulators that are unavailable to ordinary Americans.

    CALL CONGRESS

    Doubt that? Dial the Capitol switchboard at 1 (202) 224-3121, ask for your representative’s office and request a five-minute audience, in person, at the lawmaker’s convenience back in the home district.

    In more than a decade of lectures recommending this, I have yet to have a single person email me (see address to the right) about having scored a private meeting with the representative called.

    Corporations have vast resources to pour into ensuring access — resources that expand when little or no taxes are paid on profits thanks to rules they previously lobbied into law.

    Companies form nonprofit trade associations, hire former lawmakers and agency staffers, and have jobs to dole out to lawmakers after they leave office and to friends and family while they’re in office. Thanks to the Supreme Court’s Citizens United decision, corporations can now pour unlimited sums into influencing elections. So can unions, but they are financial pipsqueaks compared to companies.

    Then there are political action committees, or PACs, to finance campaigns as well as donations by executives and major shareholders.

    Combine all this and you have a powerful formula for making rules that favor corporate interests over human interests, something that the framers of the U.S. Constitution understood more than two centuries ago.

    James Madison wrote disapprovingly in 1792 of “a government operating by corrupt influence, substituting the motive of private interest in place of public duty” where eventually “the terror of the sword, may support a real domination of the few, under an apparent liberty of the many.”

    FEARS COME TRUE

    The late U.S. president’s fears have come to life. For swords, just substitute police with rubber bullets, batons and pepper spray at Occupy demonstrations, including perfectly peaceful ones.

    Company reports to shareholders show that among the 30 companies in the Public Campaign report, the 10 firms that spent the most on lobbying during the same three-year period fired more than 93,000 American workers.

    Those firings took place in an economy that had five million fewer people with any work in 2010 than in 2008.

    Continued in article

     

    Bob Jensen's threads on corporate governance are at
    http://www.trinity.edu/rjensen/fraud001.htm#Governance

     

     


    XBRL in the News
    "Staff Observations from the Review of Interactive Data Financial Statements, SEC, December 13, 2011---
    http://www.sec.gov/spotlight/xbrl/staff-review-observations-121311.shtml

    . . .

    We continue to see the same issues around the topics of formatting of the financial statements, negative values, use of unnecessary extensions, and the completeness of the tagging (i.e., parentheticals and string values). Filers should continue to pay attention to these topics when submitting information to the Commission and should carefully review our previous Staff observations (http://www.sec.gov/spotlight/xbrl/staff-review-observations.shtml).

    Continued in article (much more)

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


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

    If the law passes in its current form, insider trading by Congress will not become illegal.
    "Congress's Phony Insider-Trading Reform:  The denizens of Capitol Hill are remarkable investors. A new law meant to curb abuses would only make their shenanigans easier," by Jonathan Macey, The Wall Street Journal, December 13, 2011 ---
    http://online.wsj.com/article/SB10001424052970203413304577088881987346976.html?mod=djemEditorialPage_t

    Members of Congress already get better health insurance and retirement benefits than other Americans. They are about to get better insider trading laws as well.

    Several academic studies show that the investment portfolios of congressmen and senators consistently outperform stock indices like the Dow and the S&P 500, as well as the portfolios of virtually all professional investors. Congressmen do better to an extent that is statistically significant, according to studies including a 2004 article about "abnormal" Senate returns by Alan J. Ziobrowski, Ping Cheng, James W. Boyd and Brigitte J. Ziobrowski in the Journal of Financial and Qualitative Analysis. The authors published a similar study of the House this year.

    Democrats' portfolios outperform the market by a whopping 9%. Republicans do well, though not quite as well. And the trading is widespread, although a higher percentage of senators than representatives trade—which is not surprising because senators outperform the market by an astonishing 12% on an annual basis.

    These results are not due to luck or the financial acumen of elected officials. They can be explained only by insider trading based on the nonpublic information that politicians obtain in the course of their official duties.

    Strangely, while insider trading by corporate insiders has long been the white collar crime equivalent of a major felony, the Securities and Exchange Commission has determined that insider trading laws do not apply to members of Congress or their staff. That is because, according to the SEC at least, these public officials do not owe the same legal duty of confidentiality that makes insider trading illegal by nonpoliticians.

    The embarrassing inconsistency was ignored for years. All of this changed on Nov. 13, 2011, after insider trading on Capitol Hill was the focus of CBS's "60 Minutes." The previously moribund "Stop Trading on Congressional Knowledge Act" (H.R. 1148), first introduced in 2006, was pulled off the shelf and reintroduced. The bill suddenly had more than 140 sponsors, up from a mere nine before the show.

    The "Stock" Act, as it is called, would make it illegal for members of Congress and staff to buy or sell securities based on certain nonpublic information. It would toughen disclosure obligations by requiring congressmen and their staffers to report securities trades of more than $1,000 to the clerk of the House (or the secretary of the Senate) within 90 days. And it would bring the new cottage industry in Washington, the so-called political intelligence consultants used by hedge funds, under the same rules that govern lobbyists. These political intelligence consultants are hired by professional investors to pry information out of Congress and staffers to guide trading decisions.

    Publicly, House members echo bill sponsor Rep. Louise Slaughter (D., N.Y) in saying things like: "We want to remove any current ambiguity" about whether insider trading rules apply to Congress. Or as co-sponsor Rep. Timothy Walz (D., Minn.) put it: "We are trying to set the bar higher for members of Congress."

    On closer examination, it appears that what Congress really wants is to keep making the big bucks that come from trading on inside information but to trick those outside of the Beltway into believing they are doing something about this corruption. For one thing, the rules proposed for Capitol Hill are not like those that apply to the rest of us. Ours are so broad and vague that prosecutors enjoy almost unfettered discretion in deciding when and whom to prosecute.

    Congress's rules would be clear and precise. And not too broad; in fact they are too narrow. For example, the proposed rules in the Stock bill are directed only at information related to pending legislation. It would appear that inside information obtained by a congressman during a regulatory briefing, or in another context unrelated to pending legislation, would not be covered.

    At a Dec. 6 House hearing, SEC enforcement chief Robert Khuzami opined that any new rules for Congress should not apply to ordinary citizens. He worried that legislators might "narrow current law and thereby make it more difficult to bring future insider trading actions against individuals outside of Congress."

    This don't-rock-the-boat approach serves the interests of the SEC because it maximizes the commission's power and discretion, but it's not the best approach. The sensible thing to do would be to rationalize the rules by creating a clear definition of what constitutes insider trading, and then apply those rules to everyone on and outside Capitol Hill.

    If the law passes in its current form, insider trading by Congress will not become illegal. I predict such trading will increase because the rules of the game will be clearer. Most significantly, the rule proposed for Congress would not involve the same murky inquiry into whether a trader owed or breached a "fiduciary duty" to the source of the information that required that he refrain from trading.

    Continued in article

    From The Wall Street Journal Accounting Weekly Review on December 8, 2011

    Congress Pushing Curb on Trading
    by: Brody Mullins
    Dec 07, 2011
    Click here to view the full article on WSJ.com
    Click here to view the video on WSJ.com WSJ Video
     

    TOPICS: Disclosure, Ethics, Insider Trading, Securities and Exchange Commission

    SUMMARY: The article describes the case behind enacting legislation to ban insider-trading by members of Congress and their aides. This initiative was spurred in part by WSJ reporting on the topic. The related video presents the case for why Congressional insider-trading doesn't matter as does the 2009 opinion page piece listed in the related articles.

    CLASSROOM APPLICATION: The article is useful in classes covering topics in ethics or in the relationship between information and market responses.

    QUESTIONS: 
    1. (Introductory) What is insider trading?

    2. (Advanced) In general, how does the Securities and Exchange Commission undertake enforcement actions against suspected violations of insider trading rules by corporate insiders?

    3. (Advanced) On what basis are members of Congress considered not to be subject to insider-trading rules?

    4. (Introductory) Who is Rober Khuzami? What is his suggestion for resolving questions of whether members of Congress and their aides are undertaking improper insider trading?

    5. (Advanced) What is a blind trust? What role might blind trusts and disclosure practices provide in alleviating this issue?
     

    Reviewed By: Judy Beckman, University of Rhode Island
     

    RELATED ARTICLES: 
    Panel Cancels Vote on Insider Ban
    by Brody Mullins
    Dec 08, 2011
    Online Exclusive

    Learning to Love Insider Trading
    by Donald J. Boudreaux
    Oct 24, 2009
    Page: W1

     

    "Congress Pushing Curb on Trading," by: Brody Mullins, The Wall Street Journal, December 7, 2011 --- Click Here
    http://online.wsj.com/article/SB10001424052970204083204577082751846890664.html?mod=djem_jiewr_AC_domainid

    Congress is pressing its most concerted effort in decades to curb improper stock investing by U.S. lawmakers and their aides, with a focus on preventing trading based on nonpublic information gathered in the halls of Washington.

    A House bill to outlaw insider trading on Capitol Hill has the support of more than 180 lawmakers, up from nine a month ago. In the Senate, lawmakers introduced two similar proposals a few weeks ago that have won support of more than 20 senators.

    In a House hearing on the matter Tuesday, lawmakers batted around other ideas, such as requiring lawmakers to hold their finances in blind trusts, and mandating near-simultaneous disclosure of stock trades.

    The rules covering how lawmakers can trade stocks, and what constitutes inside information in Congress, are murky. Congressional ethics rules justifying stock ownership say lawmakers shouldn't be insulated from "the personal and economic interests" of their constituents. At the same time, lawmakers regularly pick up information through briefings with top officials that is not available to the investing public.

    At Tuesday's hearing, the director of enforcement for the Securities and Exchange Commission gave the legislation a boost by saying it would make it easier for the agency to prosecute insider-trading cases against members of Congress, something that has never happened. House and Senate committee chairman have scheduled votes on the various proposals next week.

    The moves, inspired in part by a series of articles in The Wall Street Journal, are gaining momentum on Capitol Hill as approval ratings for Congress nose-dive. The Journal analysis last year found that a total of 86 legislators and congressional aides on both sides of the aisle reported frequent trades of securities in 2009. One aide posted nearly 2,300 trades in his brokerage account.

    The push received a boost after a recent report on CBS's "60 Minutes" also examined lawmakers' trading practices, and lawmakers say approving such legislation is a good way for Congress to help restore the faith of Americans in government.

    "It is not right that Congress can benefit from information that is not available to other Americans," Rep. Tim Walz (D., Minn.) said at the House hearing. Mr. Walz is a chief co-sponsor of the Stop Trading on Congressional Knowledge Act, or Stock Act.

    Despite the recent momentum, the legislation is unlikely to make it into law this year. Time is running out on the calendar and not all lawmakers believe legislation is needed.

    A key player in the push is Rep. Spencer Bachus (R., Ala.), chairman of the House Financial Services Committee. Last year, the Journal documented that Mr. Bachus made more than 200 trades in stocks and options in 2008, according to congressional disclosure forms. He often made multiple trades per day in the depths of the financial crisis.

    Among his transactions, Mr. Bachus made $28,000 on short-term trades involving a fund designed to profit on declines in the Nasdaq 100 index, the disclosures show. At the time, Mr. Bachus was involved in briefings with key Fed and Treasury Department officials about the government's response to the financial collapse.

    Mr. Bachus told the Journal that he didn't trade on nonpublic information, and argued more lawmakers should invest in markets to better understand them.

    Rep. Bachus last year made 28 trades, primarily in a portfolio of the largest Chinese stocks available to international investors, more recent disclosure forms show. He said he stopped trading after the Journal's articles appeared.

    "After your articles and others criticizing my successful purchase of Apple, Focus Media and [ProShares UltraShort QQQ, an exchange-traded fund], the only way to avoid mischaracterization of my stock market activities was to stop all trading. I did so in October of 2010," he said Tuesday in a statement.

    In a separate statement, Mr. Bachus said he believes SEC rules already prohibit insider trading on Capitol Hill, but that "legislation that clarifies and improves the existing law would be welcomed."

    Under SEC rules, insider trading is defined as buying or selling stocks based on information that is market-moving and nonpublic. To enforce a case, the SEC must also show that an individual used the information in violation of a duty to keep it private. Many people say insider-trading rules don't apply on Capitol Hill because lawmakers don't have such a "duty" to anyone. By contrast, the SEC brings insider-trading cases against government employees at federal departments and agencies, because the executive branch has clear rules and employees have a duty to their bosses and the companies they regulate.

    On Capitol Hill, the law is "not as clear as it needs to be," said Sen. Joseph Lieberman last week at a hearing in the Homeland Security and Governmental Affairs panel.

    Testifying before the House, Robert Khuzami, director of SEC enforcement, said under current law a judge could throw out an SEC case on the grounds that lawmakers don't have a clear duty not to trade on information they pick up while performing their regular duties.

    Mr. Khuzami said "if there is a law that says that a duty exists, that is pretty clear and removes the ambiguity."

    Other ideas considered include requiring lawmakers to create blind trusts to hold their stock portfolios, an idea proposed by Rep. Sean Duffy (R., Wis.). Under Mr. Duffy's proposal, if a lawmaker chose not to create a blind trust, he or she would be required to disclose stock trades within three days.

    Mr. Duffy said mandating the disclosure of stock trades by lawmakers would bring Congress in line with the rules for corporate insiders.

    Continued in article

    Answer (Please share this with your students):
    Over the years I've been a loyal viewer of the top news show on television --- CBS Sixty Minutes
    On November 13, 2011 the show entitled "Insider" is the most depressing segment I've ever watched on television ---
    http://www.cbsnews.com/video/watch/?id=7387951n&tag=contentMain;contentBody#ixzz1dfeq66Ok

    Jensen Comment

    Watch the "Insider" Video Now While It's Still Free ---
    http://www.cbsnews.com/video/watch/?id=7387951n&tag=contentMain;contentBody

    THIS IS HOW YOU FIX CONGRESS!!!!!
    If you agree with the above, pass it on.
    Warren Buffett, in a recent interview with CNBC, offers one of the best quotes about the debt ceiling:"I could end the deficit in 5 minutes," he told CNBC. "You just pass a law that says that anytime there is a deficit of more than 3% of GDP, all sitting members of Congress are ineligible for re-election. The 26th amendment (granting the right to vote for 18 year-olds) took only 3 months & 8 days to be ratified! Why? Simple! The people demanded it. That was in1971...before computers, e-mail, cell phones, etc. Of the 27 amendments to the Constitution, seven (7) took 1 year or less to become the law of the land...all because of public pressure.Warren Buffet is asking each addressee to forward this email to a minimum oftwenty people on their address list; in turn ask each of those to do likewise. In three days, most people in The United States of America will have the message. This is one idea that really should be passed around.*Congressional Reform Act of 2011......
    1. No Tenure / No Pension. A Congressman collects a salary while in office and receives no pay when they are out of office.

    2.. Congress (past, present & future) participates in Social Security. All funds in the Congressional retirement fund move to the Social Security system immediately. All future funds flow into the Social Security system,and Congress participates with the American people. It may not be used for any other purpose..

    3. Congress can purchase their own retirement plan, just as all Americans do...

    4. Congress will no longer vote themselves a pay raise. Congressional pay will rise by the lower of CPI or 3%.

    5. Congress loses their current health care insurance and participates in the same health care plan as the American people.

    6. Congress must equally abide by all laws they impose on the American people..

    7. All contracts with past and present Congressmen are void effective 1/1/12. The American people did not make this contract with Congressmen. Congressmen made all these contracts for themselves. Serving in Congress is an honor,not a career. The Founding Fathers envisioned citizen legislators, so ours should serve their term(s), then go home and back to work.


    If each person contacts a minimum of twenty people then it will only take
    three days for most people (in the U.S.) to receive the message. Maybe it is
    time.


    PLEASE PASS THIS ON

    Read more: http://www.cbsnews.com/video/watch/?id=7387951n&tag=contentMain;contentBody#ixzz1dfeq66Ok
     

     

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

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


    Question:  Can you believe the following scenario about a 10-year old daughter named Karen and her father Ken?

    Karen:
    "Honestly Dad, a $1,000 per week allowance is just too much. I can get along on $5 per week plus whatever mom thinks is fair for new clothes."

    Ken:
    "But I make $1 million a week running the company, and $1,000 per week is mere chicken feed to me."

    Karen
    "But that might spoil me rotten and made me look bad among my closest friends who get even less than $5 per week Please, please Dad, just leave $5 per week on the kitchen table."

     

    Point to Keep in Mind Below
    The SEC is the plaintiff in this case and the defendant, Citigroup, allegedly damaged investors by more than $1 billion.
    In most instances the plaintiff in a case like this would be overjoyed if the judge declared the preliminary out-of-court settlement is way too low.

    The Judge
    "I want to award you much, much more since the defendant was criminally conspired one of the largest frauds in history and stole so much more than the relative pittance you agreed to in a preliminary settlement." 

    The SEC
    "Please don't make us settle for more than 30% of the damages. Who cares about what this bank cost investors? We worry more about retaliation from the banking industry on our government agency. To hell with what investors lost!"

     

    "SEC Appeals Judge Rakoff’s Rejection of $285 Million Citigroup Settlement," by Joshua Gallu and Patricia Hurtado, Bloomberg News, December 16, 2011 ---
    http://www.bloomberg.com/news/2011-12-15/sec-appeals-rejection-of-285-million-citigroup-settlement-1-.html

    "THE SEC’S SETTLEMENT WITH CITIGROUP—AND JUDGE RAKOFF," by Anthony H. Catanach and J. Edward Ketz, Grumpy Old Accountants, December 19, 2011 ---
    http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/459

    . . .

    The SEC has for a long time engaged in these civil judgments against firms that have experienced accounting and securities fraud.  It would do well for the SEC to re-examine this policy, realize that its effects are pernicious and counterproductive, and then repeal the strategy.  It is silly for the investors to suffer for the wrongdoing by corporate thieves masquerading as managers.  If the SEC continues to fine firms for wrongdoing and gives a pass to managers, you can expect Wall Street to continue its lascivious dalliance.

     

    And in another unrelated case:

    "Commissioner slams SEC settlement," SmartPros, July 13, 2011 ---
    http://accounting.smartpros.com/x72323.xml

    One of the SEC's five commissioners has taken the extraordinary step of publicly dissenting from an enforcement action on the grounds that it was too weak.

    Commissioner Luis A. Aguilar said the Securities and Exchange Commission should have charged a former Morgan Stanley trader with fraud in view of what he called "the intentional nature of her conduct."

    The dissent comes weeks after the SEC took flak for negotiating a $153.6 million fine from J.P. Morgan Chase in another enforcement case but taking no action against any of the firm's employees or executives.

    Under a settlement announced Tuesday, the SEC alleged that former Morgan Stanley trader Jennifer Kim and a colleague who previously settled with the agency had executed at least 32 sham trades to mask the amount of risk they had been incurring and to get around an internal restriction.

    Their trading contributed to millions of dollars of losses at the investment firm, the SEC said.

    Without admitting or denying the SEC's findings, Kim agreed to pay a fine of $25,000.

    Aguilar said the settlement was "inadequate" and "fails to address what is in my view the intentional nature of her conduct."

    "The settlement should have included charging Kim with violations of the antifraud provisions," Aguilar wrote.

    Continued in article

    Jensen Comment
    Maybe Jennifer also did porn. SEC enforcers like porn (daily).---
    http://abcnews.go.com/GMA/sec-pornography-employees-spent-hours-surfing-porn-sites/story?id=10452544


    "SEC Brings Crisis-Era Suits Fannie, Freddie Ex-Executives Face Cases Stemming From Subprime Disclosures," by Nick Timiraos and Chad Bray, The Wall Street Journal, December 17, 2011 ---
    http://online.wsj.com/article/SB10001424052970203733304577102310955780788.html

    U.S. securities regulators accused six former executives at mortgage firms Fannie Mae and Freddie Mac of playing down the risks to investors of the firms' foray into subprime loans.

    The civil lawsuits, filed Friday by the Securities and Exchange Commission in Manhattan federal court, rank among the highest-profile crisis-related cases the government has brought. They are also the first cases against the top executives at Fannie and Freddie before their 2008 government takeover, which has cost taxpayers $151 billion.

    The complaints name as defendants former Freddie Mac Chief Executive Richard Syron and former Fannie Mae CEO Daniel Mudd, who is currently chief executive of Fortress Investment Group LLC. The agency also accused four other high-ranking former executives at Freddie Mac and Fannie Mae.

    The executives and their lawyers said they would vigorously contest the charges.

    At the heart of the lawsuits is the government's contention that Fannie and Freddie executives knowingly misled investors about the volumes of risky mortgages that the companies were purchasing as the housing boom turned to bust. Documents

    Complaints: SEC v. Fannie Mae | SEC v. Freddie Mac Nonprosecution Agreements: Fannie Mae | Freddie Mac

    "Fannie Mae and Freddie Mac executives told the world that their subprime exposure was substantially smaller than it really was," said Robert Khuzami, director of the SEC's Enforcement Division.

    The lawsuits come as the SEC and other law-enforcement agencies face rising political pressure to take more aggressive action against financial companies over the 2008 crisis. Federal authorities have a mixed record in cases tied to the subprime-mortgage bust, with no major cases having been brought in some of the highest-profile blowups, such as the September 2008 bankruptcy of Lehman Brothers Holdings Inc.

    Continued in article

    Also see The New York Times report on the SEC's case at
    http://dealbook.nytimes.com/2011/12/16/s-e-c-sues-6-former-top-fannie-and-freddie-executives/?scp=4&sq=fannie mae&st=cse

    Jensen Comment
    So why is the Department of Justice and the SEC backing off of bigger criminals like the banksters of Countrywide, Washington Mutual, Citigroup, JP Morgan, Merrill Lynch, Lehman Brothers, Bear Sterns, etc.?

    The Justice Department can put criminals in jail, but the SEC can only go for fines. The problem is that when dealing with banksters the SEC has a track record of pittance, chicken feed  fines. Steal a dollar and the SEC will go after less than a dime from a bankster.

    Another CBS Sixty Minutes Blockbuster (December 4, 2011)
    "Prosecuting Wall Street"
    Free download for a short while
    http://www.cbsnews.com/8301-18560_162-57336042/prosecuting-wall-street/?tag=pop;stories
    Note that this episode features my hero Frank Partnoy

    Sarbanes–Oxley Act (Sarbox, SOX) ---
    http://en.wikipedia.org/wiki/Sarbanes%E2%80%93Oxley_Act

     Key provisions of Sarbox with respect to the Sixty Minutes revelations:

    The act also covers issues such as auditor independence, corporate governance, internal control assessment, and enhanced financial disclosure.

    Sarbanes–Oxley Section 404: Assessment of internal control ---
    http://en.wikipedia.org/wiki/Sarbanes%E2%80%93Oxley_Act#Sarbanes.E2.80.93Oxley_Section_404:_Assessment_of_internal_control

    Both the corporate CEO and the external auditing firm are to explicitly sign off on the following and are subject (turns out to be a ha, ha joke)  to huge fines and jail time for egregious failure to do so:

    Most importantly as far as the CPA auditing firms are concerned is that Sarbox gave those firms both a responsibility to verify that internal controls were effective and the authority to charge more (possibly twice as much) for each audit. Whereas in the 1990s auditing was becoming less and less profitable, Sarbox made the auditing industry quite prosperous after 2002.

    There's a great gap between the theory of Sarbox and its enforcement

    In theory, the U.S. Justice Department (including the FBI) is to enforce the provisions of Section 404 and subject top corporate executives and audit firm partners to huge fines (personal fines beyond corporate fines) and jail time for signing off on Section 404 provisions that they know to be false. But to date, there has not been one indictment in enormous frauds where the Justice Department knows that executives signed off on Section 404 with intentional lies.

    In theory the SEC is to also enforce Section 404, but the SEC in Frank Partnoy's words is toothless. The SEC cannot send anybody to jail. And the SEC has established what seems to be a policy of fining white collar criminals less than 20% of the haul, thereby making white collar crime profitable even if you get caught. Thus, white collar criminals willingly pay their SEC fines and ride off into the sunset with a life of luxury awaiting.

    And thus we come to the December 4 Sixty Minutes module that features two of the most egregious failures to enforce Section 404:
    The astonishing case of CitiBank
    The astonishing case of Countrywide (now part of Bank of America)

    The Astonishing Case of CitiBank
    What makes the Sixty Minutes show most interesting are the whistle blowing  revelations by a former Citi Vice President in Charge of Fraud Investigations

    The astonishing case of Countrywide (now part of Bank of America)

    I was disappointed in the CBS Sixty Minutes show in that it completely ignored the complicity of the auditing firms to sign off on the Section 404 violations of the big Wall Street banks and other huge banks that failed. Washington Mutual was the largest bank in the world to ever go bankrupt. Its auditor, Deloitte, settled with the SEC for Washington Mutual for $18.5 million. This isn't even a hand slap relative to the billions lost by WaMu's investors and creditors.

     No jail time is expected for any partners of the negligent auditing firms. .KPMG settled for peanuts with Countrywide for $24 million of negligence and New Century for $45 million of negligence costing investors billions.

    CFO's job description should have read: financial professional with extensive consulting, management, and prison experience.
    "SEC Charges Add to an Already Blemished Bio," by Sarah Johnson, CFO.com, December 22, 2011 ---
    http://www3.cfo.com/blogs/risk-compliance/risks--compliance/2011/12/SEC-Charges-Add-to-an-Already-Blemished-Bio

    Jensen Comment
    Note that the SEC cannot send bad men and women to prison. It's mission really is to let them off the hook for a penny fine on every dollar that they steal.

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

    Bob Jensen's threads on how white collar crime pays even if you get caught ---
    http://www.trinity.edu/rjensen/FraudConclusion.htm#CrimePays


    "What Fannie and Freddie Knew The SEC shows how the toxic twins turbocharged the housing bubble.," The Wall Street Journal, December 22, 2011 ---
    http://online.wsj.com/article/SB10001424052970204791104577110643650732030.html?mod=djemEditorialPage_t

    Democrats have spent years arguing that private lenders created the housing boom and bust, and that Fannie Mae and Freddie Mac merely came along for the ride. This was always a politically convenient fiction, and now thanks to the unlikely source of the Securities and Exchange Commission we have a trail of evidence showing how the failed mortgage giants turbocharged the crisis.

    That's the story revealed Friday by the SEC's civil lawsuits against six former Fannie and Freddie executives, including a pair of CEOs. The SEC says the companies defrauded investors because they "knew and approved of misleading statements" about Fan and Fred's exposure to subprime loans, and it chronicles their push to expand the business.

    The executives deny the charges, and we hope they don't settle. The case deserves to play out in court, so Americans can see in detail how Fan and Fred were central to the bubble. The lawsuits themselves, combined with information admitted as true by Fan and Fred in civil nonprosecution agreements with the SEC, are certainly illuminating.

    The Beltway story of the crisis claims that Congress's affordable housing mandates had nothing to do with it. But the SEC's lawsuit shows that Fannie degraded its underwriting standards to increase its market share in subprime loans. According to the SEC suit, for instance, in 2006 Fannie Mae adjusted its widely used automated underwriting system, "Desktop Underwriter." Fannie did so as part of its "Say Yes" strategy to "provide more 'approve' messages . . . for larger volumes of loans with lower FICO [credit] scores and higher LTVs [loan-to-value] than previously permitted."

    The SEC also shows how Fannie led private lenders into the subprime market. In July 1999, Fannie and Angelo Mozilo's Countrywide Home Loans entered "an alliance agreement" that included "a reduced documentation loan program called the 'internet loan,'" later called the "Fast and Easy" loan. As the SEC notes, "by the mid-2000s, other mortgage lenders developed similar reduced documentation loan programs, such as Mortgage Express and PaperSaver—many of which Fannie Mae acquired in ever-increasing volumes."

    Mr. Mozilo and Fannie essentially were business partners in the subprime business. Countrywide found the customers, while Fannie provided the taxpayer-backed capital. And the rest of the industry followed.

    As Fannie expanded its subprime loan purchases and guarantees, the SEC alleges that executives hid the risk from investors. Consider Fannie's Expanded Approval/Timely Payment Rewards (EA) loans, which the company described to regulators as its "most significant initiative to serve credit-impaired borrowers."

    By December 31, 2006, Fannie owned or securitized some $43.3 billion of these loans, which, according to the SEC, had "higher average serious delinquency rates, higher credit losses, and lower average credit scores" than Fannie's disclosed subprime loans. By June 30, 2008, Fannie had $60 billion in EA loans and $41.7 billion in another risky program called "My Community Mortgage," but it only publicly reported an $8 billion exposure.

    The SEC says Fannie executives also failed to disclose the company's total exposure to risky "Alt-A" loans, sometimes called "liar loans," which required less documentation than traditional subprime loans. Fannie created a special category called "Lender Selected" loans and it gave lenders "coding designations" to separate these Alt-A loans from those Fannie had publicly disclosed. By June 30, 2008, Fannie said its Alt-A exposure was 11% of its portfolio, when it was closer to 23%—a $341 billion difference.

    All the while, Fannie executives worked to calm growing fears about subprime while receiving internal reports about the company's risk exposure. In February 2007, Chief Risk Officer Enrico Dallavecchia told investors that Fannie's subprime exposure was "immaterial." At a March 2007 Congressional hearing, CEO Daniel Mudd testified that "we see it as part of our mission and our charter to make safe mortgages available to people who don't have perfect credit," adding that Fannie's subprime exposure was "relatively minimal." The Freddie record is similarly incriminating. ***

    The SEC's case should embarrass Congress's Financial Crisis Inquiry Commission, which spent 18 months looking at the evidence and issued a report in January 2011 that whitewashed Fan and Fred's role. Speaker Nancy Pelosi created the commission to prosecute the Beltway theory of the crisis that private bankers caused it all, and Chairman Phil Angelides delivered what she wanted.

    Far from being peripheral to the housing crisis, the SEC lawsuit shows that Fan and Fred were at the very heart of it. Private lenders made many mistakes, but they could never have done as much harm if Fan and Fred weren't providing tens of billions in taxpayer-subsidized liquidity to lend on easy terms to borrowers who couldn't pay it back.

    Congress created the two mortgage giants as well as their "affordable housing" mandates, and neither the financial system nor taxpayers will be safe until Congress shrinks the toxic twins and ultimately puts them out of business.

    Also see The New York Times report on the SEC's case at
    http://dealbook.nytimes.com/2011/12/16/s-e-c-sues-6-former-top-fannie-and-freddie-executives/?scp=4&sq=fannie mae&st=cse

    Subprime: Borne of Greed, Sleaze, Bribery, and Lies ---
    http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze
     

    Barney Frank: I've destroyed the economy, my work here is done.
    Washington Times headline, Nov. 29, 2011
    Barney's Rubble --- http://www.trinity.edu/rjensen/2008Bailout.htm#Rubble

    In a separate scandal, Fannie Mae was involved in the largest earnings/bonus management fraud in the history of the world ---
    http://www.trinity.edu/rjensen/Theory02.htm#Manipulation


    David Albrecht had a final examination essay question that reads as follows at
    http://profalbrecht.wordpress.com/2011/12/21/meh-no/

    The rest of the world uses FIFO, but does not permit LIFO.
    Should the U.S. continue to use LIFO?

    Jensen Comment
    This illustrates to me how in some instances an accounting standard should perhaps not be discussed apart from its relevance in terms of a nation's tax code. For example, synthetic leasing accounting standards are probably irrelevant to nations who do not have synthetic leasing provisions in the tax code. Similarly, a question on LIFO probably should not be answered without mention of a nation's tax code.

    The LIFO issue is much less important in nations that do not allow LIFO for tax reporting purposes. But in the U.S. companies choose LIFO to defer serious amounts of cash outflow for tax purposes. If a nation allows LIFO for tax purposes in periods of inflation, and adds an added stipulation that use of LIFO for tax purposes also requires use of LIFO for financial reporting purposes, then the loss of LIFO as an option for financial reporting can clobber cash flow unless our brilliant Congress adjusts with revisions to the tax code such as revisions for changes in price levels in inventory reporting.

    At the moment Congress seems to be unable to pass anything other than a motion to adjourn for every conceivable holiday (and motions to pass each other's earmark bills).

     

    December 25, 2011 reply from Bob Jensen

    Bob,

    A couple of students considered which one (FIFO or LIFO) would be more desirable for investors. They both came down on the FIFO side. One reasoned that comparability of U.S. company financial results with the rest of the world would outweigh any increase in the effective tax rate. The other reasoned that investors would prefer an accounting method that approximates the physical flow of products.

    This has me thinking about investor preferences in the accounting for inventories. I'm not aware this has been explicitly considered before.

    My first thought is that there is significant benefit to investors about from LIFO-based cost of goods sold expense.

    Three decades ago, I read an article about NIFO accounting (wish I had a citation for it). Nifo is Next-In, First-Out. U find LIFO desirable because it is the closest thing to NIFO.

    My second thought is that American investors seem to have adapted well to a LIFO-FIFO world. Banning LIFO might actually disadvantage investors.

    I am readying a post on this topic. I will work in Ed Scribner's FISH (first in, still here) accounting. My students always enjoy hearing about fish accounting.

    Dave Albrecht

    December 25, 2011 reply from Bob Jensen

    Hi David,

    I think that managers that choose FIFO to increase reported eps are possibly either naive or bonus hungry. I do indeed believe that in most cases the capital markets are efficient in seeing through inventory valuation differences.

    If a company that's paying corporate income taxes has a huge investment in inventories then I think management is negligent for not choosing LIFO, because the cash flow advantages of LIFO tax deferral are very real in periods of inflation. Investors should complain to management if the company is not on LIFO. Of course this is less relevant to corporations that annually dodge or defer all corporate taxes.

    There may be occasional situations where management paid way too much for commodities or investment securities relative to current prices, in which case FIFO has some tax deferral advantages. But the IRS does not allow repeatedly flipping back and forth between FIFO and LIFO, and over the long run it's probably best to think in terms of price inflation in inventories.

    NIFO is really a very old concept and dates as far back as J. Lee Nicholson in accounting history (he died in 1924) --- http://www.jstor.org/pss/241148 

    Although NIFO is not allowed under GAAP or the IRS, it's probably the inventory valuation method most consistent with fair value accounting. We really have GAAP-allowed NIFO for precious commodities provided current market prices are our best estimates of the next prices to be paid for those commodities like gold, silver, and platinum.

    In the case of such precious commodities, however, current prices really may not be the best estimates of the next prices to be paid. One of the reasons for carrying inventory is to provide more alternatives to having to buy needed inventory when prices are temporarily skyrocketing such as a military flare up in the Middle East that's driving oil price speculators crazy.

    Also NIFO does not necessarily provide the best estimates of the "next" prices for companies that are heavy into long hedges. For example, Southwest Airlines is almost always hedged on jet fuel over a relatively long period of time such that current spot prices are not good estimates of what Southwest will be paying for jet fuel in six months or even a year.

    Teaching Cases: Hedge Accounting
    Scenario 1 versus Scenario 2 Two Teaching Cases Involving Southwest Airlines, Hedging, and Hedge Accounting Controversies --- http://www.trinity.edu/rjensen/caseans/SouthwestAirlinesQuestions.htm 

    Respectfully,
    Bob Jensen

    December 25, 2011 reply from Beryl Simonson

    Don't you also need to discuss the difference between a balance sheet vs an income statement approach to financial reporting? Over a long period of time, even with a moderate price increases, LIFO vastly distorts the balance sheet yet the income statement would only be minimally different on an annual basis. On a practical basis, LIFO can have you selling goods that have not yet been received, depending on how inventory turns. It has always seemed to me to be artificial since it generally does not reflect the flow of goods.

    Beryl D. Simonson CPA
    Partner, Assurance Services
    McGladrey & Pullen, LLP

    December 25, 2011 reply from Bob Jensen

    As I vaguely recall, some of the LIFO layers in U.S. Steel went back 40 years or more. Obviously the balance sheet then becomes out of date.

    But to me in this regard, cash flow advantages trump the balance sheet valuation of inventories when there are essentially interest-free loans from tax deferrals.

    In nations having no such interest free loans due to LIFO in the tax code, the main advantage of LIFO disappears.

    Being an old timer, I recall that the main argument for building LIFO into the tax code was an inflation accounting compromise to companies wanting price-level adjustment indexing relief for inventory tax accounting.

    Japan allows LIFO for similar inflation accounting reasons.

    Bob Jensen

    December 26, 2011 reply from Beryl Simonson

    Financial statements are prepared to reflect the economic results of the business. I understand analysts might have other needs in doing their jobs, but GAAP is not designed for those interested in the future. Beryl D. Simonson CPA Partner, Assurance Services McGladrey & Pullen, LLP (267) 515-5144

    Beryl

    December 26 reply from Patricia Walters

    Beryl,

    That assumes that it's possible for both the balance sheet and the income statement CAN both be equally as reflective of economic reality. Since every account including cash and cash equivalents has some degree of estimation in the measurement we must either focus on estimating either the balance sheet amount or the income statement amount in that process. Given the balance sheet equation, one or the other effect is a plug.

    As I said in an earlier post in this thread, my preference as an analyst is to compare current costs with current costs. Neither FIFO or LIFO provides that information in the statements because the balance sheet equation has to hold. At least the LIFO disclosures provide the data to make the adjustments.

    If there's a set of financial statements that do what you suggest, I haven't met it.

    Pat

     

    December 26, 2011 reply from Bob Jensen

    Hi Patricia,

    I don't think your negativism about historical cost accounting is justified in the empirical accounting research literature.

    In particular, note --- http://www.trinity.edu/rjensen/LIFOJennings.htm
    "Does LIFO Inventory Accounting Improve the Income Statement at the Expense of the Balance Sheet?" by Ross Jennings, Paul J. Simko, Robert B. Thompson II, Journal of Accounting Research, Vol. 34, No. 1 (Spring, 1996), pp. 85-109

    My recollection is that empirical studies of forecasting and accounting valuations is somewhat the opposite of what you are claiming about useless predictability of historical cost financial statements.. In particular, note the attached Jennings02.jpg picture.

    Before I commence a hunt further, do you have any academic research citations to back your claims or are are these mere personal opinions that historical cost statements are useless for analyst forecasting?

    Off the top of my head, I recall some contrary evidence in Biddle and Lindahl (JAR, 1982), Elliott and Philbrick (TAR, 1990), Brown (International Journal of Forecasting, 1993), Rayburn (JAR, 1996) and in particular Jennings, Simco, and Thompson (JAR, 1996).

    Above are two pictures of the conclusion in the Jennings, Simco, and Thompson JAR paper that are contrary to your argument of the incremental value of current cost information.

    A 2009 PhD dissertation by Brian Batten has a more extensive listing of references ---  http://repositories1.lib.utexas.edu/bitstream/handle/2152/6551/brattenb47610.pdf?sequence=2 

    Also see
    "Sucking the LIFO Out of Inventory The government sees billions of dollars in potential tax revenue sitting on the shelves of company warehouses," by Marie Leone, CFO Magazine, July 15, 2010 ---
    http://www.cfo.com/article.cfm/14508745/c_14515016

     

    Please send us some references in support of the uselessness of historical cost accounting in forecasting and recommendations of security analysts.

    Thanks in advance,
    Bob Jensen

     

     


    Rudy Ruettiger was a high school football star who lacked the size and talent to play for Notre Dame and yet became the nation's poster boy for a walk on player who never gave up and ultimately inspired the tens of thousands of Fighting Irish fans --- not with his accomplishments but rather his never-give-up attitude.

    The movie Rudy brought tears to my eyes ---
    http://en.wikipedia.org/wiki/Rudy_%28film%29

    Rudy Ruettiger --- http://en.wikipedia.org/wiki/Rudy_Ruettiger

    Now Rudy Ruettiger is bringing tears to investors eyes.

    "SEC Says Rudy Ruettiger Is A Stock Scammer," by Nathan Vardi, Forbes, December 16, 2011 ---
    http://www.forbes.com/sites/nathanvardi/2011/12/16/sec-says-rudy-ruettiger-is-a-stock-scammer/

    To many football and movie fans, Daniel “Rudy” Ruettiger is a hero, an ordinary kid who overcame extraordinary odds through hard work and determination to become part of Notre Dame folklore.

    The Securities & Exchange Commission, however, says Rudy Ruettiger has grown up to become a penny stock promoter and scammer. The former Notre Dame walk-on has agreed to pay $382,866 to resolve the SEC’s claim that he participated in a pump-and-dump, fraudulently inducing investors to bid up the stock of his sports drink company, Rudy Nutrition. He did not admit or deny the allegations.

    According to the SEC complaint filed in federal court in Las Vegas, Ruettiger’s company sold only a small amount of a sports drink called “Rudy” and instead the company served as a vehicle for a 2008 pump-and-dump scheme that generated $11 million in illicit profits. The SEC revoked registration of the stock of Rudy Nutrition in 2008.

    “Investors were lured into the scheme by Mr. Ruettiger’s well-known, feel-good story but found themselves in a situation that did not have a happy ending,” said Scott Friestad, associate director of the SEC’s enforcement division, in a statement. “The tall tales in this elaborate scheme included phony taste tests and other false information.”

    What kind of tall tales is the SEC talking about? One example is literature mailed to potential investors falsely claiming that in “a major southwest test, Rudy outsold Gatorade 2 to 1.” While these sorts of promotions were going on, the SEC says promoters were artificially inflating the price of Rudy Nutrition’s stock while selling unregistered shares to investors.

    Continued in article

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


    Potential Accounting Cases Regarding Sears In-Home (on-site) Service Contracts

    Some Big Retail Chains Are Unhappy With 2011 Holiday Sales
    "Sears, Kmart to shut 100-120 stores," CNN Money, December 27, 2011 ---
    http://money.cnn.com/2011/12/27/news/companies/sears_kmart_closings/index.htm

    Sears Holdings on Tuesday reported a sharp drop in holiday sales compared to a year ago, and said the results will force it to close 100 to 120 Sears and Kmart stores.

    The company said the stores to be closed have yet to be identified.

    Sears Holdings said sales at stores open at least a year, a closely watched retail measure known as same-store sales, tumbled 5.2% in the eight weeks ended on Christmas Day. That came from a 4.4% drop in sales at Kmart stores and a 6% slide in sales at domestic Sears stores.

    Continued in article

    Jensen Comment
    I don't know of any Kmart in our vicinity. There are, however, somewhat limited Sears stores in Littleton (10 miles away) and St. Johnsbury, Vermont (30 miles away). I shop for almost all  appliances at Sears because I think Sears has the best and reasonably priced in-your-home service contracts. I hate service contracts that make you haul an item back to the store or haul it for miles to a service center. My neighbor has a huge Circuit City TV set that I recently helped him load into his car to take to a distant service center (not Sears). And the first time he brought it home it still didn't work. So I once again helped him load it up for a long trip.

    For my items from Sears, either Sears repairs the item at my home or Sears hauls it to and from a Sears service center. Sears has had to come to my house 12 times to repair a snow thrower. All is better now after Sears engineers finally solved a fundamental engineering problem of having long chute cables that froze up in cold weather. At last Sears manufactured shorter cables that won't freeze up. Sears also came into our basement last month and put a new motor and belt on our walking machine. I sure would not want to have to hall that big thing to a service center. And the parts and labor were all free under our five-year service contract that cost much less than the new motor and belt. In addition Sears makes annual free visits to service and clean all our other Sears appliances (over ten items in our house).

    This raises some accounting questions about how Sears should account for its repair and maintenance service contracts that our closest Sears dealer tells me is the main selling point of appliances in her Sears store.

    Bob Jensen's threads and cases on managerial accounting are at
    http://www.trinity.edu/rjensen/Theory02.htm#ManagementAccounting


    "FASB Defers Part of Comprehensive Income Standards Update," Journal of Accountancy, December 23, 2011 ---
    http://journalofaccountancy.com/Web/20114948.htm


    "Should Some Bankers Be Prosecuted?" by Jeff Madrick and Frank Partnoy, New York Review of Books, November 10, 2011 ---
    http://www.nybooks.com/articles/archives/2011/nov/10/should-some-bankers-be-prosecuted/
    Thank you Robert Walker for the heads up!

    More than three years have passed since the old-line investment bank Lehman Brothers stunned the financial markets by filing for bankruptcy. Several federal government programs have since tried to rescue the financial system: the $700 billion Troubled Asset Relief Program, the Federal Reserve’s aggressive expansion of credit, and President Obama’s additional $800 billion stimulus in 2009. But it is now apparent that these programs were not sufficient to create the conditions for a full economic recovery. Today, the unemployment rate remains above 9 percent, and the annual rate of economic growth has slipped to roughly 1 percent during the last six months. New crises afflict world markets while the American economy may again slide into recession after only a tepid recovery from the worst recession since the Great Depression.

    n our article in the last issue,1 we showed that, contrary to the claims of some analysts, the federally regulated mortgage agencies, Fannie Mae and Freddie Mac, were not central causes of the crisis. Rather, private financial firms on Wall Street and around the country unambiguously and overwhelmingly created the conditions that led to catastrophe. The risk of losses from the loans and mortgages these firms routinely bought and sold, particularly the subprime mortgages sold to low-income borrowers with poor credit, was significantly greater than regulators realized and was often hidden from investors. Wall Street bankers made personal fortunes all the while, in substantial part based on profits from selling the same subprime mortgages in repackaged securities to investors throughout the world.

    Yet thus far, federal agencies have launched few serious lawsuits against the major financial firms that participated in the collapse, and not a single criminal charge has been filed against anyone at a major bank. The federal government has been far more active in rescuing bankers than prosecuting them.

    In September 2011, the Securities and Exchange Commission asserted that overall it had charged seventy-three persons and entities with misconduct that led to or arose from the financial crisis, including misleading investors and concealing risks. But even the SEC’s highest- profile cases have let the defendants off lightly, and did not lead to criminal prosecutions. In 2010, Angelo Mozilo, the head of Countrywide Financial, the nation’s largest subprime mortgage underwriter, settled SEC charges that he misled mortgage buyers by paying a $22.5 million penalty and giving up $45 million of his gains. But Mozilo had made $129 million the year before the crisis began, and nearly another $300 million in the years before that. He did not have to admit to any guilt.

    The biggest SEC settlement thus far, alleging that Goldman Sachs misled investors about a complex mortgage product—telling investors to buy what had been conceived by some as a losing proposition—was for $550 million, a record of which the SEC boasted. But Goldman Sachs earned nearly $8.5 billion in 2010, the year of the settlement. No high-level executives at Goldman were sued or fined, and only one junior banker at Goldman was charged with fraud, in a civil case. A similar suit against JPMorgan resulted in a $153.6 million fine, but no criminal charges.

    Although both the SEC and the Financial Crisis Inquiry Commission, which investigated the financial crisis, have referred their own investigations to the Department of Justice, federal prosecutors have yet to bring a single case based on the private decisions that were at the core of the financial crisis. In fact, the Justice Department recently dropped the one broad criminal investigation it was undertaking against the executives who ran Washington Mutual, one of the nation’s largest and most aggressive mortgage originators. After hundreds of interviews, the US attorney concluded that the evidence “does not meet the exacting standards for criminal charges.” These standards require that evidence of guilt is “beyond a reasonable doubt.”

    This August, at last, a federal regulator launched sweeping lawsuits alleging fraud by major participants in the mortgage crisis. The Federal Housing Finance Agency sued seventeen institutions, including major Wall Street and European banks, over nearly $200 billion of allegedly deceitful sales of mortgage securities to Fannie Mae and Freddie Mac, which it oversees. The banks will argue that Fannie and Freddie were sophisticated investors who could hardly be fooled, and it is unclear at this early stage how successful these suits will be.

    Meanwhile, several state attorneys general are demanding a settlement for abuses by the businesses that administer mortgages and collect and distribute mortgage payments. Negotiations are under way for what may turn out to be moderate settlements, which would enable the defendants to avoid admitting guilt. But others, particularly Eric Schneiderman, the New York State attorney general, are more aggressively pursuing cases against Wall Street, including Goldman Sachs and Morgan Stanley, and they may yet bring criminal charges.

    Successful prosecutions of individuals as well as their firms would surely have a deterrent effect on Wall Street’s deceptive activities; they often carry jail terms as well as financial penalties. Perhaps as important, the failure to bring strong criminal cases also makes it difficult for most Americans to understand how these crises occurred. Are they simply to conclude that Wall Street made well- meaning if very big errors of judgment, as bankers claim, that were rarely if ever illegal or even knowingly deceptive?

    What is stopping prosecution? Apparently not public opinion. A Pew Research Opinion survey back in 2010 found that three quarters of Americans said that government policies helped banks and financial institutions while two thirds said the middle class and poor received little help. In mid-2011, half of those surveyed by Pew said that Wall Street hurts the economy more than it helps it.

    Many argue that the reluctance of prosecutors derives from the power and importance of bankers, who remain significant political contributors and have built substantial lobbying operations. Only 5 percent of congressional bills designed to tighten financial regulations between 2000 and 2006 passed, while 16 percent of those that loosened such regulations were approved, according to a study by the International Monetary Fund.2 The IMF economists found that a major reason was lobbying efforts. In 2009 and early 2010, financial firms spent $1.3 billion to lobby Congress during the passage of the Dodd-Frank Act. The financial reregulation legislation was weakened in such areas as derivatives trading and shareholder rights, and is being further watered down.

    Others claim federal officials fear that punishing the banks too much will undermine the fragile economic recovery. As one former Fannie official, now a private financial consultant, recently told The New York Times, “I am afraid that we risk pushing these guys off of a cliff and we’re going to have to bail out the banks again.”

    The responsibility for reluctance, however, also lies with the prosecutors and the law itself. A central problem is that proving financial fraud is much more difficult than proving most other crimes, and prosecutors are often unwilling to try it. Congress could fix this by amending federal fraud statutes to require, for example, that prosecutors merely prove that bankers should have known rather than actually did know they were deceiving their clients.

    But even if Congress does not, it is not too late for bold federal prosecutors to try to bring a few successful cases. A handful of wins could create new precedents and common law that would set a higher and clearer standard for Wall Street, encourage more ethical practices, deter fraud—and arguably prevent future crises.

    Continued in article

    Watch the video! (a bit slow loading)
     Lynn Turner is Partnoy's co-author of the white paper."Make Markets Be Markets"
     "Bring Transparency to Off-Balance Sheet Accounting," by Frank Partnoy, Roosevelt Institute, March 2010 ---
     http://www.rooseveltinstitute.org/policy-and-ideas/ideas-database/bring-transparency-balance-sheet-accounting
     Watch the video!

    The greatest swindle in the history of the world ---
    http://www.trinity.edu/rjensen/2008Bailout.htm#Bailout
     

    Bob Jensen's threads on how the banking system is rotten to the core ---
    http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking


    Ernst & Young
    To the Point: Impairment - a major step toward achieving convergence

    The FASB and the IASB have agreed on several tentative decisions regarding their "three-bucket" expected loss approach to the impairment of financial assets. These include the transfer principle from Bucket 1 into Bucket 2 or Bucket 3, the Bucket 1 impairment allowance, the differentiating factor between Bucket 2 and Bucket 3, the grouping of financial assets for impairment evaluation and the application of the new impairment approach to retail loans, commercial loans and debt securities. Our To the Point publication discusses these decisions ---
    http://www.ey.com/Publication/vwLUAssets/TothePoint_BB2250_Impairment_22December2011/%24FILE/TothePoint_BB2250_Impairment_22December2011.pdf

    Jensen Comment
    I think we should name the three buckets Hyacinth, Richard, and Onslow.---
    http://en.wikipedia.org/wiki/Keeping_Up_Appearances


    Ernst & Young

    Technical Line: Revenue recognition proposal - media and entertainment, retail and consumer products and telecommunications

    The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) recently re-exposed their joint revenue recognition proposal, which would converge revenue recognition guidance under US GAAP and IFRS into a single model and replace essentially all revenue recognition guidance, including industry-specific guidance.

    These industry-specific publications supplement our Technical Line, Double-exposure: The revised revenue recognition proposal, and highlight some of the more significant implications that the latest revenue recognition proposal may have on the (1) media and entertainment, (2) retail and consumer products and (3) telecommunications industries. These publications provide an analysis of the proposed model and highlight key changes from current practice.


    International Journal of Accounting Information Systems
    Volume 13, No. 1, March 2012


    1.      Editor's Prologue

    2.      Arnold, V., J.C. Bedard, J.R. Phillips and S.G. Sutton: "THE IMPACT OF TAGGING QUALITATIVE FINANCIAL INFORMATION ON INVESTOR DECISION MAKING: IMPLICATIONS FOR XBRL"

    3.      Jee-Hae Lim; Theophanis Stratopoulos; Tony Wirjanto: "ROLE OF IT EXECUTIVES ON THE FIRM'S ABILITY TO ACHIEVE COMPETITIVE ADVANTAGE THROUGH  IT  CAPABILITY"

    4.      Ogan M. Yigitbasioglu and Oana Velcu: "A Review of Dashboards in Performance Management:  Implications for Design and Research"

    5.      M. Dale Stoel; D. Havelka; J. Merhout  "An analysis of attributes that impact information technology audit quality: A study of IT and financial audit practitioners"

    Andreas Nicolaou
    Editor, International Journal of Accounting Information Systems
    http://www.elsevier.com/locate/accinf


    "Dismissed' partner accuses Ernst & Young of corruption:  Accountant Ernst & Young is facing an allegation of corruption at one of its global headquarters as part of a whistleblowing case brought by one of its ex-managing partners," by Jonathan Russell, The Telegraph, December 4, 2011 ---
    http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/8933219/Dismissed-partner-accuses-Ernst-and-Young-of-corruption.html

    The allegation is made in a High Court case brought against the Big Four accountant by former employee Cathal Lyons. The ex-E&Y partner claims he was dismissed from the company and had hundreds of thousands of pounds worth of medical cover withdrawn after he reported the alleged corruption to the practice’s director of global tax.

    Mr Lyons’ claim in the High Court relates to his employment by E&Y’s Russian practice.

    In 2006 he suffered a serious road accident resulting in permanent disabilities and partial amputation. Despite suffering serious medical complications Mr Lyons continued to work for Ernst & Young, albeit in a reduced capacity, until he claims he was dismissed in 2010.

    Following his dismissal, the medical insurance cover provided by Ernst & Young was withdrawn. Mr Lyons claims this was in direct breach of an agreement he had reached with E&Y that he would be covered by the medical insurance for life.

    His dismissal and the subsequent removal of his medical insurance were a direct result of him reporting his concerns about corruption, he claims.

    Continued in article

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


    "Arthur Andersen Ex-CEO: Enron, Europe Are Similar," by former Andersen CEO Joe Berardino, CNBC, December 2, 2011 ---
    http://www.cnbc.com/id/45521699

    A number of similarities exist between the collapse of Enron in 2001 and the current sovereign debt crisis in the euro zone, Joe Berardino, a managing director at Alvarez and Marsal and the former CEO of Enron's accounting firm, Arthur Andersen, told CNBC.

    "If you look at the Enron story at its most simplistic, you had a really successful company that was a bricks and mortar company, that became a trading company, that was very successful as a trading company… levered up," he said, using the term popular in business parlance for borrowing. "And then we found that leverage is really good, until it's bad," Berardino said.

    Enron filed for bankruptcy 10 years ago on Friday. The scandal surrounding the energy trading firm also effectively brought down Arthur Andersen as a going concern.

    Asked whether lessons had been learned since Enron filed for bankruptcy, Berardino said, "we're still learning" and pointed to the sovereign debt crisis currently engulfing the euro zone.

    "(Enron) ran out of time in terms of its liquidity and a lot of the same elements — leverage, the need for liquidity, crisis when you lose confidence — are repeated in all those examples. And I would argue we're now living through it with the sovereign crisis in Europe," he said. "There are a lot of the same elements."

    The 'Greed Path'

    Berardino said "it's easy to go down the greed path" in corporate America due to the nature of financial transactions and the rise of service sector industries, where what is "produced" is less tangible.

    "I think what complicates the matter is that we've gone more toward a service economy and years ago went off the gold standard… (now) you're finding you're trading pieces of paper, and when you're trading pieces of paper, the underlying issue is trust in your counterparty and trust in the system and transparency in the system. And so these two issues I think get intertwined," he said.

    He added that although he believed leverage was essentially a good thing, the real matter at hand for markets is a lack of liquidity.

    "What leverage does is it puts all your trades on octane, and it's great until it's not great and I think the real lasting issue there is also the need for liquidity which we lived through three years ago and we're living through now," Berardino said.

    Europe Crisis 'Solvable'

    Following a speech by German Chancellor Angela Merkel in which she warned the crisis in the euro zone would take years to solve, Berardino agreed it would take time, but the issue of sovereign debt was "largely solvable"

    Continued in article

    Jensen Comment
    Chicago Joe did not get into the criminal things that might've brought Enron down in spite of its liquidity problem --- things like manipulating energy markets fraudulently, especially when overcharging California power companies billions in excess rate hikes. Joe did not mention the fraudulent financial statements to which his company as both a consulting firm and an auditing firm was party to fraudulent financial statements, including overvaluing derivative financial instruments and over 3,000 SPEs, many of which were phony ---
    http://www.trinity.edu/rjensen/FraudEnron.htm

    Nor did he get into the things we've learned about auditing firms since the PCAOB started issuing audit inspection reports. One thing we've most certainly learned is that the Big Four charges much more for audits but often delivers worse audits than the smaller firms. For example, when KPMG took over the Countrywide Financial audit from Grant Thornton in 2004, the quality of Countrywide's audits headed south. This is also near the time when KPMG was fired from the Fannie Mae audit for incompetence. Ernst & Young and Deloitte were fined the maximum $1 million by the PCAOB for shoddy auditing.

    And we thought auditing could not get any worse than Andersen's audits of Worldcom, Enron, and a raft of other bankrupted clients
    "PCAOB Sees Decline in Audit Quality," by Michael Cohn, Accounting Today, November 5, 2011 ---
    http://www.accountingtoday.com/news/PCAOB-Sees-Decline-Audit-Quality-60375-1.html?CMP=OTC-RSS


    A December 21, 2011 WSJ Article on Those Startling Deloitte Audits That Are Beginning to Remind Us of Those Sorry Andersen Audits
    "Accounting Board Finds Faults in Deloitte Audits," by Michael Rapaport, The Wall Street Journal, December 21, 2011 ---
    http://online.wsj.com/article/SB10001424052970204879004577110922981822832.html

    Inspectors for the government's audit-oversight board found deficiencies in 26 audits conducted by Deloitte & Touche LLP in its annual inspection of the Big Four accounting firm.

    The report from the Public Company Accounting Oversight Board, released Tuesday, said some of the deficiencies it found in its 2010 inspection of Deloitte's audits were significant enough that it appeared the firm didn't obtain enough evidence to support its audit opinions.

    The 26 deficient audits found were out of 58 Deloitte audits and partial audits reviewed by PCAOB inspectors. The inspectors found that, in various audits, Deloitte didn't do enough testing on issues like inventory, revenue recognition, goodwill impairment and fair value, among other areas. In one case, follow-up between Deloitte and the audit client led to a change in the client's accounting, according to the report.

    The board didn't identify the companies involved, in accordance with its typical practice.

    The report is the first PCAOB assessment of Deloitte's performance issued since the board rebuked Deloitte in October by unsealing previously confidential criticisms of the firm's quality control.

    Deloitte said in a statement that it is "committed to the highest standards of audit quality" and has taken steps to address both the PCAOB's findings on the firm's individual audits and the board's broader observations on Deloitte's quality control and audit quality. The firm said it has been making a series of investments "focused on strengthening and improving our practice."

    Last month, the board released its annual reports on PricewaterhouseCoopers LLP, in which it found 28 deficient audits out of 75 reviewed, and KPMG LLP, in which it found 12 deficient audits out of 54 reviewed. The yearly report on the fourth Big Four firm, Ernst & Young LLP, hasn't yet been issued.

    The PCAOB conducts annual inspections of the biggest accounting firms in which it scrutinizes a sample of each firm's audits to evaluate their performance and compliance with auditing standards. The first part of the report is released publicly, but a second part, in which the board evaluates the firm's quality controls, remains confidential as long as the firm resolves any criticisms to the board's satisfaction within a year.

    Only if that doesn't happen does the PCAOB release that section of the report, as it did with Deloitte in October, the first time it had done so with one of the Big Four. In that case, the board made public a section of a 2008 inspection report in which it said Deloitte auditors were too willing to accept the word of clients' management and that "important issues may exist" regarding the firm's procedures to ensure thorough and skeptical audits.

    Bob Jensen's threads on Deloitte and the Other Large Auditing Firms ---
    http://www.trinity.edu/rjensen/Fraud001.htm

    Bob Jensen's threads on professionalism and independence in auditing ---
    http://www.trinity.edu/rjensen/Fraud001c.htm

     


    "At Deloitte, More Pain Before Any Quality Gain," by Francine McKenna, re"TheAuditors, November 30, 2011 ---
    http://retheauditors.com/2011/11/30/at-deloitte-more-pain-before-any-quality-gain/

    The PCAOB, the audit industry regulator, shamed global audit firm Deloitte recently when they exposed the private portion of the inspection report of the firm’s 2006 audits. It was the first time that had happened to one the Big Four audit firms, the largest firms that audit the vast majority of publicly listed firms in and out of the U.S..

    I’m sure Deloitte, and the rest of the Big Four, thought the PCAOB would never have the nerve.

    re: The Auditors has seen a confidential, internal Deloitte training document, prepared this past summer, that reveals the firm expects the worst when the inspection reports for their 2009, 2010, and 2011 audits are published by the PCAOB. The 2009 report should be out by the end of this year. The training document also shows how difficult it is for Deloitte leadership to steer the largest global firm away from the “audit failure iceberg.

    It seems audit competence and capacity to audit complex topics are in short supply at all the firms, based on PCAOB inspection results for audits conducted during the financial crisis period and the reports for 2010 audits at PwC and KPMG released recently. Deloitte has been particularly hard pressed to maintain audit quality since the firm lost several engagements that would have helped to grow specialized knowledge and retain experts. Big clients like Merrill Lynch, Bear Stearns, and Washington Mutual helped pay the bills for subject matter experts and quality control but those revenues were lost to financial crisis failures and forced combinations with better capitalized, non-audit client banks.

    I think the PCAOB decided to publicly criticize Deloitte for two reasons.

    We know how that story ended.

    If they did nothing, the PCAOB risked having a new major failure of a Deloitte client expose their lack of push on the firm to even respond, let alone improve.

    I wrote in American Banker about the special risks to financial services firms when the regulated, like Deloitte, resists the regulator:

    The PCAOB’s decision to make the Deloitte 2006 quality control criticisms public, and the fact that the Securities and Exchange Commission allowed it to do so, tell me Deloitte is still fighting the regulators. The deadlines for Deloitte to fix or sufficiently respond to criticisms in the 2007 and 2008 inspection reports have passed. We could soon see previously nonpublic information from those reports, too.

    The risk for banks in a situation like this is that an auditor that brazenly irritates its regulator may draw unwanted attention to its clients from their regulators. For example, PCAOB spokeswoman Colleen Brennan reminds me that the SEC knows the names of every company whose audit deficiencies are mentioned in a PCAOB auditor inspection report.

    These risks apply to all of Deloitte’s clients and to all public companies if the rest of the firms – KPMG, PwC, and Ernst & Young – are also playing chicken with the regulator.

    A little more than a month after releasing the Deloitte private report, the PCAOB released the inspection reports for audits performed by PwC and KPMG in 2009. The Financial Times’ Kara Scannell summarizes the findings:

    The Public Company Accounting Oversight Board’s findings from an annual inspection revealed that years after the financial crisis both auditing firms were not adequately challenging companies’ valuations of certain assets when the market for them dried up…

    The board reviewed 71 audits completed by PwC in 2010 and 52 audits done by KPMG in 2010.

    The Wall Street Journal’s Michael Rapoport tells us how bad the results really were:

    The government’s auditing regulator found deficiencies in 28 audits conducted by PricewaterhouseCoopers LLP and 12 audits by KPMG LLP in its annual inspections of the Big Four accounting firms.

    The Public Company Accounting Oversight Board said many of the deficiencies it found in its 2010 inspection reports of the two firms, released Monday, were significant enough that it appeared the firms didn’t obtain sufficient evidence to support their audit opinions.

    The regulator hasn’t yet issued its yearly reports on its inspections of the other Big Four firms, Ernst & Young LLP and Deloitte LLP.

    KPMG’s response to the PCAOB was not quite as belligerent as Deloitte’s persistent irritation at having their “professional judgment second-guessed”. But, it was not exactly conciliatory.

    Floyd Norris of the New York Times:

    Normally these letters say something like what KPMG wrote:

    “We conducted a thorough evaluation of the matters identified in the draft report and addressed the engagement-specific findings in a manner consistent with PCAOB auditing standards and KPMG policies and procedures.”

    You may note that said nothing about whether the firm accepted the board’s conclusions or not. That is better than what Deloitte did a few years ago, when it essentially said the board did not know what it was talking about.

    PwC, on the other hand, met the regulator more than half way according to Norris:

    PwC’s letter addressed that issue, saying that while there were cases where it differed with the board’s conclusions, “they generally related to the significance of the finding in relation to the audit taken as a whole, and not to the substance of the finding.”

    “Accordingly,” wrote the PWC officials, “the overall PCAOB inspection results, as well as the results of our internal inspections, were important considerations in formulating our quality improvement plan,” which it then describes.

    PwC’s spokesperson sent me this additional statement:

    “PwC is built on our reputation for delivering quality. We also recognize that the role we play in the capital markets requires consistent, high-quality audit performance. We therefore are focused on the increase in the number of deficiencies in our audit performance reported in the 2010 PCAOB inspection over prior years. We are working to strengthen and sharpen the firm’s audit quality, including making investments designed to improve our performance over both the short- and long-term.”

    Did the quality of the auditing really deteriorate for KPMG and PwC or is the PCAOB getting tougher, and maybe better, at what they do?

    We’ll have to see what the upcoming Ernst & Young and Deloitte reports show. Ernst & Young has been criticized for the Groupon multiple S-1 issue, as well as questions about accounting at future IPOs Zynga and Facebook. Now we have Olympus, too. And, of course, the jury is still out on the firm’s role in Repo 105 and Lehman Brothers.

    And what about the Deloitte improvement plan for prior years? Has Deloitte accepted the PCAOB’s criticisms and moved on or are they still fighting the regulator? Is Deloitte working hard to get ahead of their 2009, 2010, and 2011 results and avoid the embarrassment or worse – sanctions – if the PCAOB has to publish another private report?

    The confidential internal training report, intended to brief Subject Matter Resources (SMR), is called, “FY 2012 Engagement Quality Activities”.

    The Audit Quality Activity Plan for FY2012 has been socialized with:

    1. –  The OAQ Steering Committee
    2. –  The Audit Quality Council
    3. –  The RMPs
    4. –  The NPPDs
    5. –  The RILs
    6. –  Leaders in the PPN
    7. –  Extended Leadership Team
    8. –  CFO / CEO

    Yeah, that’s a lot of acronyms. And I’m not sure anymore – maybe I’ve been out of the firms too long or maybe I was never in them enough – what “socializing” a quality plan means. Suffice to say, the document, one hundred and eight-one very dense PowerPoint pages, has tons of information for the SMRs to absorb and pass on to engagement teams like now.

    But, by this summer, it was too late to make a difference in the inspection reports for the 2009 and 2010 audits.

    2009

    2010

    2011

    If Deloitte sent their response to the PCAOB for the 2009 audits on May 4th, why are we still waiting for the final report? Given the PCAOB’s decision to release Part 2 of the inspection report for Deloitte’s 2006 audits last month, I believe Deloitte was still treating PCAOB comments as an affront to partners’ professional judgments.

    What are the root causes for so many negative PCAOB comments, according to Deloitte?

    Continued in article

    Jensen Comment
    Deloitte may be frustrated with the PCAOB at the moment, but my guess is Deloitte's partners are raising their glasses at being able settle the Washington Mutual (WaMu) case for a settlement share of a mere $18.5 million. WaMu was the biggest bank to ever fail. And the bank failed after receiving a glowing going concern audit reports from Deloitte. It could've been far worse when the banking lawsuit dust settled for Deloitte, at least to date.

    Francine contends that Deloitte is the biggest loser among all the Big Four firms since the 2008 financial crisis. However, in the banking lawsuits all the Big Four auditors seem to be getting off for pennies on the dollar relative to the losses to banking shareholders, creditors, and taxpayers. KPMG seems to be a bigger loser than Deloitte in terms of subprime fraud settlements, but even for KPMG the settlements are merely hand slaps relative to damages done by slipshod auditing and enormous underestimations of loan loss reserves.

    None of the Big Four auditing firms are doing well in the PCAOB audit inspection reports. The highest auditing fees in the world do not seem to be buying as much auditing value added as those auditing firms would like us to believe.

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


    "Ernst Audits Found Deficient," by Michael Rapaport, The Wall Street Journal, December 22, 2011 ---
    http://online.wsj.com/article/SB10001424052970203686204577114763482556658.html?KEYWORDS=ernst

    The government's auditing-oversight board found deficiencies in 13 audits conducted by Ernst & Young LLP in its annual inspection of the Big Four accounting firm.

    In a report released Thursday, the Public Company Accounting Oversight Board said some of the deficiencies it identified in its 2010 inspection were significant enough that it appeared Ernst & Young hadn't obtained enough evidence to support its audit opinions.

    The 13 deficient audits were out of 63 Ernst & Young audits and partial audits that inspectors reviewed. The board didn't identify the companies involved, in accordance with its usual practice.

    In seven of the 13 audits, the oversight board said Ernst & Young was deficient in its testing of how clients applied fair value to their hard-to-value securities. The accounting board also said that in various audits, the firm made incorrect assumptions that led to inadequate testing of clients' internal controls, and didn't do enough testing on matters like revenue and loan-loss reserves.

    Ernst & Young said in a statement that the accounting board's observations "benefit our efforts to continuously strengthen our audit processes and improve the high quality of our audit services."

    The Ernst & Young report is the last of the current year's oversight reports on the Big Four to be released. Earlier this week, the board's annual report on Deloitte & Touche LLP found 26 deficient audits out of 58 reviewed. Last month, the report on PricewaterhouseCoopers LLP found 28 deficient audits out of 75 reviewed, and the report on KPMG LLP found 12 deficient audits out of 54 reviewed.

    The PCAOB conducts annual inspections of the largest accounting firms, scrutinizing a sample of each firm's audits to assess its performance and its compliance with auditing standards. The first part of the report, detailing deficient audits, is released publicly, but a second part, evaluating the firm's quality controls, is sealed permanently as long as the firm addresses any criticisms to the board's satisfaction within 12 months.

    Only once has the board unsealed that section of the report for a Big Four firm. In October, the board made public a section of a 2008 report in which it criticized Deloitte, saying "important issues may exist" regarding the firm's procedures to ensure thorough and skeptical audits.


    "KPMG Scrutinized Over Handling of Olympus Accounting Fraud Scandal," by Kalen Smith, Big Four Blog, December 15, 2011 ---
    http://www.big4.com/kpmg/kpmg-scrutinized-over-handling-of-olympus-accounting-fraud-scandal

    KPMG’s auditors in Tokyo are under scrutiny after signing off on reports issued by Olympus Corp. Auditors found several accounting irregularities when they reviewed financial statements provided by Olympus executives. The auditors were particularly concerned over $600 million worth of takeover advisory fees and payments on acquisitions. Despite their concerns, auditors chose to sign off on the reports after an outside consultant approved of the findings.

    Although the consultant said the takeover costs were justified, they were also hired from Olympus Corp. This has raised some red flags over a possible conflict of interest in the matter.

    Olympus has now been revealed to have engaged in financial fraud for more than two decades. Following the revelation of the accounting scandal at Olympus, regulators are looking closely at KPMG and Ernst & Young. Regulators feel the auditors should have seen signs of the fraud and taking measures to stop them.

    According to allegations, KPMG was Olympus’s auditor for years. They failed to catch the discrepancies and Ernst & Young was called in as well.

    According to Yuuki Sakurai of Fukoku Capital Management, auditors work for the companies that pay them. Auditors are going to have a hard time staying in business if they get a reputation for being the kind of company that goes to the regulators without solid evidence of malfeasance.

    Although the manner in which KPMG handled the Olympus case created some concern for regulators, it may signify greater concern over the corporate culture that has created a serious conflict of interest between auditors’ responsibilities for their clients and need to uphold the law.

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

    Bob Jensen's threads on the the decline of professionalism and independence in auditing ---
    http://www.trinity.edu/rjensen/Fraud001c.htm


    "Update: Mortgage Servicer Foreclosure Review Process," by Francine McKenna, re:TheAuditors, December 27, 2011 ---
    http://retheauditors.com/2011/12/27/update-mortgage-servicer-foreclosure-review-process/

    On November 22, 2011, the Office of the Comptroller of the Currency (OCC) issued a report on the actions by 12 national bank and federal savings association mortgage servicers to comply with consent orders issued in April 2011. These consent orders are intended to correct deficient and unsafe or unsound foreclosure practices by the servicers. The OCC also posted the twelve engagement letters between the consultants and the servicers on the OCC website.

    These disclosures were a result of pressure brought to bear by Congresswoman Maxine Waters and several other congressional members who sent a letter to the OCC and the Fed on October 28. This letter expressed the legislators’ displeasure with the way the OCC and the Federal Reserve Bank had so far run the “independent” foreclosure review process that is intended to overhaul mortgage-servicing processes and controls and to compensate borrowers harmed financially by wrongdoing or negligence.

    Congresswoman Waters cited my October 6 column for American Banker in this letter to the OCC and Fed when demanding that the regulators manage conflicts of interest in the foreclosure review process as well as make a full disclosure of vendors and their engagement letters with the banks.

    On December 6, I wrote again in American Banker after I reviewed the engagement letters that were posted by the OCC. I had several concerns. Congresswoman Waters did, too.

    “[The OCC] issued a report on the actions of a dozen national bank and federal savings association mortgage servicers aimed at complying with the consent orders issued in April 2011 to correct deficient and unsafe or unsound foreclosure practices. (The two remaining consent order recipients — GMAC/Ally and SunTrust — have not yet finalized their terms with vendors and as a result their overseers, Fed Chairman Bernanke and the Federal Reserve Bank, have not yet responded to the request for full disclosure, according to the Water’s office.)

    Waters was less than impressed with what she saw and so am I.  She told me, “My letters specifically asked for information on conflicts of interest between the banks and the consultants — which is precisely what the OCC redacted in the information they released last week. A cursory look into the banks and their consultants indicates that in some cases, there are substantial pre-existing relationships between the firms.”

    Redacted is an understatement.

    Here’s what was redacted, according to OCC spokesman Bryan Hubbard:

    Limited proprietary and personal information has been redacted from the engagement letters including, but not limited to:

    So what’s left? It’s interesting enough, as a start, to look at which consultants and law firms were selected by which servicers. It’s also interesting to look at the scope of services to be performed and the time and volume estimates for project activities where they were not redacted.

    Continued in article


    PwC already admitted its guilt and already apologized.
    "PwC Accused of Breaking Financial Rules Again," Big Four Blog,  December 16, 2011

    PwC is being probed for its reporting of client assets held by Barclays Capital Securities Ltd. to see if the Big4 firm broke financial rules.

    The UK’s Accountancy and Actuarial Discipline Board is investigating PwC’s reports to the Financial Services Authority on Barclays’s compliance with rules about separating client assets from other assets. In January, the FSA fined Barclays £1.12 million (about $1.7 million) after concluding that the bank failed to put client money in separated and protected accounts. At issue was £752 million ($1.16 billion) in client assets.

    PwC told Business Week that they “will cooperated fully with the AADB investigation and we will be defending our work vigorously,” adding that “the focus of the AADB is on cases which raise important issues affecting the public interest.”

    The AADB is also seeking a fine of £1.5 million against PwC for its role on a client-money account issue with JPMorgan Chase & Co.’s London activities. The fine would be the highest ever levied for such a case.

    PwC lawyer Tim Dutton has previously told a London tribunal that the fine should be capped at £1 million because the firm has admitted its guilt and already apologized.

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


    "European Commission Proposal will Hurt Audit Quality, says PwC," by Michael Foster, December 1, 2011 ---
    http://www.big4.com/pricewaterhousecoopers/big4-com-exclusive-european-commission-proposal-will-hurt-audit-quality-says-pwc -

    In an exclusive interview with Big4.com, PwC Director of Global Communications Mike Davies insisted that the recent European Commission proposal to tighten auditing restrictions would lower auditing quality throughout the European Union.

    While PwC supports some of the ideas in the legislation proposed by EU Financial Services Commissioner Michel Barnier, Davies suggested that the restrictions go too far. Calling some of Barnier’s proposals “radical measures”, Davies told me that PwC is happy with the status quo. “We believe the audit market is already pretty competitive,” Davies said, adding that there are already “checks and safeguards in place and provisions about what you can and can’t provide to auditing clients”.

    At the same time, Davies acknowledged that steps could be taken to allow smaller auditing firms to compete with the Big4 firms such as PwC. “There’s always more that can be done in terms of how the market operates and how to get smaller firms to increase their share,” he added.

    However, Barnier and supporters of the EC proposal disagree. The commissioner’s final green paper pursued new rules that would make it illegal for firms to offer consulting services to auditing clients. This would essentially force the Big4 firms to split into separate consulting and auditing companies, which some believe is Barnier’s ultimate goal.

    Additionally, the new European legislation would require accounting firms to have a “cooling-off” period of several years before they could offer auditing services to the same clients. This practice, known as “firm rotation”, would require companies to hire more than one auditing company over a long period of time.

    While the legislation hopes that firm rotation would help remove conflicts of interest, Mike Davies insists that it would lower the quality of audits performed by all firms. “It would actually be detrimental to audit quality,” Davies said, adding that “there are quite a number of people who support our point of view.”

    Continued in article

    "Big four auditors face breakup to restore trust," by Huw Jones, Reuters, November 30, 2011 ---
    http://in.reuters.com/article/2011/11/30/eu-auditors-idINDEE7AT0CQ20111130

    The world's top four audit firms will have to split up and rename themselves under a far-reaching draft European Union law to crack down on conflicts of interest and shortcomings highlighted by the financial crisis.

    "Investor confidence in audit has been shaken by the crisis and I believe changes in this sector are necessary," Internal Market Commissioner Michel Barnier said on Wednesday.

    Large auditors said the plans won't improve audit quality, while smaller rivals accused Barnier of a climbdown.

    Policymakers have questioned why auditors gave a clean bill of health to many banks which shortly afterwards needed rescuing by taxpayers as the financial crisis began unfolding.

    Barnier said recent apparent audit failures at AngloIrish and Lehman Brothers banks, BAE Systems and Olympus "would strongly suggest that audit is not working as it should".

    More robust supervision is needed and "more diversity in what is an overly concentrated market, especially at the top end", he said.

    Just four audit firms -- Ernst & Young ERNY.UL, Deloitte DLTE.UL, KPMG KPMG.UL, and PwC PWC.UL -- check the books of 85 percent of blue-chip companies in most EU states, a situation the Commission said was "in essence an oligopoly".

    UK data shows the Big Four profit margins are 50 percent higher than the next four audit firms, the commission said.

    Under Barnier's plan, the four top firms will have to separate audit activities from non-audit activities, such as tax and other advisory services -- "to avoid all risks of conflict of interest".

    REBRANDING

    There would have to be legal separation of audit and non-audit services if over a third of revenues from auditing is from large listed companies and the network's total annual audit revenues are more than 1.5 billion euros in the EU.

    Claire Bury, one of Barnier's top officials, said these conditions, if approved by EU states and the European Parliament, would alter all the Big Four's business models and even one or two of the next tier down in some member states.

    Continued in article

    Proof is a dangerous word in most any academic discipline except mathematics
    "Proof That Auditor Rotation is a Good Idea," by David Albrecht, Summa, December 1, 2011 ---
    http://profalbrecht.wordpress.com/2011/12/01/proof-that-auditor-rotation-is-a-good-idea/

    "PCAOB Chair takes aim at auditors' controls testing and says mandatory rotation could be difficult," Reuters, November 11, 2011 ---
    http://www.reuters.com/article/2011/11/11/us-auditor-watchdog-doty-idUSTRE7A95XQ20111111

    Auditors are not properly testing U.S. companies' internal accounting controls, the head of the main auditor watchdog said, while also reiterating urgent concerns about audit firm inspections in China.

    Internal controls on books and records -- a requirement imposed on corporations by 2002's post-Enron Sarbanes-Oxley laws to combat accounting fraud -- are not being properly tested by outside auditors, Public Company Accounting Oversight Board (PCAOB) Chairman James Doty said on Thursday.

    "This is a very major issue for us," Doty told Reuters on the sidelines of a securities regulation conference.

    Internal control rules for ensuring the adequacy of accounting record-keeping and checks were among the costliest changes mandated by Sarbanes-Oxley, often requiring sophisticated electronic systems and detailed audits.

    Auditors are supposed to gain an understanding of the controls put in place by companies and test them, but "some auditors are just taking the business process that the company has put in place as a control," Doty said.

    Touching on another key issue for his group and auditors, Doty said the PCAOB needs to gain entrance soon to China to inspect firms that audit U.S.-listed companies.

    "We are not talking about something that should happen three years from now. It needs to happen now," he said.

    PRESSING CHINESE REGULATORS

    A meeting planned for October between U.S. and Chinese regulators to talk about inspections was canceled by the Chinese, possibly because of leadership changes at their regulatory body, Doty said.

    Late last month, China announced the appointment of Guo Shuqing as the new head of the China Securities Regulatory Commission, in a reshuffle of key financial regulators.

    The PCAOB and the U.S. Securities and Exchange Commission have been encouraging the new CSRC chairman to resume talks over inspections, Doty said.

    The PCAOB negotiated agreements this year to inspect audit firms in the United Kingdom, Switzerland and Norway, but Chinese regulators have resisted U.S. inspections on the grounds that it would infringe on their authority.

    The PCAOB is struggling over whether audit firms in China should lose their U.S. registration if that country does not allow inspections of its auditors, Doty said.

    "It is not something we want to have happen," he said.

    SEES PROBLEMS WITH TERM LIMITS

    In a speech at a Practicing Law Institute conference, Doty indicated a controversial proposal to require term limits for audit firms to increase their independence could be difficult to put into practice.

    "I recognize now that audit firm rotation presents considerable operational challenges," he said.

    The PCAOB in August issued a "concept release," or initial report, on rotation, the first step in drafting changes in auditor standards. It is seeking comments on the proposal through December 14.

    Considered as early as the 1970s, audit firm rotation has been strongly opposed by audit firms, which would lose some of their most lucrative clients if it went into effect.

    Sarbanes-Oxley mandated that lead auditors be switched every five years, but put no term limits on audit firms.

    Continued in article

    Bob Jensen's threads on professionalism and independence within auditing firms ---
    http://www.trinity.edu/rjensen/Fraud001c.htm


    "Audit Reform in the European Union -- Michel Barnier Delivers A Holiday Turkey," by Jim Peterson, re:TheBlance, December 5, 2011 ---
    Click Here
    http://www.jamesrpeterson.com/home/2011/12/audit-reform-in-the-european-union-michel-barnier-delivers-a-holiday-turkey.html

    . . .

    What explains Barnier’s inability to grasp the complexities of the matrix of relationships among financial statement users, auditors and users? Perhaps it’s a simple matter of provincial bias, and lack of vision flowing down to reach its own level.

    Else it’s the basic principle taught in nursery schools:

    Give a toddler a hammer to play with, and expect breakage in the toy room

    Bob Jensen's threads on professionalism and independence within auditing firms ---
    http://www.trinity.edu/rjensen/Fraud001c.htm


    "SAS 70s: Background on the Reason for Change," by Connie Spinelli, Knowledge Leader, August 8, 2011 --- Click Here
    http://www.knowledgeleader.com/KnowledgeLeader/Content.nsf/Web+Content/HISAS70sBackgroundontheReasonforChange!OpenDocument&ISACANewsletter
    Thanks to Jerry Trites for the heads up on November 23, 2011 ---  http://uwcisa-assurance.blogspot.com/

    Earlier in the year, SAS 70 was replaced with a new standard - SSAE No. 16 “Reporting on Controls at a Service Organization,” which provides for the issuance of SOC 1 reports, which deal with controls at a service organization that are likely to be relevant to an audit of a user entity’s financial statements.

    Originally, SAS 70 was intended to be for the use of auditors who report on an organization that used service organizations to administer and run their internal control systems. However, they began to be used widely by IT auditors to report on the IT controls in the systems, and although they weren't intended to be used as general purpose reports, were often widely circulated by organizations who had them carried out to demonstrate their system was well controlled. Often this was for marketing purposes.

     
    Now, service auditor reports for periods ending on or after June 15, 2011are required to conform to the guidance contained in SSAE No. 16. Reports under SSAE No. 16 are referred to as SOC 1 reports, or “Reports on Controls at a Service Organization Relevant to User Entities’ Internal Control over Financial Reporting.”Use of these reports is still restricted to the management of the service organization, user entities and user auditors.

    The new standards also provide for SOC 2 and SOC 3 reports. SOC 2 reports are called “Reports on Controls at a Service Organization Relevant to Security, Availability, Processing Integrity, Confidentiality and Privacy” and SOC 3 engagement reports are called “Trust Services Report for Service Organizations.” The latter are available as general purpose reports, which can therefore be released to the public.

    The three types of reports are intended to meet the needs that have been indicated for controls based reports, and hopefully will provide IT Auditors with a set of standards that will be useful to them while not compromising the purpose of their reports. For an article on this change,
    see this link.

    "PCAOB Chair takes aim at auditors' controls testing and says mandatory rotation could be difficult," Reuters, November 11, 2011 ---
    http://www.reuters.com/article/2011/11/11/us-auditor-watchdog-doty-idUSTRE7A95XQ20111111

    Bob Jensen's threads on professionalism and independence in auditing ---
    http://www.trinity.edu/rjensen/Fraud001c.htm


    "Banks Favor Companies with Women CFOs? A female finance chief may be an asset when pitching for bank loans, a new Rensselaer Polytechnic Institute study suggests," by Marielle Segarra, CFO.com, December 22, 2011 ---
    http://www3.cfo.com/article/2011/12/leadership_rensselaer-polytechnic-rpi-qiang-wu-bank-loans-gender

    GirlGeeks --- http://www.girlgeeks.org/ 

     

    Question
    Who was the first woman to be admitted as an audit partner in a Big Eight accounting firm?

    Indiana University's Photo Archives (over two million pictures) ---
    http://paper.li/businessschools?utm_source=subscription&utm_medium=email&utm_campaign=paper_sub  
     

    Jensen Comment
    I did a search on the term "Accounting." One hit was a 1936 photograph of an "accounting machine room" that in some respects resembles a computing lab room of modern times. I don't know why an "auto polo" site also showed up on the hit list for accounting. That photograph mentions Ernie Pyle, although I'm wasn't sure this is the famous Ernie Pyle. However, a check on Ernie Pyle showed at he was at Indiana University at that time ---
    http://en.wikipedia.org/wiki/Ernie_Pyle

    It was slightly more productive to search on the word "Business".

    Here's a 1957 photograph of a computing machine in the school of business ---
    http://webapp1.dlib.indiana.edu/archivesphotos/results/item.do?itemId=P0023310&searchId=3&searchResultIndex=21

    Various photographs of Michele Fratianni (economics professor) show how men can truly disguise their appearances with glasses and a mustache. I wonder if the nose was attached to the glasses.

    Cartoon:  Players may strut and players may fret but orators rave on forever ---
    http://webapp1.dlib.indiana.edu/archivesphotos/results/item.do?itemId=P0022845&searchId=0&searchResultIndex=52

    Here's a 1945 Careers for Women photograph ---
    http://webapp1.dlib.indiana.edu/archivesphotos/results/item.do?itemId=P0023302&searchId=2&searchResultIndex=20
    It would be interesting to investigate what female career opportunities were being promoted at the time by Indiana University. It was in some ways too early to suggest CPA firm careers. Most of the large CPA firms were not yet admitting women partners (at least not in any significant numbers), and women were not usually allowed to travel on audits and meet with clients. How times have changed now that CPA firms hire more women graduates than men in recent years.

    In 1960 Mary Jo McCann became the first woman CPA in Kansas ---
    http://www.kscpa.org/about/news/119-mary_jo_mccann_first_woman_cpa_in_kansas_passes
    Fifteen years later she became Chair of the Kansas State Board of Accountancy

    In 1977 Cheryl Wilson became the first woman partner of any Big Eight firm in Chicago (Coopers & Lybrand) ---
    http://www.icpas.org/hc-media.aspx?id=7602 

    In  the1960s Mary E. Lanigar, a Stanford University mathematics graduate and attorney and CPA, was the arguably first U.S. female to be made partner in any Big Eight firm (Arthur Young). She was a tax partner. In 1938 she'd worked as an accountant in the Stanford University Athletics Department.
    http://articles.sfgate.com/2007-10-24/news/17264444_1_mills-college-santa-rosa-mary

    In 1973 Marianne Burge became the first Price Waterhouse female partner. She was also a tax partner.
    http://www.nytimes.com/1998/03/17/business/marianne-burge-64-expert-on-tax-issues.html

    Ernst & Ernst acquired a woman partner in 1957, but I think she was inherited as a partner in a merger with a British accounting firm (Whinney, Murray, & Company) ---
    http://www.spoke.com/info/p73cjmW/Aalso

    It would be interesting to know when the first U.S. female audit partner was admitted in a Big Eight firm.
    I suspect that Dale Flesher (Ole Miss. expert on accounting history) probably knows the answer to this one.

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


    "A Degree of Practical Wisdom:: The Ratio of Educational Debt to Income as a Basic Measurement of Law School Graduates’ Economic Viability," by Jim Chen, SSRN, December 3, 2011 ---
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1967266

    Abstract:     
    This article evaluates the economic viability of a student’s decision to borrow money in order to attend law school. For individuals, firms, and entire nations, the ratio of debt to income serves as a measure of economic stability. The ease with which a student can carry and retire educational debt after graduation may be the simplest measure of educational return on investment.

    Mortgage lenders evaluate prospective borrowers' debt-to-income ratios. The spread between the front-end and back-end ratios in mortgage lending provides a basis for extrapolating the maximum amount of educational debt that a student should incur. Any student whose debt service exceeds the maximum permissible spread between mortgage lenders' front-end and back-end ratios will not be able to buy a house on credit.

    These measures of affordability suggest that the maximum educational back-end ratio (EBER) should fall in a range between 8 and 12 percent of monthly gross income. Four percent would be even better. Other metrics of economic viability in servicing educational debt suggest that the ratio of total educational debt to annual income (EDAI) should range from an ideal 0.5 to a marginal 1.5.

    EBER and EDAI are mathematically related ways of measuring the same thing: a student's ability to discharge educational debt through enhanced earnings. This article offers guidance on the use of these debt-to-income ratios to assess the economic viability of students who borrow money in order to attend law school
    .

    . . .

    To offer good financial viability, defined as a ratio of education debt to annual income no greater than 0.5, post-law school salary must exceed annual tuition by a factor of 6 to 1. Adequate financial viability is realized when annual salary matches or exceeds three years of law school tuition. A marginal, arguably minimally acceptable level of financial viability requires a salary that is equal to two years’ tuition. The following table compares some tuition benchmarks with the salary needed to ensure the good, adequate, and marginal levels of financial viability identified in this article:

    Chen

     

    Jensen Comment
    This type of study, in my viewpoint, has some relevancy for professional schools beyond the bachelors degree. However, I would not recommend this type of analysis for students contemplating where to go after high school. In the first four years, students get much more out of college than career opportunities. There are liberal education quality considerations, greatness of faculty considerations, socialization experiences, dating, dorm living, and intimacy often leading to marriage. Often more expensive schools have more to offer beyond the classroom experience. By the time students are more mature after graduation from college, the importance of some of these "extracurricular" experiences often diminishes.

    And if we look at post-graduate law, medicine, engineering, and business schools, the job opportunities and salary expectations are not independent of the halo effect of where the candidate graduated. Diplomas from Harvard and Yale Law Schools add a great deal to salary expectations. And there are huge advantages of being able to network with alumni who often pave the way for job opportunities. What I'm saying is going to a law school having a tuition of $60,000 may well be worth it to graduates who take full advantage of the "extracurricular" opportunities such as networking with alumni. And for all practical purposes you can never be a U.S. Supreme Court justice unless you either graduated from Harvard or Yale law schools or were on the faculty at one of those law schools.

    In other words, if you can swing it go to Yale Law school rather than UCON (sorry Amy).

    EGADS. I'm a snob.


    Do financial incentives improve manuscript quality and manuscript reviews?
    December 12, 2011 message from Dan Stone

    There seems to be a "natural experiment" in progress at accounting journals. Two "top" journals (JAE, JAR) have substantial fees for submission, a portion of which is paid to reviewers. Many other journals have low or no submission fee (e.g., AOS = $0).

    Research questions:

    1. Do submission fees improve the quality of manuscript submissions?

    Theory - Ho yes: because authors with more financial resources produce better work. Ho no: because submission fees are, in relation to accounting professor salaries, still trivial.

    2. Do submission fees improve the quality of manuscript reviews?

    Theory - Ho yes: because $ increases effort and the quality of reviews is primarily a function of reviewer effort.

    Ho no: because financial motivation is of "low quality" (according to self-determination theory) and reviews require insight and creativity. Money doesn't buy insight or creativity, it only buys effort.

    Dan's remaining questions: 1. any existing papers on this topic? (here's a paper that argues that financial incentives will decrease cases of reviewer's declining to review, which could improve reviewer quality (http://jech.bmj.com/content/61/1/9.full) 2. if not, any volunteers to get this data and run this study? :)

    Thanks,

    Dan Stone

    December 13, 2011 reply from Zane Swanson

    Consider a control variable(s):

      What is the key metric(s) in an acceptable quality review?

      The reason for the aforementioned is that some informal convention discussions have occurred that editors preselect the acceptance by who becomes a reviewer.  Alternatively, some reviewers may reject about everything.  If an editor does not want a paper (too far off the current “research frontier”?), then the editor selects a reviewer who will just say no.

    Stone wrote:

    There seems to be a "natural experiment" in progress at accounting journals. Two "top" journals (JAE, JAR) have substantial fees for submission, a portion of which is paid to reviewers. Many other journals have low or no submission fee (e.g., AOS = $0). 

    Research questions:

    1. Do submission fees improve the quality of manuscript submissions?

    Theory -

    Ho yes: because authors with more financial resources produce better work.

    Ho no: because submission fees are, in relation to accounting professor salaries, still trivial.

    2. Do submission fees improve the quality of manuscript reviews?

     

    Theory -

    Ho yes: because $ increases effort and the quality of reviews is primarily a function of reviewer effort.

    Ho no: because financial motivation is of "low quality" (according to self-determination theory) and reviews require insight and creativity.

    Money doesn't buy insight or creativity, it only buys effort.

    Dan's remaining questions:

    1. any existing papers on this topic? (here's a paper that argues that financial incentives will decrease cases of reviewer's declining to review, which could improve reviewer quality

    (http://jech.bmj.com/content/61/1/9.full)

    2. if not, any volunteers to get this data and run this study? :) 

     

    Zane Swanson

     

    December 12, 2011 reply from Bob Jensen

    Since many of the TAR, JAR, and JAE top referees are used by all three journals, it seems unlikely that variations in remuneration for the refereeing is going to affect the quality of the reviews. What remuneration might affect in a particular instance is a referee's acceptance of taking on the refereeing assignment in the first place. This might be something some referees (certainly not all)  will admit to in interviews and surveys.

    Regarding the question of whether journal editors predetermine refereeing outcomes of some manuscripts, by choice of referees, probably can only be answered by journal editors, but they're not likely to admit to such unethical game playing.

    Certainly with respect to submissions using advanced mathematics in what are classified  as analytical submissions, there are referees who are known to be much tougher about the realism of the foundational assumptions. Some referees don't get hung up on assumptions and are more interested in the quality of the mathematical derivations. Other referees are likely to be more critical of the lack of realism in the assumptions and/or questions about whether the resulting outcomes are truly relevant to accounting. My suspicion is that TAR, JAR, and JAE editors are going to shy away from the latter referees unless they themselves don't don't think in advance that the paper should have much of a shot. But that is an unproven suspicion.

    With respect to "quality of a review," much depends upon the what constitutes "quality." To me the highest quality review demonstrates that the referee knows as much or more about the manuscript content and research as the authors themselves.


    A high quality rejection in one sense is a rejection that lists reasons so convincing that even the authors agree that the paper should've been rejected. I've had some memorable rejections in this category.  You won't find them at my Website.

    A low quality rejection in a sense is a terse one word "reject" or an editor's terse note that "this piece of garbage is not worth sending to our referees." One of the best-known editors of JAR was known for the latter type of rejection in those words. What such rejection feedback fails to tell us is how much time time and effort the referee/editor really put in studying the manuscript before writing a terse and useless reply to the authors.

    A high quality acceptance or re-submit outcome is one that lists tremendous ideas for improving the manuscript before final publication or resubmission. It's nice if a referee really suggests helpful ways to improve the way the paper is written (apart from content), but we should not expect referees to rewrite papers and it's unfair to downgrade a reviewer for not doing so.


    But referees can get carried away to a fault in suggesting ways to improve a paper. I was one of two referees of a submission published a short time ago by IAE. We both had resubmit suggestions, but mine were quite modest. The other referee submitted about 10 pages of "conditions" that if taken literally would've increased the size of the paper to over 200 pages and required that the authors completely re-run the field study with more questions to be asked in the field. As we sometimes say about some referee reports, "the road to hell is paved with good intentions."

    Fortunately the referee who really got carried away with "conditions" did not insist upon meeting most of the original conditions after the authors resubmitted the paper three times.

    Also it was fortunate that the authors did not simply throw up their hands in utter discouragement over all that the referee wanted in his/her first review.

    When Steve Zeff was editor of TAR, I was given the task of adjudicating conflicting referee recommendations. I had the feeling that the adjudication cases Steve sent to me were those where he wanted to publish the manuscripts but needed some additional backup for his decisions. Or put another way, he really wanted to publish some manuscripts that did not contain the requisite equations demanded by nearly all TAR referees.

    Of course when doing research on the refereeing process, it's risky to survey authors themselves. Most of us have had referees we thought were idiots and are likely to say so in surveys. We could easily be wrong of course. In my case the my three "big ones" that were flatly turned down are linked at
    http://www.trinity.edu/rjensen/default4.htm

    Please keep the dates of my three "big ones" in mind if you take the time and trouble to examine my big ones that got away. Also my secretary translated my original doc files into html files (before the MS word would do such conversions automatically). Hence the tables and exhibits and some other sections of the papers were degraded badly.

    Only one of the papers was submitted to an accounting research  journal. Actually it was rejected by both TAR and JAR even after I took on co-authors to improve the paper. That was Working Paper 153.

     

     

    Respectfully,
    Bob Jensen

    December 13, 2011 reply from Bob Jensen

    Bob,

    That was a breath of fresh air on a touchy academic subject.  There is an endless supply of material in guides to writing and examples of award winning publications, but little about reviewing.  I do suggest that your post is a keeper on your web site.

    Regards,

    Zane

    When browsing some of my 8,000+ comments on the AAA Commons, I ran across this old tidbit that relates to our more current AECM messaging on journal refereeing.

    I even liked the "Dear Sir, Madame, or Other" beginning.

    I assume that "Other" is for the benefit of Senator Boxer from California.

     

    Letter From Frustrated Authors, by  R.L. Glass, Chronicle of Higher Education, May 21, 2009 ---
    http://chronicle.com/forums/index.php?topic=60573.0
    This heads up was sent to me by Ed Scribner at New Mexico State

    Dear Sir, Madame, or Other:

    Enclosed is our latest version of Ms. #1996-02-22-RRRRR, that is the re-re-re-revised revision of our paper. Choke on it. We have again rewritten the entire manuscript from start to finish. We even changed the g-d-running head! Hopefully, we have suffered enough now to satisfy even you and the bloodthirsty reviewers.

    I shall skip the usual point-by-point description of every single change we made in response to the critiques. After all, it is fairly clear that your anonymous reviewers are less interested in the details of scientific procedure than in working out their personality problems and sexual frustrations by seeking some kind of demented glee in the sadistic and arbitrary exercise of tyrannical power over hapless authors like ourselves who happen to fall into their clutches. We do understand that, in view of the misanthropic psychopaths you have on your editorial board, you need to keep sending them papers, for if they were not reviewing manuscripts they would probably be out mugging little old ladies or clubbing baby seals to death. Still, from this batch of reviewers, C was clearly the most hostile, and we request that you not ask him to review this revision. Indeed, we have mailed letter bombs to four or five people we suspected of being reviewer C, so if you send the manuscript back to them, the review process could be unduly delayed.

    Some of the reviewers’ comments we could not do anything about. For example, if (as C suggested) several of my recent ancestors were indeed drawn from other species, it is too late to change that. Other suggestions were implemented, however, and the paper has been improved and benefited. Plus, you suggested that we shorten the manuscript by five pages, and we were able to accomplish this very effectively by altering the margins and printing the paper in a different font with a smaller typeface. We agree with you that the paper is much better this way.

    One perplexing problem was dealing with suggestions 13–28 by reviewer B. As you may recall (that is, if you even bother reading the reviews before sending your decision letter), that reviewer listed 16 works that he/she felt we should cite in this paper. These were on a variety of different topics, none of which had any relevance to our work that we could see. Indeed, one was an essay on the Spanish–American war from a high school literary magazine. The only common thread was that all 16 were by the same author, presumably someone whom reviewer B greatly admires and feels should be more widely cited. To handle this, we have modified the Introduction and added, after the review of the relevant literature, a subsection entitled “Review of Irrelevant Literature” that discusses these articles and also duly addresses some of the more asinine suggestions from other reviewers.

    We hope you will be pleased with this revision and will finally recognize how urgently deserving of publication this work is. If not, then you are an unscrupulous, depraved monster with no shred of human decency. You ought to be in a cage. May whatever heritage you come from be the butt of the next round of ethnic jokes. If you do accept it, however, we wish to thank you for your patience and wisdom throughout this process, and to express our appreciation for your scholarly insights. To repay you, we would be happy to review some manuscripts for you; please send us the next manuscript that any of these reviewers submits to this journal.

    Assuming you accept this paper, we would also like to add a footnote acknowledging your help with this manuscript and to point out that we liked the paper much better the way we originally submitted it, but you held the editorial shotgun to our heads and forced us to chop, reshuffle, hedge, expand, shorten, and in general convert a meaty paper into stir-fried vegetables. We could not – or would not – have done it without your input.

    -- R.L. Glass
    Computing Trends,
    1416 Sare Road Bloomington, IN 47401 USA

    E-mail address: rglass@acm.org

    December 31, 2011 reply from Steve Kachelmeir

    This letter perpetuates the sense that "reviewers" are malicious outsiders who stand in the way of good scholarship. It fails to recognize that reviewers are simply peers who have experience and expertise in the area of the submission. The Accounting Review asks about 600 such experts to review each year -- hardly a small set.

    While I have seen plenty of bad reviews in my editorial experience, I also sense that it is human nature to impose a self-serving double standard about reviewing. Too many times when we receive a negative review, the author concludes that this is because the reviewer does not have the willingness or intelligence to appreciate good scholarship or even read the paper carefully. But when the same author is asked to evaluate a different manuscript and writes a negative review, it is because the manuscript is obviously flawed. Psychologists have long studied self-attributions, including the persistent sense that when one experiences a good thing, it is because one is good, and when one experiences a bad thing, it is because others are being malicious. My general sense is that manucripts are not as good as we sense they are as authors and are not as bad as we sense they are as reviewers. I vented on these thoughts in a 2004 JATA Supplement commentary. It was good therapy for me at the time.

    The reviewers are us.

    Steve

    December 31, 2011 reply from Bob Jensen

    When I was a relatively young PhD and still full of myself, the Senior Editor, Charlie Griffin, of The Accounting Review sent me a rather large number of accountics papers to referee (there weren't many accountics referees available 1968-1970). I think it was at a 1970 AAA Annual Meeting that I inadvertently overheard Charlie tell somebody else that he was not sending any more TAR submissions to Bob Jensen because "Jensen rejects every submission." My point in telling you this is that having only one or two referees can really be unfair if the referees are still full of themselves.

    Bob Jensen

     

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

     


    "Corporate Tax Avoidance Cost States $42 Billion," by Michael Cohn, Accounting Today, December 7, 2011 ---
    http://www.accountingtoday.com/news/Corporate-Tax-Avoidance-Cost-States-Billions-61060-1.html
    To say nothing about the strategies to avoid or defer Federal taxes when, often reducing tax payments to zero or seeking negative tax refunds.

    Sixty-eight of the most consistently profitable Fortune 500 companies paid no state corporate income tax in at least one of the last three years, and 20 of the companies averaged a tax rate of zero or less from 2008-2010.

    Nevertheless, the companies told shareholders they made nearly $117 billion in pre-tax U.S. profits during those no-tax years, and 16 of the companies had multiple no-tax years.

    A new study from the advocacy group Citizens for Tax Justice and the Institute on Taxation and Economic Policy found that 265 of the most consistently profitable U.S. corporations cost states $42.7 billion over three years. If the 265 corporations had paid the 6.2 percent average state corporate tax rate on the $1.33 trillion in U.S. profits that they reported to their shareholders, they would have paid $82.6 billion in state corporate income taxes over the 2008-10 period. Instead, they paid only $39.9 billion.

    Continued in article

    Corporate Tax Dodging in the Fifty States, 2008-2010 ---
    http://ctj.org/ctjreports/2011/12/corporate_tax_dodging_in_the_fifty_states_2008-2010.php


    Best and Worst Run States in America — An Analysis Of All 50

    From the AICPA CPA Letter Daily on December 7, 2011
    For the second year, 24/7 Wall St. ranked the 50 states according to how well they are run. Factors included the state's financial health, standard of living, education system, employment rate, crime rate and how efficiently the state uses its resources to provide government services. 24/7 Wall St. determined that Wyoming is the best-run state and California is the worst run. 24/7 Wall St.
    http://247wallst.com/2011/11/28/best-and-worst-run-states-in-america-an-analysis-of-all-50/

    Jensen Comment
    The best-run state is Wyoming. The worst-run state is California  Most of the Top Ten best-run states have relatively low populations. Small seems to be better in terms of state government efficiency, although social programs and cold weather in those states tend to repel welfare and Medicaid recipients from around the nation. It's difficult to draw liberal versus conservative explanations for best-run states since liberal states of Vermont and Minnesota are mixed in the Top Ten along with the conservative states of Wyoming, Utah, and the two Dakota states.

    Minnesota has the least debt per capita, but the union-run state of Massachusetts has the most debt per capita. This is somewhat interesting because both Minnesota and Massachusetts are viewed as liberal states (more so in the days of Hubert Humphrey and Walter Mondale). The relatively conservative southern states tend to be below the median on state debt per capita. The western states are more variable. I accuse Taxachusetts of being union-run in part because Boston refuses to allow Wal-Mart stores until Wal-Mart becomes unionized.

    When it comes to debt per capita there is less denominator effect than I suspected beforehand, although small populations become a huge factor behind the high debt loads per capita in Alaska, Rhode Island, and Delaware. Alaska can also afford a higher debt load because of vast untapped natural resources.

    I watched two very liberal commentators from Boston on television last night arguing that more debt load in Taxachusetts to support increased spending for social programs was a good investment of that state's economy. This seems to be questionable given where Taxachusetts already stands in relation to debt per capita.

    Bob Jensen's threads on state taxation are at
    http://www.trinity.edu/rjensen/Bookbob1.htm#010304Taxation
    You have to scroll down to find the state tax comparisons.


    "GASB Plan Concerns Treasurers: NAST Members Share Qualms About Five-Year Projections," by Joan Quigley, The Bund Buyer, December 7, 2011 ---
    http://www.bondbuyer.com/issues/120_234/gasb-state-five-year-projections-1033938-1.html

    State treasurers voiced concerns about a proposal unveiled Tuesday by the Governmental Accounting Standards Board that recommends they provide five-year projections of cash flows and information about future financial obligations.

    The concerns surfaced here at the Issues Conference on Public Funds Management, sponsored by the National Association of State Treasurers.

    The NAST gathering coincided with GASB’s release of so-called preliminary views in a document entitled “Economic Condition Reporting: Financial Projections.”

    The proposal, which GASB is floating for public comment and hearings, would require issuers to provide the cash-flow projections if they wanted a clean audit.

    GASB said users of governments’ financial statements need this information to assess an entity’s financial health.

    Several state treasurers at the conference who had not reviewed the board’s proposal and had only read about it in media accounts expressed reservations.

    “We do have a basic concern about what sort of future fiscal projections are expected, with what detail and with what caveats they would be presented,” said Nancy Kopp, the treasurer of Maryland.

    She noted that if such projections had been required in 2006, they would have proven wrong after the 2008 financial crisis.

    “It’s when you get to projections and hypothetical information, we get most concerned,” she said.

    The treasurer’s office of Maryland currently posts projections on its website based on present law and economic assumptions.

    “But these are unaudited, best-guess assumptions,” Kopp said.

    Another state treasurer, who moderated the pension panel, said she had qualms about the proposal’s impact on small municipalities.

    Continued in article

    Bob Jensen's threads about the sad state of governmental accounting ---
    http://www.trinity.edu/rjensen/Theory02.htm#GovernmentalAccounting

     


    "529 college savings plans have their downsides The state-sponsored programs offer a tax-advantaged way to save for college. But there are pitfalls to 529s that even careful investors can overlook," by Walter Hamilton and Stuart Pfeifer, Los Angeles Times, December 18, 2011 ---
    http://www.latimes.com/business/la-fi-college-529-20111218,0,2693621.story

    Sherri and Cliff Nitschke thought they were planning wisely for their children's college educations when they opened a 529 savings account in 1998.

    The Fresno couple saved diligently over the years in hopes of avoiding costly student loans. But their timing couldn't have been worse.

    When they needed the money a decade later, their 529 account had plunged in value during the global financial crisis. Their portfolio sank 30% in 2008, forcing the Nitschkes to borrow heavily to send their two sons to
    UCLA.

    "529s were no friend to us," Cliff Nitschke said. "Honestly, it's probably one of the worst things we did. I could have made more money putting it in a mayonnaise jar and burying it in the backyard."

    Over the last decade, 529 savings plans have surged in popularity as parents scramble to keep up with rapidly escalating college costs.

    Similar in some ways to 401(k) retirement plans, 529s are state-sponsored programs offering a tax-advantaged way to save for college. Parents typically invest in stock and bond mutual funds with after-tax dollars. But the earnings grow free of federal, and generally state, taxes.

    Every state offers at least one 529 plan, and parents can invest in any state's plan. Many states give up-front tax deductions for 529 contributions, though California does not.

    Assets in 529 accounts have swelled to $135 billion today from $91 billion five years ago, according to Financial Research Corp.

    But as the Nitschkes discovered, there are downsides to 529s that even careful investors can overlook.

    "There are a number of pitfalls that can catch parents completely off guard," said Deborah
    Fox, founder of Fox College Funding in San Diego, which advises families on how to pay for college. "They are not a panacea."

    Bob Jensen's personal finance helpers ---
    http://www.trinity.edu/rjensen/Bookbob1.htm#InvestmentHelpers


    "A Political Solution for the Euro? Germany is right to demand that the worst-run nations submit to fiscal discipline in exchange for financial aid," by George Melloan, The Wall Street Journal, November 30, 2011 ---
    http://online.wsj.com/article/SB10001424052970204630904577062680963637586.html#mod=djemEditorialPage_t

    Markets rebounded Monday on reports that the 17 euro-zone nations are negotiating a plan to impose greater fiscal discipline on deeply indebted states. The partial recovery from last week's market swoon was a recognition that German Chancellor Angela Merkel is right to define Europe's crisis of confidence as primarily a political malaise. Nothing will come right until Europe's southern tier politicians curb their excessive borrowing.

    The possible direction of the negotiations was tipped by a leaked German memo proposing a "European Monetary Fund" that would be the core of a "stability union" paving the way for "political union." As a quid pro quo for financial aid, this fund would demand policy reforms in distressed nations to facilitate a work-off of excessive debt. Ms. Merkel, French President Nicolas Sarkozy and the new Italian premier, Mario Monti, are promising that a plan for closer economic and political integration will be submitted at the Dec. 9 European Union summit. If approved, this could be a very big deal.

    The Germans, strong backers of further European union, are essentially laying out a choice: Either the governments of its worst-run nation states submit to some form of fiscal discipline, or the monetary union will disintegrate and they will be worse off for it. The bailout funds that have already been granted—to Greece, Ireland and Portugal—have done little to ease the debt crisis because they have produced insufficient reform.

    Moreover, the bailout well is running dry. The European Financial Stability Facility (EFSF), created last year, is clearly underfunded at €440 billion ($587 billion). Having already allotted a third of that to Ireland and Portugal, the facility is certainly not capable of rescuing an Italy or Spain. As for the European Central Bank (ECB), it already is fudging on its legal limitations by buying national debt.

    The latest nonstarter put forward by the bailout lobby in Brussels would have the ECB lend money (presumably newly printed) to the International Monetary Fund (IMF), which in turn would package those euros with its own funds for additional European bailouts. This too-clever idea would bypass ECB restrictions on direct loans. More importantly it would transfer most of the bailout risks to non-European IMF members, with the IMF's largest contributor—the United States—assuming the lion's share. If the U.S. Congress buys into this deal, it should be fined for sleepwalking.

    Continued in article


    "End-of-Term Conundrums, Part 1: Plagiarism," by Frank Donoghue, Chronicle of Higher Education, December 2, 2011 ---
    http://chronicle.com/blogs/innovations/end-of-term-conundrums-part-1-plagiarism/31005?sid=wc&utm_source=wc&utm_medium=en

    As professors and students approach the end of the academic term, I thought it appropriate to post about two items that never fail to factor in the early winter and late spring. The first is plagiarism. I can’t help feeling that, in recent years, academia has not kept pace with what I see as a rapidly changing and increasingly hard-to-define concept. Two important factors to consider: 1) plagiarism has gotten much easier to commit in the age of the Internet; and 2) students currently in the undergraduate pipeline either understand intellectual property imperfectly or they simply don’t care about it.

    1) Google and Wikipedia simultaneously constitute a gold mine and a potential minefield for wannabe plagiarists. As a random illustration, I looked up “Scarlet Letter essays” and “Scarlet Letter term papers” on Google, and looked up The Scarlet Letter on Wikipedia. The Google searches yielded page after page of complete essays, “study guides” which could easily be transformed into papers with little effort, and advertisements for paper-writing services. These last were, I must admit, refreshing and funny. When I was an undergraduate in the late 1970s, I knew students who bought term papers, but, to hear them talk about it, the process sounded much like a drug deal, with everything on the QT. Now paper-writing services are out in the open, and have clearly adopted the advertising model used by online dating services: that is, they bill themselves as “free,” and there is a (very) minimal amount of free material on their sites, but if you want something you can actually turn in for a grade (the equivalent of “show profile” and “chat” options I guess), you have to pay. You can even order a customized essay, so that specific, assigned paper topics pose no problem. But with so many free papers available—and with so much thematic overlap among them that cut and paste opportunities are everywhere—why pay money?

    The Wikipedia article on The Scarlet Letter also demonstrated that a paper on the novel was one mouse click away. After a very detailed plot summary, the author of the article offered an analysis of what he or she considered its two major themes: sin and the clash between past and present.

    It’s hard to imagine weak students, students working 50 hours a week, or desperate students getting to their assignments at the eleventh hour, not availing themselves of these resources, particularly since they’re universal in all our daily lives. Smartphones have made bar bets a thing of the past; my students regularly use “Google” and “Wikipedia” as verbs; and even the new Kindle Touch has a feature that links key terms in the books one downloads to Wikipedia.

    2) Plagiarism aside, these are not bad developments. Wikipedia in particular is a unique phenomenon, in the sense that it is slowly but surely transforming itself from a catch-all bin of information into a legitimate scholarly reference. It can do so in part because the Internet allows it to be infinitely more agile than, say, the Encyclopedia Britannica (and when, by the way, was the last time you saw a citation in a student paper to that once august reference work?). Wikipedia also adopts a collaborative conception of writing, blurring the notion of writing as personal, intellectual property. Chris Anderson’s popular and provocative recent book Free: How Today’s Smartest Businesses Profit by Giving Something for Nothing (2010), simultaneously released as a traditional book and as a free downloadable text, blurs that notion even farther, giving the reader the choice either to acknowledge the book as Anderson’s intellectual property or to decide that it doesn’t belong to anyone.

    Traditionalists would argue that we need to do a better job of policing student work and punishing plagiarists. I counted myself among them and have often pointed out that, unlike my university, Ohio State, many colleges and universities require students to submit their papers to the plagiarism-detection service Turnitin.com. I thought that was a good idea until I began researching this post, only to discover that (intellectual property concerns aside—Turnitin claims ownership of the papers fed into it, as those papers make up part of its database), Turnitin just doesn’t work. I found several articles and even, amazingly, a YouTube video on the topic of “how to beat Turnitin.”

    Continued in article

    Jensen Comment
    Accounting students have a harder time plagiarizing from Wikipedia vis-à-vis finance and economics students. This is because accountants have been hugely negligent contributing to Wikipedia relative to their other professional and academic brethren.

    But Google searches by accounting students are alive and well, and hits to my own Website become more popular late in every semester. of course most of these students do not plagiarize my work. But I'll bet the shirt I'm wearing that I end up having written huge portions of term papers every semester for which I get no credit ---
    http://www.trinity.edu/rjensen/threads.htm

    Bob Jensen's threads on plagiarism and cheating are at
    http://www.trinity.edu/rjensen/Plagiarism.htm

     


    Don't wash out our SOX

    "Republicans for the Accounting Cartel:  GOP Members block Sarbox reform for small public companies," The Wall Street Journal, December 2, 2011 ---
    http://online.wsj.com/article/SB10001424052970204262304577068723458775202.html#mod=djemEditorialPage_t

    How is it that a Republican House that claims to be pro-jobs can't pass a regulatory reform so modest that even President Obama's jobs council endorses it? Part of the answer is that the accounting cartel fighting reform has one of its own in the Republican ranks. A GOP presidential candidate also can't be bothered to show up for a critical vote.

    In September we told you about Tennessee Representative Stephen Fincher's plan to relieve small public companies from Sarbanes-Oxley's most burdensome and duplicative accounting rules. "Useless" might be a better description for these rules, after MF Global became the latest company in the Sarbox era to hide catastrophic transactions outside its balance sheet—exactly what the law was supposed to prevent.

    On Tuesday night, the House Financial Services Committee had to yank the Fincher reforms from a scheduled Wednesday vote. With all committee Democrats expected to vote against reducing paperwork, the Republicans would need almost all hands to send the measure to the House floor.

    But House sources say Michele Bachmann wouldn't return from the campaign trail to vote. Meanwhile, California Republican John Campbell has been leading an effort to water down or kill the Fincher reforms. Mr. Campbell is an accountant carrying water for his former industry colleagues. New Mexico Republican Steve Pearce, who styles himself an opponent of federal regulation, is also blocking reform.

    Sarbox was supposed to punish accountants, but like much regulation in practice it guarantees a lucrative business to a cartel dominated by four big firms. The mandate for an external audit on top of the traditional financial audits has helped accounting fees rise as fast as the bureaucratic burden.

    Sarbox compliance runs into the billions of dollars annually, and the market for initial public offerings of young companies has never recovered since the law's 2002 enactment. In a report lauded by Mr. Obama, his independent jobs panel recently recommended allowing shareholders in companies below $1 billion in market capitalization to opt out of Sarbox's infamous section 404. Alternatively, the council suggested exempting all new companies from Sarbox compliance for five years after going public.

    Continued in article

    Jensen Comment
    For a few years John Campbell was a CPA with Ernst & Young after receiving a MS in Tax from USC. However, he then moved on to become a successful CEO of an automobile dealership before becoming a Congressional representative from California ---
    http://en.wikipedia.org/wiki/John_B._T._Campbell_III

    The above editorial is typical of the WSJ's disdain for SarBox. The WSJ seldom mentions the good things that SarBox did accomplish. More focus on internal controls by auditors did result in improved internal control systems, sometimes well in advance when corporations knew that the auditors would soon arrive on the scene. SarBox made auditing more profitable, thereby encouraging medium-sized CPA firms to become more competitive with the Big Four for smaller audit clients. And Sarbox created the PCAOB that has been surprisingly rigorous in its inspections of audit engagements and campaigns for audit reform.


    From Ernst & Young on December 1, 2011

    30 November 2011 FASB meeting

    Insurance Contracts - The Board discussed the measurement of cash flows of insurance contracts that depend on the performance of the insurer or specific assets and liabilities of the insurer (i.e., the underlying items). To eliminate accounting mismatches, the Board decided that the liability for performance-linked participating features should be adjusted to reflect timing differences between the current liability (i.e., the obligation incurred to date) and the measurement of the underlying items in the statement of financial position. The Board also decided that any changes in the liability for the performance-linked participating feature would be reported in the same way as the changes in the underlying items within the statement of comprehensive income (i.e., either in net income or OCI).

    EITF Consensuses - The Board ratified the final consensus reached on Issue 10-E, "Derecognition of In-Substance Real Estate." The FASB Chairman subsequently announced the addition of a research project to the Board's agenda to address the question of whether a nonfinancial asset that has been placed in a legal entity should be subject to recognition and derecognition rules applicable to the asset or the consolidation literature. She also clarified that the accounting described in the final consensus is not required for lenders. The Board also ratified the consensus-for-exposure reached on Issue 11-A, "Parent's Accounting for the Cumulative Translation Adjustment (CTA) upon the Sale or Transfer of a Group of Assets that is a Nonprofit Activity or a Business within a Consolidated Foreign Entity." The consensus-for-exposure will be exposed for a period of 60 days.

    For further detail on the consensuses, see our
    EITF Update - November 2011.

    For additional detail of the Board's decisions, see the FASB's Action Alert.
     

    A Lesson for Auditors:  Accounting for the shadow economy
    "Toxic Assets Were Hidden Assets:  We can't afford to allow shadow economies to grow this big," by Hernando de Soto, The Wall Street Journal, March 25, 2009 --- http://online.wsj.com/article/SB123793811398132049.html?mod=djemEditorialPage

    The Obama administration has finally come up with a plan to deal with the real cause of the credit crunch: the infamous "toxic assets" on bank balance sheets that have scared off investors and borrowers, clogging credit markets around the world. But if Treasury Secretary Timothy Geithner hopes to prevent a repeat of this global economic crisis, his rescue plan must recognize that the real problem is not the bad loans, but the debasement of the paper they are printed on.

    Today's global crisis -- a loss on paper of more than $50 trillion in stocks, real estate, commodities and operational earnings within 15 months -- cannot be explained only by the default on a meager 7% of subprime mortgages (worth probably no more than $1 trillion) that triggered it. The real villain is the lack of trust in the paper on which they -- and all other assets -- are printed. If we don't restore trust in paper, the next default -- on credit cards or student loans -- will trigger another collapse in paper and bring the world economy to its knees.

    If you think about it, everything of value we own travels on property paper. At the beginning of the decade there was about $100 trillion worth of property paper representing tangible goods such as land, buildings, and patents world-wide, and some $170 trillion representing ownership over such semiliquid assets as mortgages, stocks and bonds. Since then, however, aggressive financiers have manufactured what the Bank for International Settlements estimates to be $1 quadrillion worth of new derivatives (mortgage-backed securities, collateralized debt obligations, and credit default swaps) that have flooded the market.

    These derivatives are the root of the credit crunch. Why? Unlike all other property paper, derivatives are not required by law to be recorded, continually tracked and tied to the assets they represent. Nobody knows precisely how many there are, where they are, and who is finally accountable for them. Thus, there is widespread fear that potential borrowers and recipients of capital with too many nonperforming derivatives will be unable to repay their loans. As trust in property paper breaks down it sets off a chain reaction, paralyzing credit and investment, which shrinks transactions and leads to a catastrophic drop in employment and in the value of everyone's property.

    Ever since humans started trading, lending and investing beyond the confines of the family and the tribe, we have depended on legally authenticated written statements to get the facts about things of value. Over the past 200 years, that legal authority has matured into a global consensus on the procedures, standards and principles required to document facts in a way that everyone can easily understand and trust.

    The result is a formidable property system with rules and recording mechanisms that fix on paper the facts that allow us to hold, transfer, transform and use everything we own, from stocks to screenplays. The only paper representing an asset that is not centrally recorded, standardized and easily tracked are derivatives.

    Property is much more than a body of norms. It is also a huge information system that processes raw data until it is transformed into facts that can be tested for truth, and thereby destroys the main catalysts of recessions and panics -- ambiguity and opacity. To bring derivatives under the rule of law, governments should ensure that they conform to six longstanding procedures that guarantee the value and legitimacy of any kind of paper purporting to represent an asset:

    - All documents and the assets and transactions they represent or are derived from must be recorded in publicly accessible registries. It is only by recording and continually updating such factual knowledge that we can detect the kind of overly creative financial and contractual instruments that plunged us into this recession.

    - The law has to take into account the "externalities" or side effects of all financial transactions according to the legal principle of erga omnes ("toward all"), which was originally developed to protect third parties from the negative consequences of secret deals carried out by aristocracies accountable to no one but themselves.

    - Every financial deal must be firmly tethered to the real performance of the asset from which it originated. By aligning debts to assets, we can create simple and understandable benchmarks for quickly detecting whether a financial transaction has been created to help production or to bet on the performance of distant "underlying assets."

    - Governments should never forget that production always takes priority over finance. As Adam Smith and Karl Marx both recognized, finance supports wealth creation, but in itself creates no value.

    - Governments can encourage assets to be leveraged, transformed, combined, recombined and repackaged into any number of tranches, provided the process intends to improve the value of the original asset. This has been the rule for awarding property since the beginning of time.

    - Governments can no longer tolerate the use of opaque and confusing language in drafting financial instruments. Clarity and precision are indispensable for the creation of credit and capital through paper. Western politicians must not forget what their greatest thinkers have been saying for centuries: All obligations and commitments that stick are derived from words recorded on paper with great precision.

    Above all, governments should stop clinging to the hope that the existing market will eventually sort things out. "Let the market do its work" has come to mean, "let the shadow economy do its work." But modern markets only work if the paper is reliable.

    Continued in article

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

    Off Balance Sheet Vehicles
    The Mother of All Ponzi Schemes According to Top Liberal (Progressive) Economists
    The Latest Bailout Plan’s a Disaster According to Paul Krugman and James K. Galbraith

    And yet American policy-makers appear convinced that more debt can rescue an economy already drowning in it. If we can just keep the leverage party going, all will be well. $787 billion to fund “stimulus,” another $9 trillion committed to guarantee bad debts, 0% interest rates and quantitative easing to drive more lending, new off balance sheet vehicles to hide from the public the toxic assets they’ve absorbed. All of it to be funded with debt, most of it the responsibility of taxpayers. If I may offer just one reason this will all fail: rising interest rates. Interest rates need only revert to their historical median in order to hammer asset values, and balance sheets, into oblivion.
    "Added Debt Won't Rescue the Great American Ponzi Scheme," Seeking Alpha, March 23, 2009 ---
    http://seekingalpha.com/article/127261-added-debt-won-t-rescue-the-great-american-ponzi-scheme?source=article_sb_picks

    Bob Jensen's threads on In-Substance Defeasance (which is related to but not the same as In-Substance Real Estate) ---
    http://www.trinity.edu/rjensen/Theory02.htm


    GoalScreen vs, Balanced Scorecard
    November 29, 2011 Message from Jim Martin

    In a recent article the author begins by stating that surveys show 47-70 percent of executives are dissatisfied with their balanced scorecards because they include too many irrelevant factors. He recommends assumption-based metrics as a more powerful alternative because it allows for testing and revising various strategies. In addition he provides an assumption-based metric software application referred to as GoalScreen that is available free to IMA members through 2011. The application includes several steps. First, set a target or goal and list every major assumption needed for a successful outcome including those that are controllable and those that are not controllable. Second, choose a metric or driver (root cause) for each key assumption that has high impact and independence. Note that impact and independence make the metric or driver predictive. Third, for each metric or driver, list the expected outcome, a worse-case outcome, and a worse-case impact on the target or goal. Then rank your assumptions by worst-case impact. The next set of outcomes show if your assumptions were justified. If not, adjust them and keep testing. For more information see Apgar, D. 2011. Assumption-based metrics: Recipe for success. Strategic Finance (November): 26-33.

    For the GoalScreen application see http://goalscreen.com .
    The IMA publications have a lot to offer. For bibliographies that include all of their major articles from 1919-2011 see
    http://maaw.info/IMAMain.htm

    Bob Jensen's threads on managerial accounting are at
    http://www.trinity.edu/rjensen/Theory02.htm#ManagementAccounting


    "Episode 90: Growing Pains for ‘Clickers’," Jeffrey R. Young, Chronicle of Higher Education, December 7, 2011 --- Click Here
    http://chronicle.com/blogs/techtherapy/2011/12/07/episode-90-growing-pains-for-%E2%80%98clickers%E2%80%99/?sid=wc&utm_source=wc&utm_medium=en

    Classroom response systems, or “clickers,” have been around for years, but only a small percentage of classes use them. Competing and incompatible brands, faculty reluctance to try new technologies, and confusion about which campus group should provide support for the devices all contribute to a slow adoption, says Derek Bruff, director of Vanderbilt University’s Center for Teaching and author of Teaching With Classroom Response Systems. The Tech Therapy team looks at how those gadgets can be seen as an example of the difficulty in moving technology beyond the early-adopter stage.

    Download this recording as an MP3 file, or subscribe to Tech Therapy on iTunes.

    Each month, The Chronicle’s Tech Therapy podcast offers analysis of and advice on what the latest gadgets and buzzwords mean for professors, administrators, and students. Join hosts Jeff Young, a Chronicle reporter, and Warren Arbogast, a technology consultant who works with colleges, for a lively discussion—as well as interviews with leading thinkers in technology.

    Jensen Comment
    Response pads have a long history dating back over 20 years in the classroom. HyperGraphics was one of the first companies to shift from wired to wireless clickers using the old DOS HyperGraphics course (learning) management software. My first dog and pony technology shows featured my managerial accounting course in HyperGraphics. My first gig was at the University of Wisconsin.

    It was October 4-5, 1990 when I made my first away-from-home dog and pony show on featuring HyperGraphics technology --- at the University of Wisconsin. HyperGraphics software pretty much died after Windows replaced the DOS operating system in PCs. I then shifted my managerial accounting and accounting theory courses to ToolBooks for the PC. My out-of-town dog and pony shows really commenced to roll when my university hosts invested in those old three-barrel color projectors that predated LCD projectors. I eventually made hundreds of presentations of HyperGraphics and then ToolBooks on college campuses in the United States, Canada, Mexico, Finland, Sweden, Germany, Holland, and the United Kingdom (where I lugged my full PC and LCD projector between five campuses as the European Accounting Association Visiting Professor). Many of my campus visits and topics are listed at http://www.trinity.edu/rjensen/Resume.htm#Presentations

    Shortly thereafter Loyola's Barry Rice with his ToolBooks became a much heavier user of clickers than me in his large accounting lectures.

    I think Bill Ellis at Furman University is a current user of clickers in his accounting courses.

    You can read more about the history of clickers at
    http://www.trinity.edu/rjensen/000aaa/thetools.htm#ResponsePads

    Bob Jensen's threads on Tricks and Tools of the Trade ---
    http://www.trinity.edu/rjensen/000aaa/thetools.htm


    Forensic Accounting Helper Site

    December 7, 2011 message from Emma

    Hi Bob,

    Thanks for getting back to me!

    When I graduated from college I realized that forensic accounting was something that a lot of fellow students were really interested in. However, people knew very little about what it was or how their skills could be applied to a career in the field. Basically, I'm trying to create something that acts as both an educational resource and a primer/gateway for people who want to learn more about the academic and professional nature of forensic accounting. The site is located here: http://www.forensicaccounting.net , and I'd really appreciate any feedback you might have. If you like it, I'd be great if you could include it on your site as a resource for others.

    Thanks again!

    Cheers,
    Emma

    Jensen Comment
    The University of West Virginia now has a "Graduate Certificate in Forensic Accounting and Fraud Investigation (FAFI)" ---
    http://www.be.wvu.edu/fafi/index.htm 

    Forensic accountants in demand

    The widespread growth in white-collar crime and the increased need for homeland security have greatly raised the demand for forensic accountants, fraud investigators and for auditors who posses those skills. Federal, state, and local governmental agencies, such as the Securities and Exchange Commission, the Internal Revenue Service, and the Offices of Inspector General all need accountants with forensic investigation skills. In the private sector, recent legislation (Sarbanes-Oxley Act of 2002) and auditing standards (Statement on Auditing Standard No. 99) require companies and their auditors to be more aggressive in detecting and preventing fraud.

    A unique program to answer the need

    The Division of Accounting has responded to this demand by developing an academic program designed to prepare entry-level accountants and others for forensic accounting and fraud investigative careers. Although many schools have added a single graduate or undergraduate course to their curricula, very few offer a multi-course graduate certificate program. This program is the only one in the region.

    The 12-credit graduate Certificate Program in Forensic Accounting and Fraud Investigation (FAFI) is offered during the summer. Students may take two paths to earn this certificate:

    WVU developed the National Curriculum

    Drs. Richard Riley and Bonnie Morris led the effort to develop national curriculum guidelines for fraud and forensic accounting programs for the National Institute of Justice.

    Journal of Forensic Accounting ---
    http://maaw.info/JournalOfForensicAccounting.htm

    Journal of Forensic & Investigative Accounting ---
    http://maaw.info/JournalOfForensicAndInvestigativeAccounting.htm

    Association of Certified Fraud Examiners --- http://www.acfe.com/

    A Simple Guide to Understanding Forensic Accounting --- http://www.forensicaccounting.net/
    Thank you Jim Martin for the heads up.

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

     


    Faculty urged not to be “too choosy” in admitting new cash-cow graduate students
    "Not So Fast," by Lee Skallerup Bessette, Inside Higher Ed, August 29, 2011 ---
    http://www.insidehighered.com/views/2011/08/29/essay_suggesting_faculty_members_should_be_dubious_of_drive_for_new_graduate_programs

    Bad Habits of Misleading Prospective Students are Hard to Break
    "Law Schools Pump Up Classes and Tuition, Though Jobs Remain Scarce," Chronicle of Higher Education, July 16, 2011 ---
    http://chronicle.com/blogs/ticker/law-schools-pump-up-classes-tuition-though-jobs-remain-scarce/34657

    "Law Schools Mull Whether They Are Churning Out Too Many Lawyers," by Katherine Mangan, Chronicle of Higher Education, July 9, 2009 --- http://chronicle.com/daily/2009/07/21755n.htm?utm_source=at&utm_medium=en

    "Free to Good Homes: U. of Miami Law Grads," by Don Troop, Chronicle of Higher Education, October 12, 2010 ---
    http://chronicle.com/article/Free-to-Good-Homes-U-of/124899/

    We've come to expect that lawyers lie --- it's part of their job responsibilities in some instances
    But it's a bit of a shock how much law schools themselves lie (until we make the connection that law schools are run by lawyers)
    "Coburn, Boxer Call for Department of Education to Examine Questions of Law School Transparency," New Release from the Official Site of Senator Barbara Boxer, October 14, 2011 ---
    http://boxer.senate.gov/en/press/releases/101411.cfm

     

    ABA Approves New Law School Placement Data Reporting Rules
    From Paul Caron's TaxProf Blog on December 6, 2011 ---
    http://taxprof.typepad.com/

    National Law Journal, ABA Gives Ground on Law Schools' Graduate Jobs Data Reporting:

    The ABA is changing the way it collects graduate employment information from law schools.

    The council of the
    Section of Legal Education and Admissions to the Bar on Dec. 3 approved a new annual questionnaire intended to gather more detailed information about where recent law grads find work. The change came as law students, graduates and three U.S. senators heaped criticism on the ABA and law schools for not providing prospective law students with an accurate picture of graduate employment and salary levels. ...

    The updated questionnaire contains
    several new elements:

    The new questionnaire does not include all the changes that transparency advocates have been pushing for. Law School Transparency — a nonprofit organization that seeks to improve consumer data for law students — has called upon the ABA to publish school-specific salary data. That would allow prospective law students to see how much graduates of each school earn. ...

    The new questionnaire is an improvement, said Law School Transparency co-founder Kyle McEntee. But the ABA made a mistake by temporarily eliminating some key questions from the 2011 survey, which went out to law schools this fall, he said. That questionnaire did not ask schools to report the number of graduates in the class of 2010 in full- and part-time jobs or in jobs that require a J.D., meaning that less information will be available about the class of 2010 than for previous classes. ... "There are still questions about [the changes] took so long and why it still falls short of providing the best consumer information," McEntee said.

     

    Bob Jensen's threads on Turkey Times for Overstuffed Law Schools ---
    http://www.trinity.edu/rjensen/HigherEdControversies.htm#OverstuffedLawSchools

     


    Question
    How is the current Olympus scandal in Japan related to the Enron scandal?

    Hint:
    Think Special Purpose Vehicles (SPVs)

    Accounting Fraud in Japan
    Olympus Urged to Extend Purge of Executives Over Hidden Losses

    At least eight Cayman Islands entities have been linked to Olympus acquisitions that are suspected of playing a role in the accounting scandal. Five of those no longer exist, according to a search of the Caymans registry, which doesn’t give details on the individuals behind the companies.

    Olympus President Shuichi Takayama yesterday said the company was looking into the role played by special purpose funds in hiding the losses, which date back to the 1990s.

    After he was fired, Woodford went public with his concerns over the advisory fees and writedowns on three other transactions. All involved payments to Cayman Islands companies or special purpose vehicles whose beneficiaries are not known.

     

    "Olympus Urged to Extend Purge of Executives Over Hidden Losses," Business Week, November 8, 2011 ---
    http://www.businessweek.com/news/2011-11-08/olympus-urged-to-extend-purge-of-executives-over-hidden-losses.html

    Olympus Corp.’s admission that three of its top executives colluded to hide losses from investors fails to address the roles played by other officials, according to the company’s biggest overseas shareholder.

    The Japanese camera maker’s shares slumped 29 percent yesterday after it reversed weeks of denials that there was any wrongdoing in past acquisitions. The company fired Executive Vice President Hisashi Mori over his role in covering up the losses with former Chairman Tsuyoshi Kikukawa, who resigned last week, and said auditor Hideo Yamada would step down.

    Olympus’ biggest overseas shareholder is now demanding investor relations head Akihiro Nambu go too because of his role as a director of Gyrus Group Plc, the U.K. takeover target used to funnel more than $600 million in inflated advisory fees to a Cayman Islands fund. And after Nambu, the rest of the board must follow, said Josh Shores, a London-based principal for Southeastern Asset Management Inc.

    “Even if they didn’t know the specific details around where payments were going and exactly why, they knew that cash was going out the door and they also failed to raise their hands to ask questions,” Shores said. “I don’t know who else is involved, but somebody else is. There is a third party somewhere who received this money.”

    Olympus President Shuichi Takayama yesterday said the company was looking into the role played by special purpose funds in hiding the losses, which date back to the 1990s.

    Cayman Links

    At least eight Cayman Islands entities have been linked to Olympus acquisitions that are suspected of playing a role in the accounting scandal. Five of those no longer exist, according to a search of the Caymans registry, which doesn’t give details on the individuals behind the companies.

    Kikukawa, Mori and Nambu became the three directors of Gyrus in June 2008 following the $2 billion acquisition of the U.K. medical equipment maker in February that year. They were also directors of three companies set up to handle the takeover, including the decision to pay out advisory fees that amounted to more than a third of the acquisition’s value, filings show.

    Olympus declined a request to interview Kikukawa and Mori. In six attempts to talk to Kikukawa at his home, the former chairman didn’t appear. Mori’s home address given in U.K. filings leads to a house under renovation in Kawasaki city, about an hour from central Tokyo. Nobody answered the doorbell on a recent visit to Nambu’s home in a seven-story condominium about 27 kilometers from the city center.

    Japanese and U.S. regulators are probing allegations by former chief executive officer Michael C. Woodford that more than $1.5 billion was siphoned through offshore funds. That money may have been used to cancel out non-performing securities that Olympus was keeping off its books, according to a report in the Shukan Asahi magazine, which cited people familiar with the process.

    Cockroaches

    Yesterday’s plunge in Olympus shares pulled other Japanese equities lower on concerns the country hasn’t escaped corporate governance weaknesses that have dogged it since the stock market bubble burst at the end of 1989. Olympus shares have lost 70 percent of their value since Woodford took his accusations public after he was axed on Oct. 14.

    “Institutional investors will stay away from Japan’s market until they confirm this is an isolated case,” said Koichi Kurose, chief economist in Tokyo at Resona Bank Ltd. Some “investors probably think that if there’s one cockroach, there may be 10 more,” he said.

    ‘Tobashi’

    Olympus’ revelations echo the practice of hiding losses known as “tobashi” that became widespread in Japan in the late 1980s and led to the failure of Yamaichi Securities Co., according to Yasuhiko Hattori, a professor at Ritsumeikan University in Kyoto. Yamaichi used overseas paper companies to hide problematic securities, until it failed in 1997 with 260 billion yen ($3.3 billion) in hidden impairments.

    Takayama declined to comment on the involvement of any securities firms in Olympus’ cover-up. The Topix Securities and Commodity Futures Index fell 11 percent, the most of any industry group in the broader gauge. Nomura Holdings Inc. tumbled 15 percent to the lowest in 37 years.

    “There is speculation in the market that Nomura may somehow be involved in this Olympus case,” said Shoichi Arisawa, an Osaka-based manager at IwaiCosmo Holdings Inc. “Individual investors in particular probably sold after seeing a high volume of Nomura’s shares being traded.”

    Nomura didn’t participate in Olympus’s concealment of losses, said Hajime Ikeda, managing director of corporate communications for the securities firm.

    Nomura Unaware

    “We are not aware of any involvement by Nomura in Olympus’s hiding of losses in the 1990s, and we weren’t involved when Olympus wrote off the losses” between 2006 and 2008, Ikeda said in a telephone interview in Tokyo yesterday.

    Olympus plunged by its 300 yen daily limit in Tokyo trading, closing at 734 yen. The Topix ended 1.7 percent lower, the worst-performing Asian stock index.

    The Tokyo Stock Exchange said it’s considering moving the shares in Olympus, the world’s biggest maker of endoscopes, to a watchlist for possible delisting. Takayama pledged to continue with the investigation into the losses, which he said were probably inherited by Kikukawa.

    “The investigation must continue to determine how much rot there is,” said David Herro, chief investment officer of Harris Associates LP. “All responsible must, at a minimum, leave. Also, since the management’s credibility is nearly nonexistent, all of what they say must be verified.”

    Bowed in Apology

    Harris held 10.9 million Olympus shares as of June 30, a 4 percent stake that makes it the company’s second-biggest overseas investor. Southeastern had a 5 percent stake as of Aug. 16, according to data compiled by Bloomberg.

    Olympus President Takayama yesterday said he was unaware of the hidden losses until he was told by Mori and Kikukawa the previous evening. At the press conference, he bowed three times in seven minutes to apologize.

    In the weeks running up to his dismissal, Woodford was engaged in an exchange of letters with Kikukawa and Mori in which he detailed the allegations and which were copied to all member of the board.

    After he was fired, Woodford went public with his concerns over the advisory fees and writedowns on three other transactions. All involved payments to Cayman Islands companies or special purpose vehicles whose beneficiaries are not known.

    Olympus paid a total of 73.4 billion yen to increase stakes in Altis Co., News Chef Co. and Humalabo Co. between 2006 and 2008, which was also used to hide losses, it said yesterday. Olympus wrote down 55.7 billion yen, or 76 percent of the acquisition value, in March 2009, the company said in a statement Oct. 19.

    “It’s beyond belief that Mr. Takayama claims he only found out about it last night,” Woodford said in a telephone interview yesterday. “If he didn’t know before I started writing my letters then he should have known after.”

    Continued in article

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

    "ENRON: what happened and what we can learn from it," by George J. Benston and Al L. Hartgraves, Journal of Accounting and Public Policy, 2002, pp. 125-127 
    The following are excerpts only.

    Abstract

    Enron's accounting for its non-consolidated special-purpose entities (SPEs), sales of its own stock and other assets to the SPEs, and mark-ups of investments to fair value substantially inflated its reported revenue, net income, and stockholders' equity, and possibly understated its liabilities.  We delineate six accounting and auditing issues, for which we describe, analyze, and indicate the effect on Enron's financial statements of their complicated structures and transactions.  We next consider the role of Enron's board of directors, audit committee, and outside attorneys and auditors.  From the foregoing, we evaluate the extent to which Enron and Andersen followed the requirements of GAAP and GAAS, from which we draw lessons and conclusions.

    The accounting issues

    The transactions involving SPEs at Enron, and the related accounting issues are, indeed, very complex.  This section summarizes some of the key transactions and their related accounting effects.  The Powers Report, a 218-page document, provides in great detail a discussion of a selected group of Enron SPEs that have been the central focus of the Enron investigations.  While very much less detailed than the Powers Report, the discussion in the following section (which may seem laborious at times), supplemented with additional material that became available after publication of the Report, should provide the reader with insight into how Enron sought to bend the accounting rules to their advantage.  However, even a cursory review of this section will give the reader a sense of the complex financing structures that Enron used in an attempt to create various financing, tax, and accounting advantages.

    Six accounting and auditing issues are of primary importance, since they were used extensively by Enron to manipulate its reported figures: (1) The accounting policy of not consolidating SPEs that appear to have permitted Enron to hide losses and debt from investors.  (2) The accounting treatment of sales of Enron's merchant investments to unconsolidated (though actually controlled) SPEs as if these were arm's length transactions.  (3) Enron's income recognition practice of recording as current income fees for services rendered in future periods and recording revenue from sales of forward contracts, which were, in effect, disguised loans.  (4) Fair-value accounting resulting in restatements of merchant investments that were not based on trustworthy numbers.  (5) Enron's accounting for its stock that was issued to and held by SPEs.  (6) Inadequate disclosure of related party transactions and conflicts of interest, and their costs to stockholders.

    Continued in article at
    http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm

     

    Teaching Cases on Olympus and SPV Frauds

    From The Wall Street Journal Accounting Weekly Review on December 2, 2011

    Olympus Heat Rises
    by: Juro Osawa and Phred Dvorak
    Nov 25, 2011
    Click here to view the full article on WSJ.com
    Click here to view the video on WSJ.com WSJ Video
     

    TOPICS: Audit Quality, Audit Report, Auditing, Auditor Changes, Auditor/Client Disagreements, business combinations, Business Ethics, Fraudulent Financial Reporting

    SUMMARY: The series of events leading to questions about auditing practices at Olympus that failed to uncover a decades-long coverup of investment losses is highlighted in this review. The company must submit its next financial statement filing to the Tokyo Stock Exchange by December 14, 2011 for the period ended September 30, 2011 or face delisting.

    CLASSROOM APPLICATION: The review focuses on auditing questions about sufficient competent evidence, change of auditors, and ability to provide an audit report given knowledge of the length of time this coverup has been ongoing.

    QUESTIONS: 
    1. (Introductory) What fraudulent accounting and reporting practices has Olympus, the Japanese optical equipment maker, admitted to committing?

    2. (Advanced) What services is Mr. Woodford calling for to investigate the inappropriate payments and accounting practices by Olympus? Specifically name the type of engagement for which Mr. Woodford thinks that Olympus should contract with outside accountants.

    3. (Introductory) Refer to the related articles. What questions have been raised about outside accountants' examinations of Olympus's financial statements for many years?

    4. (Advanced) Based only on the discussion in the article, what evidence did Olympus's auditors rely on to resolve their questions about the propriety of accounting for mergers and acquisitions? Again, based only on the WSJ articles, how reliable was that audit evidence?

    5. (Advanced) What happened with Olympus's engagement of KPMG AZSA LLC as its outside auditor? What steps must be taken under U.S. requirements when a change of auditors occurs?

    6. (Introductory) What challenges will Olympus face in meeting the deadline of December 14 to file its latest financial statements? What will happen to the company if it cannot do so?
     

    Reviewed By: Judy Beckman, University of Rhode Island
     

    RELATED ARTICLES: 
    Olympus Casts Spotlight on Accounting
    by Kana Inagaki
    Nov 08, 2011
    Online Exclusive

    Olympus Admits to Hiding Losses
    by Kana Inagaki and Phred Dvorak
    Nov 08, 2011
    Online Exclusive

     

    "Olympus Heat Rises (video)," by: Juro Osawa and Phred Dvorak, The Wall Street Journal, November 25, 2011 ---
    http://online.wsj.com/video/olympus-we-hid-investment-losses-for-decades/54207106-7753-477D-9EA5-7C152AF62DF4.html

    Bob Jensen's threads on the criminal activity at Olympus
    Scroll down deeply at
    http://www.trinity.edu/rjensen/Fraud001.htm#KPMG

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


    From The Wall Street Journal Weekly Accounting Review on December 9, 2011

    Panel Calls Olympus "Rotten" at Core
    by: Daisuke Wakabayashi and Phred Dvorak
    Dec 07, 2011
    Click here to view the full article on WSJ.com
     

    TOPICS: Auditing, Auditor/Client Disagreements, Fair Value Accounting, Historical Cost Accounting, Investments

    SUMMARY: This review continues coverage from last week of the accounting scandal at Olympus Corp. The Investigation Report into Olympus Corporation and its management, written by the "Third Party Committee" hired by the Board of Directors on October 14, 2011, is available directly online at http://online.wsj.com/public/resources/documents/third_party_olympus_report_english_summary.pdf The report provides the clearest description yet of the investment loss and accounting scandal that has brought the Japanese imaging equipment maker to the brink of delisting from the Tokyo Stock Exchange. As described in the opening page of the document, the Olympus Corporation Board of Directors called for a third party review because "the shareholders and others doubted that" payments by Olympus to a financial advisor and acquisitions by Olympus, along with subsequent recognition of impairment losses on those investments, were appropriate. The findings in the report essentially state that Olympus began incurring financial losses on speculative investments that were originally hoped to bolster corporate earnings when operating earnings declined due to a strengthening yen in the late 1980s. "However, in 1990 the bubble economy burst and the loss incurred on Olympus by the financial assets management increased" (p. 6). Then, in 1997 to 1998, "when the unrealized loss was ballooning," Japanese accounting standards were changed to require fair value reporting of financial assets, as did those in the U.S. "In that environment, Olympus led by Yamada and Mori started seeking a measure to avoid the situation where the substantial amount of unrealized loss would come up to the surface..." because of this change in accounting standards. The technique was so common in Japan that it was given a name, "tobashi." As noted in the WSJ article, the Olympus auditors at the time, KPMG AZSA LLC "...came across information that indicated the company was engaged in tabshi, which recently had become illegal in Japan....[T]he auditor pushed them...to admit to the presence of one [tobashi scheme] and unwind it, booking a loss of 16.8 billion yen."

    CLASSROOM APPLICATION: Questions relate to the accounting environment under historical cost accounting that allows avoiding recognition of unrealized losses and to the potential for audit issues when management is found to have engaged in one unethical or illegal act.

    QUESTIONS: 
    1. (Introductory) For how long were investment losses hidden by accounting practices at Olympus Corp?

    2. (Advanced) What is the difference between realized and unrealized investment losses? How are these two types of losses shown in financial statements under historical cost accounting and under fair value accounting methods for investments?

    3. (Introductory) What accounting change in the late 1990s led Olympus Corp. management to search for further ways to hide their investment losses? In your answer, comment on the meaning of the Japanese term "tobashi."

    4. (Introductory) What happened in 1999 when KPMG AZSA "came across information that indicated the company was engaged in tobashi, which recently had become illegal in Japan"?

    5. (Advanced) Given the result of the KPMG AZSA finding in 1999, what concerns should that raise for any auditor about overall ability to conduct an audit engagement?
     

    Reviewed By: Judy Beckman, University of Rhode Island

    "Panel Calls Olympus 'Rotten' at Core," by: Daisuke Wakabayashi and Phred Dvorak, The Wall Street Journal, December 7, 2011 ---
    http://online.wsj.com/article/SB10001424052970204083204577082163172106608.html?mod=djem_jiewr_AC_domainid 

    The secret held for a quarter-century, quietly passed among senior executives. Within Olympus Corp. the goal was clear. Hide some $1.5 billion in investment losses from public view.

    The toll on Olympus mounted as time went by. "The core part of the management was rotten, and that contaminated other parts around it."

    So concluded a 200-page reported issued Tuesday, the most complete account yet of a scandal that routed money through more than a dozen banks, funds and investment firms around the globe, ultimately leading to the departure of several top executives and putting the respected optical-equipment maker on the bubble for a stock delisting.

    Starting in the mid-1980s, Olympus, along with other Japanese exporters, turned to speculative financial investments as a way to ease the sting of a surging yen with what they believed would be easy profits.

    At Olympus, that strategy set in motion a chain of events that were the heart of the company's accounting scandal, according to the report, written by a six-member outside panel appointed by the company last month.

    The document, based on 189 interviews with current and former Olympus employees and business partners, also brought into relief the organizational problems that plague many Japanese companies: lack of transparency, little regard for shareholder rights and reluctance to challenge authority.

    "The situation was an epitome of the salaryman mentality in a bad sense," said the panel, referring to Japan's culture of corporate loyalty.

    Olympus on Tuesday said it "takes very seriously the results" of the investigation and "is considering further fundamental measures to restore confidence."

    The report identified former Vice President Hisashi Mori, his former boss in the company's accounting department, Hideo Yamada, and two former Olympus presidents among a "select few" with knowledge of the original investment losses, the effort to hide the losses and then the attempts to account for them through inflated acquisition prices and advisory fees.

    Based on the report's account, Olympus's financial troubles started with the Plaza Accord in 1985, an agreement to devalue the U.S. dollar.

    The ensuing rise in the yen dented the company's operating profit, and its president at the time, Toshiro Shimoyama, decided Olympus should augment its core business with zaiteku, or financial investments.

    It didn't go well.

    Read more:
    http://online.wsj.com/article/SB10001424052970204083204577082163172106608.html#ixzz1g3z5Q5SY

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


    "KPMG Scrutinized Over Handling of Olympus Accounting Fraud Scandal," by Kalen Smith, Big Four Blog, December 15, 2011 ---
    http://www.big4.com/kpmg/kpmg-scrutinized-over-handling-of-olympus-accounting-fraud-scandal

    KPMG’s auditors in Tokyo are under scrutiny after signing off on reports issued by Olympus Corp. Auditors found several accounting irregularities when they reviewed financial statements provided by Olympus executives. The auditors were particularly concerned over $600 million worth of takeover advisory fees and payments on acquisitions. Despite their concerns, auditors chose to sign off on the reports after an outside consultant approved of the findings.

    Although the consultant said the takeover costs were justified, they were also hired from Olympus Corp. This has raised some red flags over a possible conflict of interest in the matter.

    Olympus has now been revealed to have engaged in financial fraud for more than two decades. Following the revelation of the accounting scandal at Olympus, regulators are looking closely at KPMG and Ernst & Young. Regulators feel the auditors should have seen signs of the fraud and taking measures to stop them.

    According to allegations, KPMG was Olympus’s auditor for years. They failed to catch the discrepancies and Ernst & Young was called in as well.

    According to Yuuki Sakurai of Fukoku Capital Management, auditors work for the companies that pay them. Auditors are going to have a hard time staying in business if they get a reputation for being the kind of company that goes to the regulators without solid evidence of malfeasance.

    Although the manner in which KPMG handled the Olympus case created some concern for regulators, it may signify greater concern over the corporate culture that has created a serious conflict of interest between auditors’ responsibilities for their clients and need to uphold the law.

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

    Bob Jensen's threads on the the decline of professionalism and independence in auditing ---
    http://www.trinity.edu/rjensen/Fraud001c.htm

     

     


    Question
    Where did the missing MF Global $1+ billion end up?

    Hint:
    The the word "repo" sound familiar?
    http://en.wikipedia.org/wiki/Repurchase_agreement

    "MF Global and the great Wall St re-hypothecation scandal," by Chrisopher Elias, Reuters, December 7, 2011 ---
    http://newsandinsight.thomsonreuters.com/Securities/Insight/2011/12_-_December/MF_Global_and_the_great_Wall_St_re-hypothecation_scandal/

    A legal loophole in international brokerage regulations means that few, if any, clients of MF Global are likely to get their money back. Although details of the drama are still unfolding, it appears that MF Global and some of its Wall Street counterparts have been actively and aggressively circumventing U.S. securities rules at the expense (quite literally) of their clients. 

    MF Global's bankruptcy revelations concerning missing client money suggest that funds were not inadvertently misplaced or gobbled up in MF’s dying hours, but were instead appropriated as part of a mass Wall St manipulation of brokerage rules that allowed for the wholesale acquisition and sale of client funds through re-hypothecation. A loophole appears to have allowed MF Global, and many others, to use its own clients’ funds to finance an enormous $6.2 billion Eurozone repo bet. 

    If anyone thought that you couldn’t have your cake and eat it too in the world of finance, MF Global shows how you can have your cake, eat it, eat someone else’s cake and then let your clients pick up the bill. Hard cheese for many as their dough goes missing. 

    FINDING FUNDS 

    Current estimates for the shortfall in MF Global customer funds have now reached $1.2 billion as revelations break that the use of client money appears widespread. Up until now the assumption has been that the funds missing had been misappropriated by MF Global as it desperately sought to avoid bankruptcy. 

    Sadly, the truth is likely to be that MF Global took advantage of an asymmetry in brokerage borrowing rules that allow firms to legally use client money to buy assets in their own name - a legal loophole that may mean that MF Global clients never get their money back. 

    REPO RECAP 

    First a quick recap. By now the story of MF Global’s demise is strikingly familiar. MF plowed money into an off-balance-sheet maneuver known as a repo, or sale and repurchase agreement. A repo involves a firm borrowing money and putting up assets as collateral, assets it promises to repurchase later. Repos are a common way for firms to generate money but are not normally off-balance sheet and are instead treated as “financing” under accountancy rules. 

    MF Global used a version of an off-balance-sheet repo called a "repo-to-maturity." The repo-to-maturity involved borrowing billions of dollars backed by huge sums of sovereign debt, all of which was due to expire at the same time as the loan itself. With the collateral and the loans becoming due simultaneously, MF Global was entitled to treat the transaction as a “sale” under U.S. GAAP. This allowed the firm to move $16.5 billion off its balance sheet, most of it debt from Italy, Spain, Belgium, Portugal and Ireland. 

    Backed by the European Financial Stability Facility (EFSF), it was a clever bet (at least in theory) that certain Eurozone bonds would remain default free whilst yields would continue to grow. Ultimately, however, it proved to be MF Global’s downfall as margin calls and its high level of leverage sucked out capital from the firm. For more information on the repo used by MF Global please see Business Law Currents MF Global – Slayed by the Grim Repo? 

    Puzzling many, though, were the huge sums involved. How was MF Global able to “lose” $1.2 billion of its clients’ money and acquire a sovereign debt position of $6.3 billion – a position more than five times the firm’s book value, or net worth? The answer it seems lies in its exploitation of a loophole between UK and U.S. brokerage rules on the use of clients funds known as “re-hypothecation”. 

    RE-HYPOTHECATION 

    By way of background, hypothecation is when a borrower pledges collateral to secure a debt. The borrower retains ownership of the collateral but is “hypothetically” controlled by the creditor, who has a right to seize possession if the borrower defaults. 

    In the U.S., this legal right takes the form of a lien and in the UK generally in the form of a legal charge. A simple example of a hypothecation is a mortgage, in which a borrower legally owns the home, but the bank holds a right to take possession of the property if the borrower should default. 

    In investment banking, assets deposited with a broker will be hypothecated such that a broker may sell securities if an investor fails to keep up credit payments or if the securities drop in value and the investor fails to respond to a margin call (a request for more capital). 

    Re-hypothecation occurs when a bank or broker re-uses collateral posted by clients, such as hedge funds, to back the broker’s own trades and borrowings. The practice of re-hypothecation runs into the trillions of dollars and is perfectly legal. It is justified by brokers on the basis that it is a capital efficient way of financing their operations much to the chagrin of hedge funds. 

    U.S. RULES 

    Under the U.S. Federal Reserve Board's Regulation T and SEC Rule 15c3-3, a prime broker may re-hypothecate assets to the value of 140% of the client's liability to the prime broker. For example, assume a customer has deposited $500 in securities and has a debt deficit of $200, resulting in net equity of $300. The broker-dealer can re-hypothecate up to $280 (140 per cent. x $200) of these assets. 

    But in the UK, there is absolutely no statutory limit on the amount that can be re-hypothecated. In fact, brokers are free to re-hypothecate all and even more than the assets deposited by clients. Instead it is up to clients to negotiate a limit or prohibition on re-hypothecation. On the above example a UK broker could, and frequently would, re-hypothecate 100% of the pledged securities ($500). 

    This asymmetry of rules makes exploiting the more lax UK regime incredibly attractive to international brokerage firms such as MF Global or Lehman Brothers which can use European subsidiaries to create pools of funding for their U.S. operations, without the bother of complying with U.S. restrictions. 

    In fact, by 2007, re-hypothecation had grown so large that it accounted for half of the activity of the shadow banking system. Prior to Lehman Brothers collapse, the International Monetary Fund (IMF) calculated that U.S. banks were receiving $4 trillion worth of funding by re-hypothecation, much of which was sourced from the UK. With assets being re-hypothecated many times over (known as “churn”), the original collateral being used may have been as little as $1 trillion – a quarter of the financial footprint created through re-hypothecation. 

    BEWARE THE BRITS: CIRCUMVENTING U.S. RULES 

    Keen to get in on the action, U.S. prime brokers have been making judicious use of European subsidiaries. Because re-hypothecation is so profitable for prime brokers, many prime brokerage agreements provide for a U.S. client’s assets to be transferred to the prime broker’s UK subsidiary to circumvent U.S. rehypothecation rules. 

    Under subtle brokerage contractual provisions, U.S. investors can find that their assets vanish from the U.S. and appear instead in the UK, despite contact with an ostensibly American organisation. 

    Potentially as simple as having MF Global UK Limited, an English subsidiary, enter into a prime brokerage agreement with a customer, a U.S. based prime broker can immediately take advantage of the UK’s unrestricted re-hypothecation rules. 

    LEHMAN LESSONS 

    In fact this is exactly what Lehman Brothers did through Lehman Brothers International (Europe) (LBIE), an English subsidiary to which most U.S. hedge fund assets were transferred. Once transferred to the UK based company, assets were re-hypothecated many times over, meaning that when the debt carousel stopped, and Lehman Brothers collapsed, many U.S. funds found that their assets had simply vanished. 

    A prime broker need not even require that an investor (eg hedge fund) sign all agreements with a European subsidiary to take advantage of the loophole. In fact, in Lehman’s case many funds signed a prime brokerage agreement with Lehman Brothers Inc (a U.S. company) but margin-lending agreements and securities-lending agreements with LBIE in the UK (normally conducted under a Global Master Securities Lending Agreement). 

    These agreements permitted Lehman to transfer client assets between various affiliates without the fund’s express consent, despite the fact that the main agreement had been under U.S. law. As a result of these peripheral agreements, all or most of its clients’ assets found their way down to LBIE. 

    MF RE-HYPOTHECATION PROVISION 

    A similar re-hypothecation provision can be seen in MF Global’s U.S. client agreements. MF Global’s Customer Agreement for trading in cash commodities, commodity futures, security futures, options, and forward contracts, securities, foreign futures and options and currencies includes the following clause: 

     “7. Consent To Loan Or PledgeYou hereby grant us the right, in accordance with Applicable Law, to borrow, pledge, repledge, transfer, hypothecate, rehypothecate,loan, or invest any of the Collateral, including, without limitation, utilizing the Collateral to purchase or sell securities pursuant to repurchase agreements [repos] or reverse repurchase agreements with any party, in each case without notice to you, and we shall have no obligation to retain a like amount of similar Collateral in our possession and control.” 

    In its quarterly report, MF Global disclosed that by June 2011 it had repledged (re-hypothecated) $70 million, including securities received under resale agreements. With these transactions taking place off-balance sheet it is difficult to pin down the exact entity which was used to re-hypothecate such large sums of money but regulatory filings and letters from MF Global’s administrators contain some clues. 

    According to a letter from KPMG to MF Global clients, when MF Global collapsed, its UK subsidiary MF Global UK Limited had over 10,000 accounts. MF Global disclosed in March 2011 that it had significant credit risk from its European subsidiary from “counterparties with whom we place both our own funds or securities and those of our clients”. 

    CAUSTIC COLLATERAL 

    Matters get even worse when we consider what has for the last 6 years counted as collateral under re-hypothecation rules. 

    Despite the fact that there may only be a quarter of the collateral in the world to back these transactions, successive U.S. governments have softened the requirements for what can back a re-hypothecation transaction. 

    Beginning with Clinton-era liberalisation, rules were eased that had until 2000 limited the use of re-hypothecated funds to U.S. Treasury, state and municipal obligations. These rules were slowly cut away (from 2000-2005) so that customer money could be used to enter into repurchase agreements (repos), buy foreign bonds, money market funds and other assorted securities. 

    Hence, when MF Global conceived of its Eurozone repo ruse, client funds were waiting to be plundered for investment in AA rated European sovereign debt, despite the fact that many of its hedge fund clients may have been betting against the performance of those very same bonds. 

    OFF BALANCE SHEET 

    As well as collateral risk, re-hypothecation creates significant counterparty risk and its off-balance sheet treatment contains many hidden nasties. Even without circumventing U.S. limits on re-hypothecation, the off-balance sheet treatment means that the amount of leverage (gearing) and systemic risk created in the system by re-hypothecation is staggering. 

    Re-hypothecation transactions are off-balance sheet and are therefore unrestricted by balance sheet controls. Whereas on balance sheet transactions necessitate only appearing as an asset/liability on one bank’s balance sheet and not another, off-balance sheet transactions can, and frequently do, appear on multiple banks’ financial statements. What this creates is chains of counterparty risk, where multiple re-hypothecation borrowers use the same collateral over and over again. Essentially, it is a chain of debt obligations that is only as strong as its weakest link. 

    With collateral being re-hypothecated to a factor of four (according to IMF estimates), the actual capital backing banks re-hypothecation transactions may be as little as 25%. This churning of collateral means that re-hypothecation transactions have been creating enormous amounts of liquidity, much of which has no real asset backing. 

    The lack of balance sheet recognition of re-hypothecation was noted in Jefferies recent 10Q (emphasis added): 

     “Note 7. Collateralized Transactions
    We pledge securities in connection with repurchase agreements, securities lending agreements and other secured arrangements, including clearing arrangements. The pledge of our securities is in connection with our mortgage−backed securities, corporate bond, government and agency securities and equities businesses. Counterparties generally have the right to sell or repledge the collateral.Pledged securities that can be sold or repledged by the counterparty are included within Financial instruments owned and noted as Securities pledged on our Consolidated Statements of Financial Condition. We receive securities as collateral in connection with resale agreements, securities borrowings and customer margin loans. In many instances, we are permitted by contract or custom to rehypothecate securities received as collateral. These securities maybe used to secure repurchase agreements, enter into security lending or derivative transactions or cover short positions. At August 31, 2011 and November 30, 2010, the approximate fair value of securities received as collateral by us that may be sold or repledged was approximately $25.9 billion and $22.3 billion, respectively. At August 31, 2011 and November 30, 2010, a substantial portion of the securities received by us had been sold or repledged. 

    We engage in securities for securities transactions in which we are the borrower of securities and provide other securities as collateral rather than cash. As no cash is provided under these types of transactions, we, as borrower, treat these as noncash transactions and do not recognize assets or liabilities on the Consolidated Statements of Financial Condition. The securities pledged as collateral under these transactions are included within the total amount of Financial instruments owned and noted as Securities pledged on our Consolidated Statements of Financial Condition. 

    According to Jefferies’ most recent Annual Report it had re-hypothecated $22.3 billion (in fair value) of assets in 2011 including government debt, asset backed securities, derivatives and corporate equity- that’s just $15 billion shy of Jefferies total on balance sheet assets of $37 billion. 

    HYPER-HYPOTHECATION 

    With weak collateral rules and a level of leverage that would make Archimedes tremble, firms have been piling into re-hypothecation activity with startling abandon. A review of filings reveals a staggering level of activity in what may be the world’s largest ever credit bubble. 

    December 12, 2011 reply from Robert Walker in New Zealand

    As I understand it what these financial intermediaries (the entity) are doing is gearing on their clients’ funds by way of a secured loan where the security is secured by a repurchasing agreement (repo).

    The principal purpose of a repo is to raise cash. I assume what they do is acquire European sovereign debt with their clients’ money. They then sell the stock now and re-buy in the future, albeit running through a subsidiary based in London (the greatest off-shore banking centre on earth, no wonder Cameron is prepared to sacrifice Europe to protect it). In exchange the entity receives cash but promises to meet margin calls in the event of decline. Once you have the cash you can repeat the process. I don’t know how long this can be repeated, but I would think several times. The secured party can be confident in that they hold (a) the legal right to the stock in question because their name is on the register and (b) they have a right to call on margin.

    It is impossible for this gearing not to be presented on a balance sheet. If FASB says otherwise then it is badly mistaken. There is a golden rule in accounting and it is this: if in doubt, gross up. The silver rule is: always be in doubt.

    December 12, 2011 reply from Bob Jensen

    Hi Robert,

    That was a nice, concise reply. I also think there were some suspicious, possibly criminal, transactions when bankruptcy was imminent for MF Global, transactions that improperly mixed customer funds and used them for its own account for at least several days before the bankruptcy and even transferred funds improperly outside the country.

    Jon Corzine's testimony proves that you do not have to plead the Fifth Amendment to say absolutely nothing in a lot of words ---
     http://en.wikipedia.org/wiki/Jon_Corzine 
    He appears to be dumb like a fox or the most stupid dupe ever born.
     

    Jensen Summary of Repo Fraud and Deceptive Accounting Enabled by the FASB
    The word "repo" is short for "repossession" of the title back to some asset that has been sold or used as collateral in a loan. For example, in states with lemon warranty laws, an automobile dealer may have to take back possession of a vehicle that turns out to be a real lemon. This is a bit different that the majority of warranty obligations that simply contract for repair of the sold item but not repossession of the item itself. There are also those "money back" sales contracts such as a contractual term that reads "use for 10 days and if you're not totally satisfied you money will be cheerfully refunded in full."

    The overwhelming use of the word "repo" is the repossession of title to a creditor where the item sold is collateral on the loan. If a dealer loans money on a car loan, then the dealer may repossess the collateral if the customer defaults on the loan. Movies have been made about "Repo Men" who sneak into garages or driveways in the dead of night and drive away with repossessed cars. If the bank loan, than the bank must repossess the collateral on the loan rather than the dealer.

    In the case of financial instruments sales such as the sale of mortgage note/bond investments, sometimes the instruments themselves are collateral on the loans. For example, in the famous case of Repo 105 and 108 deals by Lehman Brothers, Lehman needed to improve its cash liquidity position for about two weeks surrounding the year end closing of its books in order to show a better leverage position of liquidity to debt. So Lehman really borrowed millions from former Lehman employees (not exactly arms length transactions) using poisoned mortgages that it could not easily sell as collateral on the very short term borrowings (a week or two) for which Lehman contracted for either 5% or 8% returns to its former employees who loaned the cash.

    But receiving cash offset by short term borrowing does not really improve liquidity and leverage on the balance sheet. So Lehman and its auditor, Ernst & Young, devised a really devious ploy that was enabled by a totally stupid clause in the FASB's

    Lehman reported its Repo 105 and Repo 108 transactions as sales rather than secured borrowings, apparently by attempting to structure the transactions so as to try to support the following conclusions:

    (a) That the transferred securities had been legally isolated from Lehman (based on a true sale opinion from a U.K. law firm), and

    (b) That the collateralization in the transactions did not provide Lehman with effective control over the transferred securities.

    Based on the Bankruptcy Examiner’s report, Lehman’s Repo 105 and Repo 108 transactions were structurally similar to ordinary repo transactions. The transactions were conducted with the same collateral and with substantially the same counterparties. See Report of Anton R. Valukas, Examiner, United States Bankruptcy Court Southern District of New York, In re Lehman Brothers Holdings Inc., et al., Debtors, March 11, 2010, v3, pg. 746.

    The contracting was a bit more complicated than I will discuss here, but the bottom line that got Ernst & Young off the hook for total negligence (in spite of a scathing lashing out at E&Y by the Bankruptcy Examiner) was a really obscure and stupid provision in FAS 140 that let Lehman and E&Y get away with deceptive financial statements. Of course it did not matter to Lehman after it imploded, but E&Y got off the hook with only a huge blot of public perception of the firm's ethics in the case of the Lehman audit.

    The Examiner's Report is not at all kind to Ernst & Young
    Lehman’s use of Repo 105 — hidden from the firm’s board but not its auditors at Ernst & Young — helped the investment bank look less indebted than it really was.

    As quoted in
    Volumes 1-9 of the Examiner's Report --- http://dealbook.blogs.nytimes.com/2010/03/11/lehman-directors-did-not-breach-duties-examiner-finds/#reports

    More from the examiner’s report:

    Lehman never publicly disclosed its use of Repo 105 transactions, its accounting treatment for these transactions, the considerable escalation of its total Repo 105 usage in late 2007 and into 2008, or the material impact these transactions had on the firm’s publicly reported net leverage ratio. According to former Global Financial Controller Martin Kelly, a careful review of Lehman’s Forms 10-K and 10-Q would not reveal Lehman’s use of Repo 105 transactions. Lehman failed to disclose its Repo 105 practice even though Kelly believed “that the only purpose or motive for the transactions was reduction in balance sheet”; felt that “there was no substance to the transactions”; and expressed concerns with Lehman’s Repo 105 program to two consecutive Lehman Chief Financial Officers – Erin Callan and Ian Lowitt – advising them that the lack of economic substance to Repo 105 transactions meant “reputational risk” to Lehman if the firm’s use of the transactions became known to the public. In addition to its material omissions, Lehman affirmatively misrepresented in its financial statements that the firm treated all repo transactions as financing transactions – i.e., not sales – for financial reporting purposes.

    I've oversimplified the Repo 105 and 105 transactions by Lehman Brothers. For a more complete explanation, see the following:
    "Lehman's Demise and Repo 105: No Accounting for Deception," Knowledge@Wharton, March 31, 2010 ---
    http://knowledge.wharton.upenn.edu/article.cfm?articleid=2464

    The collapse of Lehman Brothers in September 2008 is widely seen as the trigger for the financial crisis, spreading panic that brought lending to a halt. Now a 2,200-page report says that prior to the collapse -- the largest bankruptcy in U.S. history -- the investment bank's executives went to extraordinary lengths to conceal the risks they had taken. A new term describing how Lehman converted securities and other assets into cash has entered the financial vocabulary: "Repo 105."

    While Lehman's huge indebtedness and other mistakes have been well documented, the $30 million study by Anton Valukas, assigned by the bankruptcy court, contains a number of surprises and new insights, several Wharton faculty members say.

    Among the report's most disturbing revelations, according to Wharton finance professor Richard J. Herring, is the picture of Lehman's accountants at Ernst & Young. "Their main role was to help the firm misrepresent its actual position to the public," Herring says, noting that reforms after the Enron collapse of 2001 have apparently failed to make accountants the watchdogs they should be.

    "It was clearly a dodge.... to circumvent the rules, to try to move things off the balance sheet," says Wharton accounting professor professor Brian J. Bushee, referring to Lehman's Repo 105 transactions. "Usually, in these kinds of situations I try to find some silver lining for the company, to say that there are some legitimate reasons to do this.... But it clearly was to get assets off the balance sheet."

    The use of outside entities to remove risks from a company's books is common and can be perfectly legal. And, as Wharton finance professor Jeremy J. Siegel points out, "window dressing" to make the books look better for a quarterly or annual report is a widespread practice that also can be perfectly legal. Companies, for example, often rush to lay off workers or get rid of poor-performing units or investments, so they won't mar the next financial report. "That's been going on for 50 years," Siegel says. Bushee notes, however, that Lehman's maneuvers were more extreme than any he has seen since the Enron collapse.

    Wharton finance professor professor Franklin Allen suggests that the other firms participating in Lehman's Repo 105 transactions must have known the whole purpose was to deceive. "I thought Repo 105 was absolutely remarkable – that Ernst & Young signed off on that. All of this was simply an artifice, to deceive people." According to Siegel, the report confirms earlier evidence that Lehman's chief problem was excessive borrowing, or over-leverage. He argues that it strengthens the case for tougher restrictions on borrowing.

    A Twist on a Standard Financing Method

    In his report, Valukas, chairman of the law firm Jenner & Block, says that Lehman disregarded its own risk controls "on a regular basis," even as troubles in the real estate and credit markets put the firm in an increasingly perilous situation. The report slams Ernst & Young for failing to alert the board of directors, despite a warning of accounting irregularities from a Lehman vice president. The auditing firm has denied doing anything wrong, blaming Lehman's problems on market conditions.

    Much of Lehman's problem involved huge holdings of securities based on subprime mortgages and other risky debt. As the market for these securities deteriorated in 2008, Lehman began to suffer huge losses and a plunging stock price. Ratings firms downgraded many of its holdings, and other firms like JPMorgan Chase and Citigroup demanded more collateral on loans, making it harder for Lehman to borrow. The firm filed for bankruptcy on September 15, 2008.

    Prior to the bankruptcy, Lehman worked hard to make its financial condition look better than it was, the Valukas report says. A key step was to move $50 billion of assets off its books to conceal its heavy borrowing, or leverage. The Repo 105 maneuver used to accomplish that was a twist on a standard financing method known as a repurchase agreement. Lehman first used Repo 105 in 2001 and became dependent on it in the months before the bankruptcy.

    Repos, as they are called, are used to convert securities and other assets into cash needed for a firm's various activities, such as trading. "There are a number of different kinds, but the basic idea is you sell the security to somebody and they give you cash, and then you agree to repurchase it the next day at a fixed price," Allen says.

    In a standard repo transaction, a firm like Lehman sells assets to another firm, agreeing to buy them back at a slightly higher price after a short period, sometimes just overnight. Essentially, this is a short-term loan using the assets as collateral. Because the term is so brief, there is little risk the collateral will lose value. The lender – the firm purchasing the assets – therefore demands a very low interest rate. With a sequence of repo transactions, a firm can borrow more cheaply than it could with one long-term agreement that would put the lender at greater risk.

    Under standard accounting rules, ordinary repo transactions are considered loans, and the assets remain on the firm's books, Bushee says. But Lehman found a way around the negotiations so it could count the transaction as a sale that removed the assets from its books, often just before the end of the quarterly financial reporting period, according to the Valukas report. The move temporarily made the firm's debt levels appear lower than they really were. About $39 billion was removed from the balance sheet at the end of the fourth quarter of 2007, $49 billion at the end of the first quarter of 2008 and $50 billion at the end of the next quarter, according to the report.

    Bushee says Repo 105 has its roots in a rule called FAS 140, approved by the Financial Accounting Standards Board in 2000. It modified earlier rules that allow companies to "securitize" debts such as mortgages, bundling them into packages and selling bond-like shares to investors. "This is the rule that basically created the securitization industry," he notes.

    FAS 140 allowed the pooled securities to be moved off the issuing firm's balance sheet, protecting investors who bought the securities in case the issuer ran into trouble later. The issuer's creditors, for example, cannot go after these securities if the issuer goes bankrupt, he says.

    Because repurchase agreements were really loans, not sales, they did not fit the rule's intent, Bushee states. So the rule contained a provision saying the assets involved would remain on the firm's books so long as the firm agreed to buy them back for a price between 98% and 102% of what it had received for them. If the repurchase price fell outside that narrow band, the transaction would be counted as a sale, not a loan, and the securities would not be reported on the firm's balance sheet until they were bought back.

    This provided the opening for Lehman. By agreeing to buy the assets back for 105% of their sales price, the firm could book them as a sale and remove them from the books. But the move was misleading, as Lehman also entered into a forward contract giving it the right to buy the assets back, Bushee says. The forward contract would be on Lehman's books, but at a value near zero. "It's very similar to what Enron did with their transactions. It's called 'round-tripping.'" Enron, the huge Houston energy company, went bankrupt in 2001 in one of the best-known examples of accounting deception.

    Lehman's use of Repo 105 was clearly intended to deceive, the Vakulas report concludes. One executive email cited in the report described the program as just "window dressing." But the company, which had international operations, managed to get a legal opinion from a British law firm saying the technique was legal.

    Bamboozled

    The Financial Accounting Standards Board moved last year to close the loophole that Lehman is accused of using, Bushee says. A new rule, FAS 166, replaces the 98%-102% test with one designed to get at the intent behind a repurchase agreement. The new rule, just taking effect now, looks at whether a transaction truly involves a transfer of risk and reward. If it does not, the agreement is deemed a loan and the assets stay on the borrower's balance sheet.

    The Vakulas report has led some experts to renew calls for reforms in accounting firms, a topic that has not been front-and-center in recent debates over financial regulation. Herring argues that as long as accounting firms are paid by the companies they audit, there will be an incentive to dress up the client's appearance. "There is really a structural problem in the attitude of accountants." He says it may be worthwhile to consider a solution, proposed by some of the industry's critics, to tax firms to pay for auditing and have the Securities and Exchange Commission assign the work and pay for it.

    The Valukas report also shows the need for better risk-management assessments by firm's boards of directors, Herring says. "Every time they reached a line, there should have been a risk-management committee on the board that at least knew about it." Lehman's ability to get a favorable legal opinion in England when it could not in the U.S. underscores the need for a "consistent set" of international accounting rules, he adds.

    Siegel argues that the report also confirms that credit-rating agencies like Moody's and Standard & Poor's must bear a large share of the blame for troubles at Lehman and other firms. By granting triple-A ratings to risky securities backed by mortgages and other assets, the ratings agencies made it easy for the firms to satisfy government capital requirements, he says. In effect, the raters enabled the excessive leverage that proved a disaster when those securities' prices fell to pennies on the dollar. Regulators "were being bamboozled, counting as safe capital investments that were nowhere near safe."

    Some financial industry critics argue that big firms like Lehman be broken up to eliminate the problem of companies being deemed "too big to fail." But Siegel believes stricter capital requirements are a better solution, because capping the size of U.S. firms would cripple their ability to compete with mega-firms overseas.

    While the report sheds light on Lehman's inner workings as the crisis brewed, it has not settled the debate over whether the government was right to let Lehman go under. Many experts believe bankruptcy is the appropriate outcome for firms that take on too much risk. But in this case, many feel Lehman was so big that its collapse threw markets into turmoil, making the crisis worse than it would have been if the government had propped Lehman up, as it did with a number of other firms.

    Allen says regulators made the right call in letting Lehman fail, given what they knew at the time. But with hindsight he's not so sure it was the best decision. "I don't think anybody anticipated that it would cause this tremendous stress in the financial system, which then caused this tremendous recession in the world economy."

    Allen, Siegel and Herring say regulators need a better system for an orderly dismantling of big financial firms that run into trouble, much as the Federal Deposit Insurance Corp. does with ordinary banks. The financial reform bill introduced in the Senate by Democrat Christopher J. Dodd provides for that. "I think the Dodd bill has a resolution mechanism that would allow the firm to go bust without causing the kind of disruption that we had," Allen says. "So, hopefully, next time it can be done better. But whether anyone will have the courage to do that, I'm not sure."

    Lehman's Ghost Has Been Named "Debt Masking"
    The initials DM, however, stand for
    "Deception Manipulation"
    "Debt 'Masking' Under Fire:  SEC Considers New Rules to Deter Banks From Dressing Up Books; Ghost of Lehman, by Tom McGinty, Kate Kelly, and Kara Scannell, " The Wall Street Journal, April 21, 2010 ---
    http://online.wsj.com/article/SB20001424052748703763904575196334069503298.html#mod=todays_us_page_one

    Teaching Case on Repo 105/108 "Sales" That are 100% Certain to be Returned
    This is really a test of whether an audit firm should follow FASB rules that, in a particular context, become deceptive for investors/creditors
    Given a choice of choosing the client's interests versus the interests of investors and creditors, the auditor chose the client in this case.

    From The Wall Street Journal Weekly Accounting Review on March 18, 2011

    Lehman Probe Stalls; Chance of No Charges
    by: Jean Eaglesham and Liz Rappaport
    Mar 12, 2011
    Click here to view the full article on WSJ.com
     

    TOPICS: Advanced Financial Accounting, Audit Report, Auditing, Bankruptcy

    SUMMARY: "In recent months, Securities and Exchange Commission officials have grown increasingly doubtful they can prove that Lehman violated U.S. laws by using an accounting measure to move as much as $50 billion in assets..." and debt off of its balance sheet. One year ago, a report by "...a U.S. bankruptcy-court examiner investigating the collapse of Lehman Brothers Holdings Inc. blame[d] senior executives and auditor Ernst & Young for serious lapses that led to the largest bankruptcy in U.S. history and the worst financial crisis since the Great Depression."

    CLASSROOM APPLICATION: The article is useful to discuss repurchase agreements ("repos"), auditors' responsibility to ascertain whether a client is utilizing appropriate accounting and has internal controls in place to ensure the sue of those methods, and the Lehman Brothers collapse that led to the financial crisis.

    QUESTIONS: 
    1. (Introductory) Who is the firm of Lehman Brothers? What happened to this firm? Hint: you may use related articles to answer this question.

    2. (Advanced) What are "repos" or repurchase agreements? How can they be used to reduce debt on a balance sheet and therefore make a firm look healthier than it really is?

    3. (Advanced) What is an auditor's responsibility for assessing whether financial statements are prepared in accordance with generally accepted accounting standards? What steps must the auditor take if he or she finds transactions not accounted for in accordance with generally accepted accounting principles?

    4. (Introductory) How did the Lehman Brothers auditor, Ernst & Young, view the firm's use of repo transactions? Who has questioned their business purpose and the accounting for them? Why is the accounting for these transactions being questioned?

    5. (Advanced) What are the potential implications for E&Y if the SEC had found evidence that Lehman Brothers executives intentionally misused accounting for repo transactions to improve the overall appearance of the financial statements?

    6. (Advanced) Are U.S. accounting standards establish in U.S. law? Explain your answer.

    7. (Introductory) How could Lehman Brothers executives have violated U.S. law and therefore have acted in a way that would bring an SEC enforcement action against them? Cite explanations in the article specifically related to the grounds on which the SEC would be able to bring a civil suit and perhaps lead the justice department to bring a criminal suit against these executives.
     

    Reviewed By: Judy Beckman, University of Rhode Island

     

    One Auditing Firm Has Become Better Known for Its Auditing Specialty Than Other Firms like Ernst & Young are only pretenders
    "The Leading Indicator of Repurchase Risk Losses? Audited By KPMG," by Francine McKenna, re: The Auditors, April 25, 2010 ---
    http://retheauditors.com/2010/04/25/the-leading-indicator-of-repurchase-risk-losses-audited-by-kpmg/ 

    If you are a regular reader of this site, you may remember the first time I warned you about the poor disclosure practices surrounding repurchase risk. It was all the way back in March of 2007 and I was referring to the lack of disclosures surrounding New Century Financial. I warned you again seven months ago that another KPMG client, Wachovia/Wells Fargo, has the same disclosure issues with regard to repurchase risk. The latest announcements of potentially material losses due to forced repurchases of mortgages from Fannie Mae (Deloitte) and Freddie Mac (PwC) were made by JP Morgan and Bank of America – both audited by PwC. Maybe ya’ll should kick the tires a little more on Citibank’s big comeback

    Continued in article

    Also see Francine's update at
    http://retheauditors.com/2010/09/27/auditors-arent-forcing-full-repurchase-risk-exposure-disclosure/

     

    Conclusion
    And now we see "repo" transactions forming the basis of another enormous Wall Street scandal --- the case of the missing $1+ billion at MF Global.

     

    Bob Jensen's threads on repo accounting scandals ---
    http://www.trinity.edu/rjensen/Fraud001.htm#Ernst


    "If Car Companies Were Run Like Tech Companies …," by David Pogue, The New York Times, December 22, 2011 ---
    http://pogue.blogs.nytimes.com/2011/12/22/if-car-companies-were-run-like-tech-companies/

    Jensen Comment
    This item focuses upon R&D in the automotive industry and failed models that vanished from the scene. David Pogue is one of my favorite tech authors.

    In an indirect way the above article may be of interest to financial accountants in the area of R&D accounting differences between the international (IASB) versus domestic (FASB) standards. Both standard setting bodies require expensing of research outlays due to uncertainties about valuation on the balance sheet. The FASB, however, requires expensing of development costs that the IASB is more inclined to want capitalized as assets. The above article illustrates how difficult it can be to carry development costs as assets.

    Especially note the comments that follow this article. One of the main problems with vehicles is that there are so many components. Hence, predicting the future of a new vehicle model is like predicting the future of a "portfolio" of components having different futures and risks. This makes R&D accounting for "portfolios" much more complicated than R&D accounting for many other products such as new drugs, new cat food, and even new laptop computers. But it's less complicated than accounting for more complicated "portfolios" of components in new aircraft, submarines, nuclear power plants, and space ships.

    December 25, 2011 reply from Jagdish Gangolly

    Bob,

    Here's a humorous piece from the internet:

    Source: http://www.snopes.com/humor/jokes/autos.asp 

    At a computer expo (COMDEX), Bill Gates reportedly compared the computer industry with the auto industry and stated: "If GM had kept up with the technology like the computer industry has, we would all be driving $25.00 cars that got 1,000 miles to the gallon."

    In response to Bill's comments, General Motors issued a press release (byMr. Welch himself) stating:

    If GM had developed technology like Microsoft, we would all be driving cars with the following characteristics:

    1. For no reason at all, your car would crash twice a day.

    2. Every time they repainted the lines on the road, you would have to buy a new car.

    3. Occasionally, executing a manoeuver such as a left-turn would cause your car to shut down and refuse to restart, and you would have to reinstall the engine.

    4. When your car died on the freeway for no reason, you would just accept this, restart and drive on.

    5. Only one person at a time could use the car, unless you bought 'Car95' or 'CarNT', and then added more seats.

    6. Apple would make a car powered by the sun, reliable, five times as fast, and twice as easy to drive, but would run on only five per cent of the roads.

    7. Oil, water temperature and alternator warning lights would be replaced by a single 'general car default' warning light.

    8. New seats would force every-one to have the same size butt.

    9. The airbag would say 'Are you sure?' before going off.

    10. Occasionally, for no reason, your car would lock you out and refuse to let you in until you simultaneously lifted the door handle, turned the key, and grabbed the radio antenna.

    11. GM would require all car buyers to also purchase a deluxe set of road maps from Rand-McNally (a subsidiary of GM), even though they neither need them nor want them. Trying to delete this option would immediately cause the car's performance to diminish by 50 per cent or more. Moreover, GM would become a target for investigation by the Justice Department.

    12. Every time GM introduced a new model, car buyers would have to learn how to drive all over again because none of the controls would operate in the same manner as the old car.

    13. You would press the 'start' button to shut off the engine.

     


    Corporate Executives Just Do Not Learn From Past Disasters

    "Execs to Cash In Despite Market Woes: Even companies whose investors received a negative return this year expect to fund at least 100% of formula-based annual bonus plans," David McCann, CFO.com, December 9, 2011 ---
    http://www3.cfo.com/article/2011/12/compensation_executive-bonus-larre-towers-watson-

    Are companies in denial when it comes to executives' annual bonuses for 2011? Judge for yourself.

    Among 265 companies that participated in a newly released Towers Watson survey, 42% said their shareholders' total returns were lower this year than in 2010. No surprise there, given the stock markets' flat performance in 2011.

    Yet among those that reported declining shareholder value, a majority (54%) said they expected their bonus plan to be at least 100% funded, based on the plan's funding formula. That wasn't much behind the 58% of all companies that expected full or greater funding (see chart).

    "It boggles the mind. How do you articulate that to your investors?" asks Eric Larre, consulting director and senior executive pay consultant at Towers Watson. Noting that stocks performed excellently in 2010 while corporate earnings stagnated — the opposite of what has happened this year — he adds, "How are you going to say to them, 'We made more money than we did last year, but you didn't'?"

    In particular, companies would have to convincingly explain that annual bonus plans are intended to motivate executives to achieve targets for short-term, internal financial metrics such as EBITDA, operating margin, or earnings per share, and that long-term incentive programs — which generally rest on stock-option or restricted-stock awards, giving executives, like investors, an ownership stake in the company — are more germane to investors.

    But such arguments may hold little sway with the average investor, who "doesn't bifurcate compensation that discretely," says Larre. Rather, investors simply look at the pay packages as displayed in the proxy statement to see how much top executives were paid overall, and at how the stock performed.

    Larre attributes much of the current, seeming generosity to executives to complacence within corporate boards. This year, the first in which public companies were required to give shareholders an advisory ("say on pay") vote on executive-compensation plans, 89% received a thumbs-up. But that came on the heels of 2010, when the S&P 500 gained some 13% and investors were relatively content with their returns. "They may not be as content now," Larre observes. "I think the number of 'no' say-on-pay votes will be larger during the 2012 proxy season."

    Continued in article

    Bob Jensen's threads on corporate governance are at
    http://www.trinity.edu/rjensen/fraud001.htm#Governance

    White Collar Crime Pays Even if You Get Caught ---
    http://www.trinity.edu/rjensen/FraudConclusion.htm#CrimePays 


    Judging the Relevance of Fair Values for Financial Statements

    Since fair value accounting is arguably the hottest accounting theory/practice topic among accounting standard setters and financial analysts these days, I was naturally attracted to the following accountics science research article:
    "Judging the Relevance of Fair Values for Financial Statements," by Lisa Koonce, Karen K. Nelson, and Catherine M. Shakespeare, The Accounting Review, Volume 86, 2075-2098.November 2011, pp. 2075-2098

    ABSTRACT: 

    We conduct three experiments to test if investors' views about fair value are contingent on whether the financial instrument in question is an asset or liability, whether fair values produce gains or losses, and whether the item will or will not be sold/settled soon. We draw on counterfactual reasoning theory from psychology, which suggests that these factors are likely to influence whether investors consider fair value as providing information about forgone opportunities. The latter, in turn, is predicted to influence investors' fair value relevance judgments. Results are generally supportive of the notion that judgments about the relevance of fair value are contingent. Attempts to influence investors' fair value relevance judgments by providing them with information about forgone opportunities are met with mixed success. In particular, our results are sensitive to the type of information provided and indicate the difficulty of overcoming investors' (apparent) strong beliefs about fair value.

    . . .

    Fair value proponents maintain that, no matter the circumstance, fair value provides information about forgone opportunities that affect the economics of the firm (Hague and Willis 1999). That is, proponents of fair value would argue that such information is always relevant to evaluating a firm.

    To be concrete, consider the following example. Company X issues bonds payable at par in the amount of $1,000,000. Two years after issuing the bonds, interest rates fall and so the fair value of the bonds is $1,200,000. From a discounted cash flow perspective, although the cash outflows have not changed, the discount rate has decreased. This denominator change leads to a greater negative present value associated with Company X having debt with fixed cash outflows—that is, it leads to a fair value loss. A fair value advocate would argue that the $200,000 loss is always relevant to the evaluation of the firm as it represents a forgone opportunity—that is, the present value of the additional interest cost (i.e., above current market rates) that Company X will pay over the remaining term of the bond, essentially because Company X did not refinance before rates changed (Hague and Willis 1999). Accordingly, fair value advocates would maintain that Company X's valuation should decrease as its cash flows are higher than an otherwise identical company (say, Company Y) that financed after the rate decrease. Stated differently, at the end of the financing period, Company X's cash balance will be lower than Company Y's (because X is paying a higher interest rate) and, thus, each firm's valuation should reflect this real economic difference.4

    If investors follow the logic of the fair value advocate and consider fair value gains and losses as representing forgone opportunities, they are essentially engaging in a process that psychologists call counterfactual reasoning (Roese 1997). In this type of reasoning, individuals “undo” outcomes by changing (or mutating) the cause that led to them. For example, if only the driver had not taken an unusual route home late at night, he would not have gotten into an accident. In the fair value domain, the calculation of fair value is based on the same type of simulation as counterfactual reasoning—“undoing” the actual contractual interest rate and replacing it with the current market rate of interest that the company would be paying if management had undertaken an alternative set of actions (i.e., the forgone opportunity). As the above numerical example illustrates, determining the amount of the fair value gain or loss is fairly mechanical once an interest (or discount) rate change occurs. The more subtle effect is whether the investor considers the fair value gain or loss as a forgone opportunity and thus relevant to evaluating the firm. If investors do (do not) follow a process similar to counterfactual reasoning, they are more (are less) likely to judge fair value measurements as relevant.

    Thinking about fair value in terms of counterfactual reasoning is helpful, as this theory suggests when investors' fair value judgments are likely to depend on context. Prior research in psychology indicates that counterfactual thinking is more likely when events are seen as abnormal versus normal, when negative rather than positive events occur, when the outcome or antecedent is mutable or changeable, or when the outcome is close versus more distant in time (Roese and Olson 1995). Drawing on this research, we identify three fair value contexts for financial instruments—namely, assets versus liabilities, gains versus losses, and held to maturity versus sold/settled soon—that we posit will cause investors to change their fair value relevance judgments.5 That is, we predict that investors' views about the relevance of fair value will not be unwavering, as proponents of fair value would maintain, but rather will be contingent on context. Relevance of Fair Value Depending on Context

    Fair value accounting is currently being used for financial instruments that are either assets or liabilities (but not for equity items). In addition, fair value accounting produces both gains and losses. Accordingly, a natural question is whether investors reason differently about the relevance of fair value for assets versus liabilities and for gains versus losses. Counterfactual reasoning theory suggests that investors treat these situations differently.

    Turning first to gains and losses, prior literature (e.g., Roese 1997) indicates that counterfactual reasoning is more likely when undesirable outcomes occur. Here, individuals tend to evaluate the undesirable outcome by determining how easy it is to mentally undo it. In the fair value context, this would entail reasoning about how the fair value loss could have been avoided. In contrast, counterfactual reasoning is less likely with desirable outcomes like fair value gains. In the case of such desirable outcomes, individuals have less need to understand the cause of the gain and are unlikely to mentally undo the outcome (Roese 1997). Accordingly, we hypothesize: H1: 

    Individuals will judge fair value losses as more relevant than fair value gains.

    In the context of assets versus liabilities, counterfactual reasoning theory suggests that the more mutable an item is (i.e., the easier an outcome can be undone), the more likely an individual will engage in counterfactual reasoning (McGill and Tenbrunsel 2000). For example, if a parachuter falls to his death, individuals are more likely to consider mutable factors in considering how he could have avoided death. That is, “if only he had rechecked the safety cord before jumping” is more likely to be considered (i.e., it is more mutable) than “if only gravity were not at work.”

    We predict that, in the eyes of investors, financial assets are perceived to be more mutable than financial liabilities. In other words, it is easier to consider an alternative set of actions for assets than for liabilities. This idea comes from the line of reasoning that individuals generally think they can more easily sell, for example, a bond investment than they can settle a home loan. That is, it is easier for them to simulate an alternative set of actions for (i.e., counterfactually reason about) assets than liabilities.6 Accordingly, we hypothesize: H2: 

    Individuals will judge the fair value of financial assets as more relevant than the fair value of financial liabilities.

    Finally, we posit that management's intent likely influences investors' judgments about fair value relevance. Research shows that perceived closeness to an outcome affects whether individuals engage in counterfactual reasoning (Meyers-Levy and Maheswaran 1992). For example, a traveler who misses his/her flight by five minutes is more likely to engage in counterfactual reasoning (i.e., “if only I had run the yellow stop light, I'd have made it to the gate on time”) than a traveler who misses the flight by one hour. Drawing on this idea, we maintain that individuals will be more inclined to think about “if only” when the financial instrument is to be sold/settled soon as compared to when it is to be held to maturity. Counterfactual reasoning seems particularly likely here, particularly in the case of loss outcomes. Individuals will likely think, for example, “if only the company had sold the investment before the fair value decreased, they would not be in this position today.” Accordingly, we hypothesize: H3: 

    Individuals will judge the fair value of financial instruments that are to be sold/settled soon as more relevant than those that are to be held to maturity. Changing Investor Judgments about Fair Value Relevance

    Because we conjecture that investors' judgments about fair value relevance will depend on the context, we believe it is possible to desensitize their judgments to context (Arkes 1991). In particular, we surmise that providing information about forgone opportunities should influence investors' understanding of the fair value change and, ultimately, will influence their fair value relevance judgments. This approach of providing individuals with a summary of the information that they may not normally consider is frequently employed as a “fix” in various decision settings (Arkes 1991). We summarize our expectations in the following hypothesis. H4: 

    Individuals will judge the relevance of fair value for financial instruments as greater when they are given information about forgone alternatives.

    Continued in article

    Jensen Comment
    I like this paper in terms of it's originality and clever ideas in terms of accounting theory, especially the concept of counterfactual reasoning.

    But like nearly all accountics behavioral experiments reported over the past four decades, I'm disappointed in how the hypotheses were actually tested. I'm also disappointed in the virtual lack of validity testing and replication of behavioral accounting studies, but it's too early to speculate on future replication studies of this particular November 2011 article.

    To their credit, Professors Koonce, Nelson, and Shakespeare conducted three experiments rather than just one experiment, although from a picky point of view these would not constitute independent replications in science ---
    http://www.trinity.edu/rjensen/TheoryTAR.htm

    Also to their credit the sample sizes are large enough to almost make statistical inference testing superfluous.

    But I just cannot get excited about extrapolating research findings form students as surrogates for investors and analysts in the real world. This is a typical example of where accountics researchers tried to do their research without having to set foot off campus.

    Even if these researchers had stepped off campus to conduct their experiments on real-world investors and analysts, I have difficulty with assigning the research subjects artificial/hypothetical tasks even though my own doctoral thesis entailed submitting hypothetical proxy reports to real-world security analysts. My favorite criticism is an anecdotal experience with one banker who was an extremely close friend when I lived in Bangor, Maine while on the faculty of the University of Maine. I played poker or bridge with this banker at least once a week. With relatively small stakes in a card game he was a reckless fool in his betting and nearly always came up a money loser at the end of the night. But in real life he was a Yankee banker who was known in the area for his tight-fisted conservatism.

    And thus I have a dilemma. Even if there are ten replications of these experiments using real world investors and analysts I cannot get excited about the accountics science outcomes. I would place much more faith in a protocol analysis of one randomly selected CFA, but protocol researchers are not allowed to publish their small sample studies in TAR, JAR, or JAE. They can, however, find publishing outlets in social science research journals.
    http://en.wikipedia.org/wiki/Protocol_analysis

    The best known protocol analysis in accounting and finance was the award-winning doctoral thesis research of Geoffrey Clarkson at Carnegie-Mellon, although the integrity of his research was later challenged.

    Protocol Analysis

    "Can thinking aloud make you smarter?" Barking Up the Wrong Tree, August 12, 2010 ---
    http://www.bakadesuyo.com/can-thinking-aloud-make-you-smarter

    Few studies have examined the impact of age on reactivity to concurrent think-aloud (TA) verbal reports. An initial study with 30 younger and 31 older adults revealed that thinking aloud improves older adult performance on a short form of the Raven's Matrices (Bors & Stokes, 1998, Educational and Psychological Measurement, 58, p. 382) but did not affect other tasks. In the replication experiment, 30 older adults (mean age = 73.0) performed the Raven's Matrices and three other tasks to replicate and extend the findings of the initial study. Once again older adults performed significantly better only on the Raven's Matrices while thinking aloud. Performance gains on this task were substantial (d = 0.73 and 0.92 in Experiments 1 and 2, respectively), corresponding to a fluid intelligence increase of nearly one standard deviation.

    Source: "How to Gain Eleven IQ Points in Ten Minutes: Thinking Aloud Improves Raven's Matrices Performance in Older Adults" from Aging, Neuropsychology, and Cognition, Volume 17, Issue 2 March 2010 , pages 191 - 204

    Here's an explanation of what Raven's Matrices are.

    Speaking of smarts and genius, if you haven't read it, Dave Eggers' book A Heartbreaking Work of Staggering Genius is a lot of fun. I highly recommend the introduction, oddly enough.

    Jensen Comment
    Protocol Analysis --- http://en.wikipedia.org/wiki/Protocol_analysis

    This takes me back to long ago to "Protocol Analysis" when having subjects think aloud was documented in an effort to examine what information was used and how it was used in decision making. One of the first Protocol Analysis studies that I can recall was at Carnegie-Mellon when Geoffrey Clarkson wrote a doctoral thesis on a bank's portfolio manager thinking aloud while making portfolio investment decisions for clients. Although there were belated questions about the integrity of Jeff's study, one thing that stuck out in my mind is how accounting choices (LIFO vs. FIFO, straight-line vs. accelerated depreciation) were ignored entirely when the decision maker analyzed financial statements. This is one of those now rare books that I still have in some pile in my studio:
    Geoffrey Clarkson, Portfolio Selection-A Simulation of. Trust Investment (Englewood Cliffs, N. J.: Prentice-Hall,. Inc., 1962)
    Clarkson reached a controversial conclusion that his model could choose the same portfolios as the live decision maker. That was the part that was later questioned by researchers.

    Another application of Protocol Analysis was the doctoral thesis of Stan Biggs.
    As cited in The Accounting Review in January, 1988 ---  http://www.jstor.org/pss/247685
    By the way, this one one of those former years when TAR had a section for "Small Sample Studies" (those fell by the board in later years)

    Also see http://onlinelibrary.wiley.com/doi/10.1002/bdm.3960060303/abstract

    Bob Jensen's threads on fair value accounting and other bases of accounting measurement are at
    http://www.trinity.edu/rjensen/theory02.htm#FairValue


    "On Assets and Debt in the Psychology of Perceived Wealth," by Abigail B. Sussman and Eldar Shafir, Psychological Science, December 23, 2011 ---
    http://pss.sagepub.com/content/early/2011/12/16/0956797611421484.abstract?rss=1


    A Case About Cash Flow Versus Accrual Accounting

    From The Wall Street Journal Accounting Weekly Review on December 16, 2011

    Diamond Payments Questioned By Growers
    by: Hannah Karp
    Dec 12, 2011
    Click here to view the full article on WSJ.com
     

    TOPICS: Auditing, Cash Flow, Fiscal Year, Inventory Systems, Mergers and Acquisitions

    SUMMARY: Diamond Foods, Inc., may have been attempting to reduce its 2010 costs for nut purchases and shift them into 2011 in order to maintain a sufficient stock price for use in purchasing the Pringles chips product line from Procter & Gamble. The related article indicates that Investigating the payments has led to a delay in filing the company's fiscal quarterly financial statements with the SEC.

    CLASSROOM APPLICATION: The article is useful in discussing cash versus accrual based accounting and when cash payments subsequent to a fiscal period may indicate that liabilities were in existence at a financial statement date. The discussion also can be used to discuss the impact of purchases of direct materials on the calculation of cost of goods sold.

    QUESTIONS: 
    1. (Introductory) What is the discrepancy between Diamond Foods, Inc.'s description of payments to walnut growers and what the farmers themselves say the payments are for?

    2. (Advanced) In this case, how does shifting the timing of cash payments help to shift the period in which costs are expensed by Diamond Foods, Inc.? In your answer, explain what item of cost is being paid for by Diamond.

    3. (Advanced) Does the time period for cash payouts always match the period in which expenses for the item in question are recorded? Explain your answer

    4. (Advanced) How have questions about these payments impacted Diamond Foods planned acquisition of Pringles snack chips from Procter and Gamble? In your answer, address how reducing Diamond's 2010 costs would impact the planned transaction given its structure as described in the WSJ article.
     

    Reviewed By: Judy Beckman, University of Rhode Island
     

    RELATED ARTICLES: 
    Probe Delays Diamond Foods' Report
    by Hannah Karp
    Dec 13, 2011
    Online Exclusive

    "Diamond Payments Questioned By Growers,"  by: Hannah Karp, The Wall Street Journal, December 12, 2011 ---
    http://online.wsj.com/article/SB10001424052970204336104577092701009641444.html?mod=djem_jiewr_AC_domainid

    Some walnut growers have challenged Diamond Foods Inc.'s explanation of mysterious payments to them, further tangling an accounting question that has delayed the snack maker's planned $2.35 billion acquisition of Pringles from Procter & Gamble Co.

    Diamond Foods has said a sizable payment to its walnut growers in September was an advance on their 2011 crop.

    But three growers said they told the company that they didn't intend to deliver their 2011 crops to Diamond, yet were assured by company representatives that they could cash the checks anyway. The three said they were told the checks were to top up payments for their 2010 crops.

    The company is the subject of shareholder suits that claim Diamond may have used the payments to shift costs from the fiscal year that ended July 31 into the current year, padding earnings for the previous year.

    The checks to the growers, what the company called momentum payments, are the subject of an investigation by Diamond's board and have become a sticking point in the company's deal to buy the Pringles snack brand. Diamond plans to pay in part with its stock, which has dropped 56% since late September, shortly after the company reported fiscal-year results.

    Diamond said its agreements with growers are confidential.

    Many growers, who harvested their 2011 crops last month, said they had never seen momentum payments before. Some growers also had grumbled over what they said were insufficient payments from Diamond for their 2010 crops.

    Mark Royer, who has grown walnuts for Diamond for the past 10 years, said he hadn't decide whether to deliver his 2011 crop to the company when he received his momentum check in September. He said he called his Diamond field representative to explain "what the mysterious payment represented."

    "I made the assumption it would have to be 2010 compensation, because the delivery-to-date pricing was almost 40% under market," Mr. Royer said.

    He said the representative told him Diamond executives "were not committing" about which crop the payment was for. "He simply said that he knew that certain growers were cashing their momentum-payment check with the understanding that they didn't intend to deliver in 2011."

    Mr. Royer said he then decided it was safe to deposit his check.

    He said he won't deliver this year's crop to Diamond. "I've kind of washed my hands of the matter," he says.

    A grower from Sacramento, Calif., said he was unsatisfied with his final official payment this summer for his 2010 crop. "It was grossly under what other growers had received," he said.

    He was pleased to get another check, for $90,000, several days later, he said.

    But he said he had been concerned that accepting the payment would require him to deliver his fall harvest to Diamond. He said field-service representative Eric Heidman, in Stockton, Calif., assured him that the check was the last payment for the 2010 crop.

    Mr. Heidman didn't return calls seeking comment.

    Another grower in Northern California said his field representative told him the momentum check was for 2010, and that he had told Diamond he wouldn't deliver this year's crop to the company. He said he had his lawyer send Diamond a letter, confirming that the grower wouldn't deliver this year's crop and would cash the check.

    Diamond began an investigation into its accounting practices last month after the chairman of the board's audit committee, Edward Blechschmidt, received complaints about the payments from someone outside the company.

    The investigation delayed Diamond's cash-and-stock purchase of Pringles from P&G.

    Continued in article

    Bob Jensen's threads on cash flow versus accrual accounting analysis ---
    http://www.trinity.edu/rjensen/Theory02.htm#CashVsAccrualAcctg


    Question
    What's a variable prepaid forward contract?

    Hint
    Keep in mind that forward contracts, unlike option contracts, commonly have no initial (premium) costs. The same is true of most swaps that are simply portfolios of forward contracts.

    Answer
    http://www.themargininvestor.com/2/post/2011/11/prepaid-variable-forward-strategy-takes-heat-from-irs-portfolio-margin-to-the-rescue.html

    "Taxing Derivatives Gets Capitol Hill Airing," by John D. McKinnon, The Wall Street Journal, December 6, 2011 ---
    http://blogs.wsj.com/washwire/2011/12/06/taxing-derivatives-gets-capitol-hill-airing/

    Some witnesses at a congressional hearing urged a sweeping overhaul of derivatives taxation to curb abuses by big businesses and the wealthy.

    But others raised concerns that tightening the rules too much could put the U.S. out of step with the world, and could restrict legitimate use of derivatives for hedging. While acknowledging that derivatives have been used to duck taxes, these experts also noted that middle-class investors increasingly are able to make use of the same basic strategies.

    Given the chronic problems with derivatives, “we need a fundamental rethinking of the taxation of financial products,” Alex Raskolnikov, a Columbia University law professor, told lawmakers at a joint hearing of the Senate Finance Committee and the House Ways and Means Committee.

    Mr. Raskolnikov estimated that hundreds and perhaps thousands of high-income earners have used a particular technique known as a “variable prepaid forward contract” that allows deferral of taxes on appreciated securities. He and others urged more disclosure of derivative-related tax avoidance by the Internal Revenue Service, so the extent of the problems can be known.

    But other experts and lawmakers said the cure could be worse than the disease, and predicted that any overhaul would have only limited benefit.

    “Whatever changes are made, there will be new opportunities” for tax avoidance, said Andrea Kramer, a lawyer with McDermott Will & Emery in Chicago. “Eighteen months would be the outer limit” before new strategies appeared.

    Some lawmakers and witnesses also said that middle-class investors increasingly are able to take advantage of the same tax benefits of derivatives contracts, such as deferral of taxation on investment income. Exchange-traded notes, for example, mimic the economics of long-term securities investments, but can eliminate the need to pay taxes in the interim on dividends or other income.

    In a statement, Finance Committee Chairman Max Baucus (D., Mont.) said that derivatives used to avoid paying taxes “aren’t fair to taxpayers who can’t afford those high-priced lawyers and accountants.” He called on Congress to “clarify and simplify the tax treatment of these financial products.”

    Continued in article

    December 16, 2011 reply from Eliot Kamlet

    If you want to know what’s wrong with our tax system, read

    A Family’s Billions, Artfully Sheltered
    http://www.nytimes.com/2011/11/27/business/estee-lauder-heirs-tax-strategies-typify-advantages-for-wealthy.html?_r=1&scp=2&sq=lauder&st=cse 

    In the New York Times. An excerpt from it says:

    And earlier this year, Mr. Lauder used his stake in the family business, Estée Lauder Companies, to create a tax shelter to avoid as much as $10 million in federal income tax for years. In June, regulatory filings show, Mr. Lauder entered into a sophisticated contract to sell $72 million of stock to an investment bank in 2014 at a price of about 75 percent of its current value in exchange for cash now. The transaction, known as a variable prepaid forward, minimizes potential losses for shareholders and gives them access to cash. But because the I.R.S. does not classify this as a sale, it allows investors like Mr. Lauder to defer paying taxes for years.

    Elliot Kamlet
    Binghamton University

    Bob Jensen's threads on accounting for derivatives are at
    http://www.trinity.edu/rjensen/caseans/000index.htm


    Below is a link to a long article about scientific misconduct and the difficulties of investigating such misconduct. The conclusion seems to rest mostly upon what insiders apparently knew but were unwilling to testify about in public. Marc Hauser eventually resigned from Harvard. The most aggressive investigator in this instance appears to be Harvard University itself.

    "Disgrace: On Marc Hauser," by Mark Gross, The Nation, January 9, 2012 ---
    http://www.thenation.com/article/165313/disgrace-marc-hauser?page=0,2

    . . .

    Although some of my knowledge of the Hauser case is based on conversations with sources who have preferred to remain unnamed, there seems to me to be little doubt that Hauser is guilty of scientific misconduct, though to what extent and severity remains to be revealed. Regardless of the final outcome of the investigation of Hauser by the federal Office of Research Integrity, irreversible damage has been done to the field of animal cognition, to Harvard University and most of all to Marc Hauser.

    "Bad science: The psychology behind exaggerated & false research [infographic]," Holykaw, December 21, 2011 ---
    http://holykaw.alltop.com/bad-science-the-psychology-behind-exaggerated

    One in three scientists admits to using shady research practices.
    Bravo:  Zero accountics scientists admit to using shady research practices.

    One in 50 scientists admit to falsifying data outright.
    Bravo:  Zero accountics scientists admit to falsifying data in the history of accountics science.

    Reports of colleague misconduct are even more common.
    Bravo:  But not in accountics science

    Misconduct rates are highest among clinical, medical, and phamacological researchers
    Bravo:  Such reports are lowest (zero) among accountics scientists

    Four ways to make research more honest

    1. Make all raw data available to other scientists
       
    2. Hold journalists accountable
       
    3. Introduce anonymous publication
       
    4. Change from real science into accountics science where research is unlikely to be validated/replicated except on rare occasions where no errors are ever found

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


    "The Man Who Busted the ‘Banksters’," Smithsonian, November 29, 2011 ---
    http://blogs.smithsonianmag.com/history/2011/11/the-man-who-busted-the-%E2%80%98banksters%E2%80%99/

    Three years removed from the stock market crash of 1929, America was in the throes of the Great Depression, with no recovery on the horizon. As President Herbert Hoover reluctantly campaigned for a second term, his motorcades and trains were pelted with rotten vegetables and eggs as he toured a hostile land where shanty towns erected by the homeless had sprung up. They were called “Hoovervilles,” creating the shameful images that would define his presidency. Millions of Americans had lost their jobs, and one in four Americans lost their life savings. Farmers were in ruin, 40 percent of the country’s banks had failed, and industrial stocks had lost 80 percent of their value.

    With unemployment hovering at nearly 25 percent in 1932, Hoover was swept out of office in a landslide, and the newly elected president, Franklin Delano Roosevelt, promised Americans relief. Roosevelt had decried “the ruthless manipulation of professional gamblers and the corporate system” that allowed “a few powerful interests to make industrial cannon fodder of the lives of half the population.” He made it plain that he would go after the “economic nobles,” and a bank panic on the day of his inauguration, in March 1933, gave him just the mandate he sought to attack the economic crisis in his “First 100 Days” campaign. “There must be an end to a conduct in banking and in business which too often has given to a sacred trust the likeness of callous and wrongdoing,” he said.

    Ferdinand Pecora was an an unlikely answer to what ailed America at the time. He was a slight, soft-spoken son of Italian immigrants, and he wore a wide-brimmed fedora and often had a cigar dangling from his lips. Forced to drop out of school in his teens because his father was injured in a work-related accident, Pecora ultimately landed a job as a law clerk and attended New York Law School, passed the New York bar and became one of just a handful of first-generation Italian lawyers in the city. In 1918, he became an assistant district attorney. Over the next decade, he built a reputation as an honest and tenacious prosecutor, shutting down more than 100 “bucket shops”—illegal brokerage houses where bets were made on the rise and fall prices of stocks and commodity futures outside of the regulated market. His introduction to the world of fraudulent financial dealings would serve him well.

    Just months before Hoover left office, Pecora was appointed chief counsel to the U.S. Senate’s Committee on Banking and Currency. Assigned to probe the causes of the 1929 crash, he led what became known as the “Pecora commission,” making front-page news when he called Charles Mitchell, the head of the largest bank in America, National City Bank (now Citibank), as his first witness. “Sunshine Charley” strode into the hearings with a good deal of contempt for both Pecora and his commission. Though shareholders had taken staggering losses on bank stocks, Mitchell admitted that he and his top officers had set aside millions of dollars from the bank in interest-free loans to themselves. Mitchell also revealed that despite making more than $1 million in bonuses in 1929, he had paid no taxes due to losses incurred from the sale of diminished National City stock—to his wife. Pecora revealed that National City had hidden bad loans by packaging them into securities and pawning them off to unwitting investors. By the time Mitchell’s testimony made the newspapers, he had been disgraced, his career had been ruined, and he would soon be forced into a million-dollar settlement of civil charges of tax evasion. “Mitchell,” said Senator Carter Glass of Virginia, “more than any 50 men is responsible for this stock crash.”

    The public was just beginning to get a taste for the retribution that Pecora was dishing out. In June 1933, his image appeared on the cover of Time magazine, seated at a Senate table, a cigar in his mouth. Pecora’s hearings had coined a new phrase, “banksters” for the finance “gangsters” who had imperiled the nation’s economy, and while the bankers and financiers complained that the theatrics of the Pecora commission would destroy confidence in the U.S. banking system, Senator Burton Wheeler of Montana said, “The best way to restore confidence in our banks is to take these crooked presidents out of the banks and treat them the same as [we] treated Al Capone.”

    President Roosevelt urged Pecora to keep the heat on. If banks were worried about the hearings destroying confidence, Roosevelt said, they “should have thought of that when they did the things that are being exposed now.” Roosevelt even suggested that Pecora call none other than the financier J.P. Morgan Jr. to testify. When Morgan arrived at the Senate Caucus Room, surrounded by hot lights, microphones and dozens of reporters, Senator Glass described the atmosphere as a “circus, and the only things lacking now are peanuts and colored lemonade.”

    Continued in article

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

    Bob Jensen's American History of Fraud ---
    http://www.trinity.edu/rjensen/415wp/AmericanHistoryOfFraud.htm

     


    The Seven Deadly Sins of Student Writers
    "The Elements of Clunk," by Ben Yagoda, Chronicle of Higher Education, January 2, 2012 ---
    http://chronicle.com/article/The-Elements-of-Clunk/125757/

    Four years ago, I wrote an essay for The Chronicle Review cataloging "The Seven Deadly Sins of Student Writers"—the errors and infelicities that cropped up most frequently in my students' work. Since then a whole new strain of bad writing has come to the fore, not only in student work but also on the Internet, that unparalleled source for assessing the state of the language.

    Consider:

    For our one year anniversary, my girlfriend and myself are going to a Yankees game, with whomever amongst our friends can go. But, the Weather Channel just changed their forecast and the skies are grey, so we might go with the girl that lives next door to see the movie, "Iron Man 2".

    Those two hypothetical sentences contain 11 instances of this new type of "mistake" (I put the word in quotes to include usages that would almost universally be deemed errors, ones that merely diverge from standard practice, and outposts in between). They are as follows:

    1. There should be no comma after "But."

    2. The period after "Iron Man 2" should be inside the quotation marks around the title (which would be italicized in most publications, including The Chronicle).

    3. No comma is needed after "movie."

    4. "Its," not "their," is needed with "Weather Channel."

    5. "Whomever" should be "whoever."

    6. "Myself" should be "I."

    7. "Girl that" should be "girl who"

    8. "Gray" is the correct spelling, not "grey."

    9. "Amongst" should be "among."

    10. "One year anniversary" should be written as "one-year anniversary," but, really, "first anniversary."

    11. It's a "Yankee," not "Yankees," game.

    Are you surprised by the absence of smiley faces, LOL-type abbreviations, and slang terms like "diss" or "phat"? A reading of the typical lament about student writing would lead you to think all are rampant. However, I have yet to encounter a single example in all my years of grading. Students realize that this kind of thing is in the wrong register for a college assignment (even an assignment for my classes, which for the most part cover journalism, broadly defined—that is, writing for publication in newspapers and magazines, in print or online). Maybe students are being too careful. Slang can streamline or lend poetry to language, or both. The new errors and changes, on the other hand, make it longer and more prosaic. They give a new sound to prose. I call it clunk.

    The leadoff hitters are Nos. 1 to 3; punctuation is a train wreck among my students. I have no doubt as to the root of the problem: Students haven't spent much time reading. Punctuation, including the use of apostrophes and hyphens, is governed by a fairly complicated series of rules and conventions, learned for the most part not in the classroom but by encountering and subliminally absorbing them again and again. Students have a lot of conversations and texting sessions, but that's no help. You need to read a lot of edited and published prose.

    Unfamiliarity with written English has brought about the other mistakes and changes as well. They may not appear at first to have much in common, but note: All except Nos. 2 and 8 lengthen the sentence they're in. This is the opposite of the way language usually changes. "God be with you" becomes "goodbye"; "base ball" becomes "base-ball" and then "baseball"; "disrespect" becomes "diss." Two hundred years ago, Jane Austen wrote, "It is a truth universally acknowledged, that a single man in possession of a good fortune, must be in want of a wife." A copy editor today would cut both commas.

    Standard written English is a whole other language from its spoken (and texted) counterpart, with conventions not just of punctuation but also of many shortcuts to meaning—streamlined words and phrases, ellipses (omitted word or words), idioms, figures of speech—that have developed over many years. You learn them by reading. And if you haven't read much, when you set pen to paper yourself, you take things more slowly and apply a literal-minded logic, as you would in finding your way through a dark house.

    Thus, in No. 1, it seems natural to place a comma after "But" because in speaking you would pause there. (So natural that commas after "But," "And," or "Yet" at the start of a sentence now show up frequently in Associated Press dispatches and The New York Times, as well as in blogs and other writing on the Web.) And in No. 2, it makes sense to put a period after the title Iron Man 2—after all, a film title is a unit. But in both cases the rules, animated by a general urge to make writing smooth and efficient, allow us and in fact compel us to punctuate in an illogical and counterintuitive way.

    The question in No. 3, of whether to put a comma after the word "movie," relates to the famously difficult issue of defining or nondefining clauses and phrases—the whole "that/which" thing. It's a slam dunk that students would be clueless here. What I want to point out is that they're much more likely to err by putting a comma in than by taking one out. In other words, every day I see mistakes like "the movie, Iron Man 2" or "my friend, Steve." But rarely do I encounter something along the lines of "We live in the richest country in the world the United States."

    As for No. 4, every student of mine who is not the child of a high-school English teacher uses the third-person plural pronoun ("they," "them," "their") to refer to companies, organizations, and rock bands with nonplural names, such as the Clash and Arcade Fire. That is eminently reasonable, given that these outfits consist of multiple individuals, and in fact the plural pronoun is standard in Britain. However, we live in the United States, where it is not.

    (Even English teachers' children use "they" for the epicene pronoun—that is, to stand for a person of indeterminate sex. Thus, "Everyone who wants to come on the trip should bring their passport." In that sentence, "their" is so much better a choice than "his or her," "her or his," or "her/his" that it will almost certainly become standard in written English in the next 10 years.)

    Continued in article

    Jensen Common
    Along with a lot of other bloggers I admit to a lot of grammar mistakes in email messages. The biggest problem for me is that after 40+ years as a professor I know most of the rules of writing (like knowing not to split infinitives), but there's a tendency among those of us who write a lot of email messages to type phonetically and fail to proof read because we're in a hurry.

    I also admit over the years to be much more tolerant of grammatical errors of other professors and most friends who send me email messages, because we wear the same shoes. More importantly, it's not my responsibility to correct their grammar. Occasionally when I quote them on my Website I correct some grammar errors that I know would embarrass them.

    On the other hand, I've never been tolerant of grammatical errors of my students. This is because it's my responsibility to correct their grammar --- at least while they're still my students. After they graduate they become my friends and not my students.

    I'm never tolerant of bad grammar when I'm an assigned referee on a research paper. That's because it's my  responsibility to at least point out some of the grammatical errors, although it's not my responsibility to rewrite the submitted paper.

     


    "Boomers Wearing Bull's-Eyes Postcrisis:  Those Over 50 Targeted in Investment Scams; Problem is 'Rampant'," by Blake Ellis, The Wall Street Journal, December 13, 2011 ---
    http://money.cnn.com/2011/12/13/real_estate/home_sales_revision/index.htm

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


    In defence of the dismal science:  In a guest article, Robert Lucas, the John Dewey Distinguished Service Professor of Economics at the University of Chicago, rebuts criticisms that the financial crisis represents a failure of economics," The Economist, August 6, 2009 ---
    http://www.economist.com/node/14165405?story_id=14165405

    THERE is widespread disappointment with economists now because we did not forecast or prevent the financial crisis of 2008. The Economist’s articles of July 18th on the state of economics were an interesting attempt to take stock of two fields, macroeconomics and financial economics, but both pieces were dominated by the views of people who have seized on the crisis as an opportunity to restate criticisms they had voiced long before 2008. Macroeconomists in particular were caricatured as a lost generation educated in the use of valueless, even harmful, mathematical models, an education that made them incapable of conducting sensible economic policy. I think this caricature is nonsense and of no value in thinking about the larger questions: What can the public reasonably expect of specialists in these areas, and how well has it been served by them in the current crisis?

    One thing we are not going to have, now or ever, is a set of models that forecasts sudden falls in the value of financial assets, like the declines that followed the failure of Lehman Brothers in September. This is nothing new. It has been known for more than 40 years and is one of the main implications of Eugene Fama’s “efficient-market hypothesis” (EMH), which states that the price of a financial asset reflects all relevant, generally available information. If an economist had a formula that could reliably forecast crises a week in advance, say, then that formula would become part of generally available information and prices would fall a week earlier. (The term “efficient” as used here means that individuals use information in their own private interest. It has nothing to do with socially desirable pricing; people often confuse the two.)

    Mr Fama arrived at the EMH through some simple theoretical examples. This simplicity was criticised in The Economist’s briefing, as though the EMH applied only to these hypothetical cases. But Mr Fama tested the predictions of the EMH on the behaviour of actual prices. These tests could have come out either way, but they came out very favourably. His empirical work was novel and carefully executed. It has been thoroughly challenged by a flood of criticism which has served mainly to confirm the accuracy of the hypothesis. Over the years exceptions and “anomalies” have been discovered (even tiny departures are interesting if you are managing enough money) but for the purposes of macroeconomic analysis and forecasting these departures are too small to matter. The main lesson we should take away from the EMH for policymaking purposes is the futility of trying to deal with crises and recessions by finding central bankers and regulators who can identify and puncture bubbles. If these people exist, we will not be able to afford them.

    Continued in article

    Bob Jensen's threads on the Efficient Market Hypothesis (EMH) and its critics ---
    http://www.economist.com/node/14165405?story_id=14165405
    Professor Lucas provides a brief, albeit interesting, summary of how Eugene Fama developed the EMH from cases to models rather than vice versa as in often advocated in journals like the TAR, JAR, and JAE that are heavily biased toward publishing models but not cases

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


    "An Asset-Pricing Model for the Contagion Age," by Nicholas G. Polson and James G. Scott, Bloomberg News, December 7, 2011 ---
    http://www.bloomberg.com/news/2011-12-08/an-asset-pricing-model-for-contagion-age-commentary-by-polson-and-scott.html

    The financial crisis and the meltdown in Europe have exposed the deficiencies of traditional asset- pricing models, particularly their inability to account for the effect of contagion from one market to another. The good news is that the length and the persistence of the turmoil have given researchers a trove of data to develop new predictive tools.

    In our work, we developed an asset-pricing model to study these market disruptions, which incorporates random shocks to volatility that are correlated across markets. It provides a more accurate way to evaluate contagion, defined as the extent to which shocks from one market affect another over and above the level implied by the underlying asset-pricing model.

    As an example of the volatility and correlation observed during the financial crisis, consider the movements in Germany’s DAX Index (DAX) and the Standard & Poor’s 500 Index (SPX) from July through early October 2011. The DAX fell 30 percent, to 5,216 on Oct. 4, from a high of 7,402 at the beginning of July. Over the same period, the S&P fell 20 percent, to 1,075, from 1,340; meanwhile the Chicago Board Options Exchange Volatility Index, known as the VIX, increased to 45.5 percent, from 15 percent.

    Over the subsequent month and a half, volatility remained persistently higher than traditional asset-pricing models would have predicted, even though returns stabilized. The large drops in the DAX and S&P 500 reflect increases in the underlying asset-return volatilities. This is also directly observed in the increase in the VIX. (VIX) VIX Spike

    Moreover, one can see the fat-tailed nature of the distribution of volatility in the daily movements. For example, on Nov. 10, after markets had stabilized somewhat, the VIX index spiked to above 36 percent, from 28 percent, an intraday move of more than 8 percent.

    This episode captures the three facts about global markets that any asset-pricing model must now address:

    -- A large shock in asset returns in one market predicts large shocks to other markets. This is cross-sectional clustering of shocks, which some researchers call “meteor shower” volatility.

    -- A large shock in asset prices today predicts further large, mean-reverting, shocks tomorrow. This is a time-series or self-exciting clustering effect in volatility.

    -- A large shock to aggregate market volatility predicts specific, directional clustering of country-level returns. Allowing for the effect of directional volatility is important for measuring contagion in markets.

    Our asset-pricing model incorporates three volatility effects: cross-sectional clustering across countries (or markets), longitudinal clustering across time and directional clustering. These aren’t part of traditional models.

    Cross-sectional clustering accounts for the observation that large market movements in one region seem to increase the chances of observing a large movement in another, beyond what would be predicted by traditional asset-pricing models.

    Longitudinal clustering allows volatility shocks to persist over time, a well-known feature of such phenomena.

    Directional clustering captures the fact that shocks in one market are often followed by shocks in a particular direction in another. That is, the event in the first market can be used to help predict the return in the other market. Our analysis finds that directional clustering has the greatest impact in predicting contagion between markets. Fat-Tails

    Our analysis allows the distribution of volatility during disruptive periods to have fat-tails. This is a characteristic that has long been recognized in the distribution of asset returns. Fat-tailed distributions, in contrast to a normal (or Gaussian) distribution, have greater probability for values further away from the average; fat-tailed distributions will have more extreme volatility movements than one would predict with the assumption of standard normality.

    The inclusion of fat-tails has implications for the way contagion between markets is measured. Because contagion is the excess correlation between asset returns, it can only be properly evaluated if one begins with an asset pricing that incorporates fat-tailed volatility.

    Continued in article

    Modern Portfolio Theory --- http://en.wikipedia.org/wiki/Portfolio_theory

    Capital Asset Pricing Model (CAPM) --- http://en.wikipedia.org/wiki/CAPM

    This is a Must Read
    Dartmouth Professor Ken French comes in for the rescue of CAPM!
    "How to use the Fama French Model," Empirical Finance Blog, August 1, 2011 ---
    http://blog.empiricalfinancellc.com/2011/08/how-to-use-the-fama-french-model/

    The CAPM is prolific, but doesn’t appear to work!

    For example, in the figures below I’ve plotted the Fama-French 25 (portfolios ranked on size and book-to-market) against beta.

    In the first figure, I plot the average excess return to the FF 25 against the average excess return one would expect, given beta.

    If you’d like to see how I calculated the charts above, please reference the excel file here.

    Given such a poor track record, is anyone still using the CAPM?

    Lot’s of people, apparently…

    Welch (2008) finds that ~75% of professors recommend the use of the model when estimating the cost of capital, and Graham and Harvey (2001) find that ~74% of CFOs use the CAPM in their work.

    A few quotes from Graham and Harvey 2001 sum up common sentiment regarding the CAPM:

    “While the CAPM is popular, we show later that it is not clear that the model is applied properly in practice. Of course, even if it is applied properly, it is not clear that the CAPM is a very good model [see Fama and French (1992)].

    “…practitioners might not apply the CAPM or NPV rule correctly. It is also interesting that CFOs pay very little attentionto risk factors based on momentum and book-to-market-value.”

    Of course, there are lots of arguments to consider before throwing out the CAPM. Here are a few:

    Regardless, being that this blog is dedicated to empirical data and evidence, and not about ‘mentally masturbating about theoretical finance models,’ we’ll operate under the assumption that the CAPM is dead until new data comes available.

    The Fama French Alternative?

    Given the CAPM doesn’t work that well in practice, perhaps we should look into the Fama French model (which isn’t perfect or cutting edge, but a solid workhorse nonetheless). And while the FF model inputs are highly controversial, one thing is clear: the FF 3-factor model does a great job explaining the variability of returns. For example, according to Fama French 1993, the 3-factor model explains over 90% of the variability in returns, whereas the CAPM can only explain ~70%!

    The 3-factor model is great, but how the heck does one estimate the FF factors?

    Dartmouth Professor Ken French comes in for the rescue!

    Continued in article

    Ken French's Link
    http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html

    "The Impact of Asymmetry on Expected Stock Returns: An Investigation of Alternative Risk Measures," by Stephen P. Huffman and Cliff Moll, SSRM, September 7, 2011 ---
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1924048

    Abstract:     
    We investigate the relation between various alternative risk measures and future daily returns using a sample of firms over the 1988-2009 time period. Previous research indicates that returns are not normally distributed and that investors seem to care more about downside risk than total risk. Motivated by these findings and the lack of research on upside risk, we model the relation between future returns and risk measures and investigate the following questions: Are investors compensated for total risk? Is the compensation for downside risk different than the compensation for upside risk? and which measure of risk (i.e., upside, downside, or total) is most important to investors? We find that, although investors seem to be compensated for total risk, measures of downside risk, such as the lower partial moment, better explain future returns. Further, when downside and upside risk are modeled simultaneously, investors seem to care only about downside risk. Our findings are robust to the addition of control variables, including prior returns, size, book-to-market ratio of equity (B/M), and leverage. We also find evidence of short-run mean reversals in daily returns. Our findings are important because we document a positive risk-return relationship, using both total and downside risk measures; however, we find that investors are concerned more with downside risk than total risk.

    Where capital market research in accounting made a huge mistake by relying on CAPM
    http://www.trinity.edu/rjensen/theory01.htm#AccentuateTheObvious

     

    Bob Jensen's threads on the EMH ---
    http://www.trinity.edu/rjensen/Theory01.htm#EMH


    "My Favorite Quotes About Teaching – Number One," by Joe Hoyle, Teaching Blog, December 9, 2011 ---
    http://joehoyle-teaching.blogspot.com/2011/12/my-favorite-quotes-about-teaching.html

    Jensen Comment
    I like a teaching evaluation submitted to Tony Catanach in a course where Tony was using the BAM (forced self learning) pedagogy ---
    http://www.trinity.edu/rjensen/265wp.htm

    The quote goes something like this:
    "Everything I learned in this course I had to learn by myself."

    To which Tony replied:
    "Case closed."


    Advanced Accounting
    Teaching case on a accounting entry has AT&T made in relation to its proposed acquisition of T-Mobile USA?

    From The Wall Street Journal Weekly Accounting Review on December 2, 2011

    AT&T's T-Mobile Deal Teeters
    by: Anton Troianovski, Greg Bensinger and Amy Schatz
    Nov 25, 2011
    Click here to view the full article on WSJ.com
     

    TOPICS: Contingent Liabilities

    SUMMARY: 'AT&T and Deutsche Telekom insisted they weren't throwing in the towel" on their proposed transaction for AT&T to acquire T-Mobile, Deutsche Telekom's U.S. cellular phone operation. However, AT&T announced it would take a charge in the fourth quarter's financial statements for a $4 billion break-up fee it agreed to in negotiations.

    CLASSROOM APPLICATION: Accounting for contingent liabilities and the link to information being signaled to the market is the focus of this review.

    QUESTIONS: 
    1. (Introductory) What accounting entry has AT&T made in relation to its proposed acquisition of T-Mobile USA? When will this entry impact AT&T's reported results?

    2. (Advanced) What accounting standard requires making this entry?

    3. (Introductory) Access the filing made by AT&T to the SEC regarding this matter. It is available on the SEC web site at http://www.sec.gov/Archives/edgar/data/732717/000073271711000097/tmobile.htm. Why do you think the company must make this disclosure at this time?

    4. (Advanced) How does the accounting for this $4 billion become a signal that the AT&T planned acquisition of T-Mobile "is more likely to fail than to succeed"?
     

    Reviewed By: Judy Beckman, University of Rhode Island
     

    RELATED ARTICLES: 
    Nuggets from the FCC's Scathing Report on AT&T/T-Mobile
    by Anton Troianovski
    Nov 30, 2011
    Online Exclusive

     

    "AT&T's T-Mobile Deal Teeters," by: Anton Troianovski, Greg Bensinger and Amy Schatz, The Wall Street Journal, November 25, 2011 ---
    http://online.wsj.com/article/SB10001424052970204452104577057482069627186.html?mod=djem_jiewr_AC_domainid

    AT&T Inc. signaled for the first time that its planned $39 billion acquisition of T-Mobile USA is more likely to fail than to succeed, saying Thursday it would set aside $4 billion in this year's final quarter to cover the potential cost of the deal falling apart.

    The move came after Federal Communications Commission Chairman Julius Genachowski said this week he would seek a rare, trial-like hearing on the merger, which would add months of arguments and another big hurdle for the controversial deal.

    AT&T and T-Mobile parent Deutsche Telekom AG responded Thursday morning by pulling their application for merger approval at the FCC in order to focus on their fight with the Justice Department, which has sued to block the acquisition.

    The federal agencies say a deal combining the No. 2 and No. 4 wireless carriers would damage competition and potentially raise prices, with little offsetting benefit. AT&T needs both agencies to sign off to get the merger through.

    The moves, disclosed in the early hours of Thanksgiving morning in the U.S. and just ahead of the market's opening in Germany, reflect a changed internal calculus at AT&T about the deal's chances to succeed.

    AT&T and Deutsche Telekom insisted they weren't throwing in the towel. Their strategy is to try to strike a settlement with the Justice Department or to beat the agency in a trial that begins Feb. 13, then reapply with the FCC for merger approval.

    But it was clear that the odds have lengthened significantly for a deal that would have created the country's largest wireless operator. "There's a degree of giving up," said Bernstein Research analyst Robin Bienenstock. "If you believed you could litigate your way out of it or do something else, you wouldn't take the charge."

    The developments could mean many more months of uncertainty for the wireless industry and for consumers, particularly T-Mobile's 33.7 million customers. T-Mobile has lost 850,000 contract customers this year, and it failed to land the most sought-after device, Apple Inc.'s iPhone. If the AT&T deal falls through, analysts and investors expect Deutsche Telekom to try to find another way to exit the U.S. market.

    A broken deal would send AT&T back to the drawing board for a strategy to shore up its network and compete with larger rival Verizon Wireless. AT&T has said it needs to buy T-Mobile to gain much-needed rights to the airwaves. It also sees the deal as an expeditious way to shore up its network, which has come under strain from the demands of millions of iPhones and other devices, hurting call quality and prompting customer complaints.

    Justice Department officials were taking stock of the developments but expected to continue preparing for trial, a person familiar with the matter said. AT&T's move has increased the certainty felt by many department officials that the company is unlikely to prevail in court, this person said. A Justice Department spokesperson couldn't be reached for comment.

    For AT&T Chief Executive Officer Randall Stephenson, the merger with T-Mobile represents the biggest gamble in a four-year tenure that has been devoid of blockbuster deals, which were a hallmark of his predecessor, Ed Whitacre. Mr. Whitacre created today's AT&T over more than a decade of deal-making that pieced together fragments of Ma Bell and rolled up several wireless companies.

    Analysts had generally considered AT&T to be too big to pull off any more mergers in the U.S. In order to persuade Deutsche Telekom to go along, AT&T agreed to pay $3 billion in cash, and to turn over valuable spectrum if the merger fell through, an unusually large breakup fee.

    For AT&T, the benefits of the deal are potentially huge. T-Mobile, which uses the same network technology as AT&T, seemed to be the answer to network constraints. Heavy overlap meant cost savings could be huge. The deal would vault AT&T ahead of rival Verizon Wireless.

    AT&T, which announced the deal on March 20, said buying T-Mobile would allow it to extend its high-speed mobile network into more of rural America, striking a chord in Washington. AT&T lined up supporters among governors, members of Congress and interest groups.

    Yet AT&T apparently failed to anticipate antitrust officials' concerns about growing market concentration in the wireless industry, already dominated by Verizon Wireless and AT&T.

    On the morning of Aug. 31, Mr. Stephenson touted the deal on CNBC. Later that day, the Justice Department filed suit to block it on antitrust grounds.

    Continued in article

    Bob Jensen's neglected threads on acquisitions ---
    http://www.trinity.edu/rjensen/Theory02.htm#Pooling


    "ProfHacker 2011 Holiday Gift Guide," by Mark Sample, Chronicle of Higher Education, December 8, 2011 ---
    http://chronicle.com/blogs/profhacker/profhacker-2011-holiday-gift-guide/37610?sid=wc&utm_source=wc&utm_medium=en

    2012 Happiness Buttons (beautiful tech futures slide show) --- http://www.cs.trinity.edu/~rjensen/temp/TechFutures.pps

    With a bit of sarcasm
    "Yes, You Need More Gadgets," by Michael Schrage, The Harvard Business Review Blog, October 20, 2011 --- Click Here
    http://blogs.hbr.org/schrage/2011/10/yes-you-need-more-gadgets.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date

    Hooked on Gadgets, and Paying a Mental Price
    You might want to examine the NYT feature while it is still free --- http://nyti.ms/9EegB2

    Bob Jensen's threads on ubiquitous computing ---
    http://www.trinity.edu/rjensen/ubiquit.htm

    Bob Jensen's threads on gadgets ---
    http://www.trinity.edu/rjensen/Bookbob4.htm#Technology


    Philosophy in Prison: Weighty Conversations about Right and Wrong --- Click Here
    http://www.openculture.com/2011/12/philosophy_in_prison.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+OpenCulture+%28Open+Culture%29


    "Progress but Also Insecurity: An Insider's View of Life in Today's Russia," Knowledge@Wharton, November 22, 2011 ---
    http://knowledge.wharton.upenn.edu/article.cfm?articleid=2885

    Russia experienced one of the largest mass privatization efforts ever undertaken in the history of the world, says Wharton legal studies and business ethics professor Philip M. Nichols. "Virtually everything was at one time controlled by the state. Now that is no longer true. Virtually all assets in Russia have been privatized. However, some of the largest and most valuable assets have been renationalized, or they are privatized in a way that allows the state to continue to control them."

    A prime example is the energy conglomerate, Gazprom, Russia's biggest company and one in which the Russian government now holds a controlling stake. Another, very highly publicized example is the state's seizure of the petroleum company Yukos, whose former head, Mikhail Khodorkovsky, was convicted of acquiring the company illegally and is currently in prison.

    It is against this backdrop that Nichols recently interviewed Vitali Naishul, president of the Institute for the Study of the Russian Economy and the Center for the Study of Russian Socio-Political Language, and widely acknowledged as one of the creators of the market economy in Russia. During the Soviet era, Naishul worked in the inner circles of Gosplan, the Soviet Union's central planning agency. In addition, he was one of the founding members of the Snakehill Group, a gathering of economists who met regularly to study and develop strategies to manage the future of the Soviet Union. A paper Naishul wrote for that group, later published as the book Another Life, became the blueprint for the Yeltsin-era economic reforms. "Essentially, he is the architect of the modern Russian state," says Nichols.

    In the interview with Nichols, Naishul talks about privatization in Russia as well as life in Russia today -- improvements in material well-being, but also a renewed awareness of insecurity about individual and property rights. As Nichols explains it, "there is no sense that the state cannot take back what it gave you, no sense that property is inviolate. As long as people still see the state as a powerful actor that can take property, there is a feeling of unease. Will your house be your house tomorrow? Will your car be your car tomorrow? That is the kind of uncertainty that Vitali speaks about." In Russia today, Nichols adds, "it's not that people worry on a daily basis that some physical harm will come to them; it's more the sense that physical harm could come to them."

    Naishul remains a well-known figure today in Russia, adds Nichols, who works with him on projects involving business ethics and Russian values. He says he has seen strangers come up to Naishul on the streets of Moscow and ask to shake his hand. "Then they giggle," Nichols says, "because in Russia, an intellectual is a rock star. That's how Vitali continues to be seen in Russia today."

    Continued in article
    Watch the video

    Bob Jensen's neglected threads on acquisitions ---
    http://www.trinity.edu/rjensen/Theory02.htm#Pooling

    "Undercover Researchers Expose Chinese Internet Water Army: An undercover team of computer scientists reveals the practices of people who are paid to post on websites," Technology Review, November 22, 2011 ---
    http://www.technologyreview.com/blog/arxiv/27357/
    Thank you Glen Gray for the heads up

     




     

    Humor Between December 1 and December 31, 2011

    Who put this thing on the snowman? ---
    http://www.youtube.com/watch?v=OaSXa5KmYQw&feature=youtu.be

    The New Yorker's 2011 Cartoon Contest for 2011 ---
    http://www.newyorker.com/humor/caption/

    ELECTILE DYSFUNCTION:
    the inability to become aroused over any of the choices for President or Congress put forth by either party.


    Video:  Bob Hope's Opening Comedy Lines --- http://www.youtube.com/watch?v=ENISgdSgPBY

    Forwarded by Paula

    According to the Alaska Department of Fish and Game, while both male and female reindeer grow antlers in the summer each year, male reindeer drop their antlers at the beginning of winter, usually late November to mid-December. Female reindeer retain their antlers till after they give birth in the spring. Therefore, accordingly EVERY historical rendition depicting Santa's reindeer, EVERY single one of them, from Rudolph to Blitzen, had to be a girl. We should've known…... ONLY women would be able to drag a fat-ass man in a red velvet suit all around the world in one night and not get lost.


     

    Steve Bridges as Barack Obama at at Fund Raiser --- http://www.stevebridges.com/obamavideos-promo-Aug-2011.html


    Message from Bob Jensen on December 24, 2011
    Erika and I are preparing to leave for a Christmas eve service in our Sugar Hill Community Church. It warmed up to 6F in these mountains today so we should have a good attendance tonight --- for us. All 12 worshippers who show up should have a good time, especially when the cookies are served afterwards.

    Steve Kachelmeir announced that he was going to be watching the AECM for messages on Christmas eve. I know he would be disappointed if there was not a single message.

    Firstly Steve, I want to wish you and your family (is it three daughters?) a very happy holiday season. Given all that you  do for the University of Texas and the American Accounting Association, I suspect that they do not see as much of you during the year as they would like. So please make this a special night of memories for them and don't forget to take video so that you can have replays of this night for years to come.

    Secondly, for those of you who think this message is too off topic for the AECM, I provide a link to the serious legal version of
    Twas the Night Before Christmas
    http://taxprof.typepad.com/taxprof_blog/2011/12/twas-the-night.html#more 

    Thirdly, let's not forget that this is a special season for some subscribers to the AECM who are not into Christianity. I apologize if the wording below that might be somewhat offensive to some people of the Jewish faith. I only remind you that this message was sent by a very good friend who is very faithful to the Jewish religion. I love it when people of all religious faith and dignity can still laugh at themselves. We all need to laugh at ourselves more often.

     

    Holiday wishes from my Jewish friend
     
    Just want to take this moment to wish you a very happy (Chanukkah), (Chanukka), (Channukah), (Hanukah), (Hannukah). Oh the hell with it ---
    http://en.wikipedia.org/wiki/Chanukkah

    A very marry Christmas and a happy new year.

     
    If anyone asks you what the difference is between Christmas and Chanukah, you will know what and how to answer!
     
    1. Christmas is one day, same day every year, December 25. Jews also love December 25th. It's another paid day off work. We go to movies and out for Chinese food and Israeli dancing. Chanukah is 8 days. It starts the evening of the 24th of Kislev, whenever that falls. No one is ever sure.
    Jews never know until a non-Jewish friend asks when Chanukah starts, forcing us to consult a calendar so we don't look like idiots. We all have the same calendar, provided free with a donation from the World Jewish Congress, the kosher butcher, or the local Sinai Memorial Chapel(especially in Florida ) or other Jewish funeral home.
     
    2. Christmas is a major holiday. Chanukah is a minor holiday with the same theme as most Jewish holidays. They tried to kill us, we survived, let's eat..
     
    3. Christians get wonderful presents such as jewelry, perfume, stereos....
    Jews get practical presents such as underwear, socks, or the collected works of the Rambam, which looks impressive on the bookshelf.
     
    4. There is only one way to spell Christmas. No one can decide how to spell Chanukah, Chanukkah, Chanukka, Channukah, Hanukah, Hannukah, etc.
     
    5. Christmas is a time of great pressure for husbands and boyfriends. Their partners expect special gifts. Jewish men are relieved of that burden. No one expects a diamond ring on Chanukah.
     
    6. Christmas brings enormous electric bills. Candles are used for Chanukah. Not only are we spared enormous electric bills, but we get to feel good about not contributing to the energy crisis.
     
    7. Christmas carols are beautiful...Silent Night, Come All Ye Faithful.... Chanukah songs are about dreidels made from clay or having a party and dancing the hora. Of course, we are secretly pleased that many of the beautiful carols were composed and written by our tribal brethren. And don't Barbara Streisand and Neil Diamond sing them beautifully?
     
    8. A home preparing for Christmas smells wonderful. The sweet smell of cookies and cakes baking. Happy people are gathered around in festive moods. A home preparing for Chanukah smells of oil, potatoes, and onions. The home, as always, is full of loud people all talking at once.
     
    9. Women have fun baking Christmas cookies. Women burn their eyes and cut their hands grating potatoes and onions for latkas on Chanukah. Another reminder of our suffering through the ages.
     
    10. Parents deliver to their children during Christmas. Jewish parents have no qualms about withholding a gift on any of the eight nights.
     
    11. The players in the Christmas story have easy to pronounce names such as Mary, Joseph, and Jesus. The players in the Chanukah story are Antiochus, Judah Maccabee, and Matta whatever. No one can spell it or pronounce it. On the plus side, we can tell our friends anything and they believe we are wonderfully versed in our history.
     
    12. Jensen deleted this line --- it must've been written by Mel Brooks.
     
    13. In recent years, Christmas has become more and more commercialized. The same holds true for Chanukah, even though it is a minor holiday. It makes sense. How could we market a major holiday such as Yom Kippur? Forget about celebrating. Think observing. Come to synagogue, starve yourself for 27 hours, become one with your dehydrated soul, beat your chest, confess your sins, a guaranteed good time for you and your family. Tickets a mere $200 per person.
     
    Better stick with Chanukah!

     


    An Old One Forwarded by Auntie Bev

    You think English is easy? It took a lot of work to put this together.

    1) The bandage was wound around the wound.

    2) The farm was used to produce produce.

    3) The dump was so full that it had to refuse more refuse.

    4) We must polish the Polish furniture.

    5) He could lead if he would get the lead out.

    6) The soldier decided to desert his dessert in the desert.

    7) Since there is no time like the present, he thought it was time to present the present.

    8) A bass was painted on the head of the bass drum.

    9) When shot at, the dove dove into the bushes.

    10) I did not object to the object.

    11) The insurance was invalid for the invalid.

    12) There was a row among the oarsmen about how to row.

    13) They were too close to the door to close it.

    14) The buck does funny things when the does are present.

    15) A seamstress and a sewer fell down into a sewer line.

    16) To help with planting, the farmer taught his sow to sow.

    17) The wind was too strong to wind the sail.

    18) Upon seeing the tear in the painting I shed a tear.

    19) I had to subject the subject to a series of tests.

    20) How can I intimate this to my most intimate friend?

    Let's face it - English is a crazy language. There is no egg in eggplant, nor ham in hamburger; neither apple nor pine in pineapple. English muffins weren't invented in England or French fries in France . Sweetmeats are candies while sweetbreads, which aren't sweet, are meat. We take English for granted. But if we explore its paradoxes, we find that quicksand can work slowly, boxing rings are square and a guinea pig is neither from Guinea nor is it a pig..

    And why is it that writers write but fingers don't fing, grocers don't groce and hammers don't ham? If the plural of tooth is teeth, why isn't the plural of booth, beeth? One goose, 2 geese. So one moose, 2 meese? One index, 2 indices? Doesn't it seem crazy that you can make amends but not one amend? If you have a bunch of odds and ends and get rid of all but one of them, what do you call it?

    If teachers taught, why didn't preachers praught? If a vegetarian eats vegetables, what does a humanitarian eat? Sometimes I think all the English speakers should be committed to an asylum for the verbally insane. In what language do people recite at a play and play at a recital? Ship by truck and send cargo by ship? Have noses that run and feet that smell?

    How can a slim chance and a fat chance be the same, while a wise man and a wise guy are opposites? You have to marvel at the unique lunacy of a language in which your house can burn up as it burns down, in which you fill in a form by filling it out and in which, an alarm goes off by going on.

    English was invented by people, not computers, and it reflects the creativity of the human race, which, of course, is not a race at all. That is why, when the stars are out, they are visible, but when the lights are out, they are invisible.

    PS. - Why doesn't 'Buick' rhyme with 'quick' ?

    You lovers of the English language might enjoy this...

    I have read this about 'up' before.

    There is a two-letter word that perhaps has more meanings than any other two-letter word, and that is 'UP.'

    It's easy to understand UP, meaning toward the sky or at the top of the list, but when we awaken in the morning, why do we wakeUP?

    At a meeting, why does a topic come UP?

    Why do we speak UP and why are the officers UP for election and why is it UP to the secretary to write UP a report? We call UP our friends.

    And we use it to brighten UP a room, polish UP the silver; we warm UP the leftovers and clean UP the kitchen.

    We lock UP the house and some guys fix UP the old car.

    At other times the little word has real special meaning.

    People stir UP trouble, line UP for tickets, work UP an appetite, and think UP excuses.

    To be dressed is one thing, but to be dressed UP is special.

    A drain must be opened UP because it is stopped UP.

    We open UP a store in the morning but we close it UP at night.

    We seem to be pretty mixed UP about UP!

    To be knowledgeable about the proper uses of UP, look the word UP in the dictionary.

    In a desk-sized dictionary, it takes UP almost 1/4th of the page and can add UP to about thirty definitions.

    If you are UP to it, you might try building UP a list of the many ways UP is used.

    It will take UP a lot of your time, but if you don't give UP, you may wind UP with a hundred or more.

    When it threatens to rain, we say it is clouding UP.

    When the sun comes out we say it is clearingUP. When it rains, it wets the earth and often messes things UP. When it doesn't rain for awhile, things dry UP.

    One could go on and on, but I'll wrap it UP,

    for now my time is UP,

    so........it is time to shut UP!

    Now it's UP to you what you do with this email.

     


    Forwarded by Gene and Joan

    The Haircut...

    A teenage boy had just passed his driving test and inquired of his father as to when they could discuss his use of the car.

    His father said he'd make a deal with his son: 'You bring your grades up from a C to a B average, study your Bible, and get your hair cut. Then we'll talk about the car.'

    The boy thought about that for a moment, decided he'd settle for the offer, and they agreed on it.

    After about six weeks his father said, 'Son, you've brought your grades up and I've observed that you have been studying your Bible, but I'm disappointed you haven't had your hair cut.

    The boy said, 'You know, Dad, I've been thinking about that, and I've noticed in my studies of the Bible that Samson had long hair, John the Baptist had long hair, Moses had long hair ~ ~ ~ and there's even strong evidence that Jesus had long hair.'

    You're going to love the Dad's reply:

    'Did you also notice that they all walked everywhere they went?'


    Forwarded by Paula

    The following was printed in Heloise's column on November 27, 2011:
     
    Want to make Christmas morning special for your little ones?  Make "Santa's Footprints."
     
    Cut two large foot-shaped stencils from paper or cardboard.  (Or use a large pair of shoes to draw the outline on the cardboard.)
     
    Lay them on the floor and sift baking soda around the edge.
     
    Carefully lift and repeat the process from the fireplace or window to the tree and then toward the table with the milk and cookies (and carrots for the reindeer).
     
    In the morning, your child will wake up to a nice surprise -- "evidence" that Santa visited in the middle of the night.  The baking soda is easily vacuumed up and will deodorize the carpet.
     
    Alternately, string out empty beer bottles
    but the kids might suspect that Dad rather than Santa drank the beer).
     

    The World’s First Mobile Phone (1922) --- Click Here
    http://www.openculture.com/2011/12/worlds_first_mobile_phone_1922.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+OpenCulture+%28Open+Culture%29
    One Ringing Dingy --- http://www.youtube.com/watch?v=k9e3dTOJi0o



     
    WOMAN'S PERFECT BREAKFAST 
    She's sitting at the table with her gourmet coffee. 
    Her son is on the cover of the Wheaties box.
     
    Her daughter is on the cover of Business Week.
     
    Her boyfriend is on the cover of Playgirl.
     
    And her husband is on the back of the milk carton.
     

    Keep reading-they get better!!!

     

    WOMEN'S REVENGE
     
    'Cash, check or charge?' I asked, after folding items the woman wished to purchase. 
    As she fumbled for her wallet
    I noticed a remote control for a television set in her purse. 
    'So, do you always carry your TV remote?' I asked.
     
    'No,' she replied, 'but my husband refused to come shopping with me, 

    and I figured this was the most evil thing I could do to him legally.'

     
        

    UNDERSTANDING WOMEN
     
    (A MAN'S PERSPECTIVE)
     
    I know I'm not going to understand women.
     
    I'll never understand how you can take boiling hot wax, 
    pour it onto your upper thigh, rip the hair out by the root,
     
    and still be afraid of a spider.

     

    WIFE VS. HUSBAND
     
    A couple drove down a country road for several miles, not saying a word. 
    An earlier discussion had led to an argument and 
    neither of them wanted to concede their position.
     
    As they passed a barnyard of mules, goats, and pigs,
     
    the husband asked sarcastically, 'Relatives of yours?'
     
    'Yep,' the wife replied, 'in-laws.'
     

    Memory --- A Spoof --- http://www.youtube.com/embed/HzSaoN2LdfU?fs=1


    Political quotations forwarded by Eileen

    Those who are too smart to engage in politics are punished by being governed by those who are dumber.
    ~Plato

    The problem with political jokes is they get elected.
    ~Henry Cate, VII

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

    If we got one-tenth of what was promised to us in these campaign speeches there wouldn't be any inducement to go to heaven.
    ~Will Rogers

    Politicians are the same all over. They promise to build a bridge even where there is no river.
    ~Nikita Khrushchev

    When I was a boy I was told that anybody could become President. I'm beginning to believe it.
    ~Clarence Darrow

    If God wanted us to vote, he would have given us candidates.
    ~Jay Leno

    I offer my opponents a bargain: if they will stop telling lies about us, I will stop telling the truth about them.
    ~Adlai Stevenson, campaign speech, 1952

    A politician is a fellow who will lay down your life for his country.
    ~Texas Guinan

    Any American who is prepared to run for president should automatically, by definition, be disqualified from ever doing so.
    ~Gore Vidal

    I have come to the conclusion that politics is too serious a matter to be left to the politicians.
    ~Charles de Gaulle

    Politics is supposed to be the second-oldest profession. I have come to realize that it bears a very close resemblance to the first.
    ~Ronald Reagan

    Politics: [Poly "many" + tics "blood-sucking parasites"]
    ~Larry Hardiman

    Instead of giving a politician the keys to the city, it might be better to change the locks.
    ~Doug Larson

    Don't vote, it only encourages them.
    ~Author Unknown

    There ought to be one day - just one - when there is open season on senators and congressmen.
    ~Will Rogers

    Jensen Comment
    The above Will Rogers' quote is no longer politically correct since Gabby Giffords was gunned down in her home district. But don't you wish, down deep, that Dick Cheney would invite Newt Gingrich on a hunting trip.


    Balancing Act
    Forwarded by Eileen

    Jan, Sue and Mary haven't seen each other since leaving School. They rediscover each other via a reunion website and arrange to meet for lunch in a wine bar.

    Jan arrives first, wearing a beige Versace dress. She orders a bottle of Pinot Grigio. Sue arrives shortly afterward, wearing a grey Chanel number. After the initial hugs and kisses she joins Jan in a glass of wine. Then Mary walks in, wearing a faded old tee-shirt, blue jeans and boots. She too shares the wine.

    Jan explains that after leaving school and attending Oxford University, she met and married Timothy, with whom she has a beautiful daughter. Timothy is a partner in one of London's leading law firms. They live in a 4000 sq ft apartment on Park Lane, where Susanna, the daughter, attends drama school. They have a second home in Portugal.

    Sue relates that she graduated from Cambridge University, studied to become a doctor and became a surgeon. Her husband, Clive, is a leading financial investment banker in the City. They live in the Surrey stockbroker belt and have a second home in Italy.

    Mary explains that after she left school at 17 she ran off with her boyfriend Mark. They run a tropical bird park in Essex and grow their own vegetables. Mark can stand five parrots, side by side, on his erect penis.

    Halfway down the third bottle of wine and several hours later, Jan blurts out that her husband is really a cashier at Tesco's. They live in a small apartment in Bromley and have a caravan parked on the front drive.

    Sue, chastened and encouraged by her old friend's honesty, explains that she and Clive are both nursing care assistants in an old peoples home. They live in Peckham and take camping holidays in Kent.

    Mary admits that the fifth parrot has to stand on one leg.

     


    Forwarded by Maureen

     What Starts with F and ends with k
     
     
     
    A first-grade teacher, Ms Brooks, was having trouble with one of her students. The teacher asked, 'Harry, what's your problem?'


    Harry answered, '
    I'm too smart for the 1st grade. My sister is in the 3rd grade and I'm smarter than she is! I think I should be in the 3rd grade too!'


    Ms.. Brooks had had enough. She took Harry to the principal's office.


    While Harry waited in the outer office, the teacher explained to the principal what the situation was. The principal told Ms. Brooks he would give the boy a test. If he failed to answer any of his questions he was to go back to the 1st grade and behave. She agreed.

    Harry was brought in and the conditions were explained to him and he agreed to take the test.


    Principal:

    'What is 3 x 3?'


    Harry:

    '9.'



    Principal:
    'What is
    6 x 6?'



    Harry:

    '36.'


    And so it went with every question the principal thought a 3rd grader should know.

    The principal looks at Ms. Brooks and tells her,
    'I think Harry can go to the 3rd
    grade'


    Ms.. Brooks says to the principal,
    'Let me ask him some questions..'

    The principal and Harry both agreed.


    Ms. Brooks asks,
    'What does a cow have four of that I have only two of?'


    Harry, after a moment:
    'Legs.'


    Ms Brooks:
    'What is in your pants that you have but I do not have?'


    The principal wondered why would she ask such a question!


    Harry replied:
    'Pockets.'



    Ms. Brooks:
    'What does a dog do that a man steps into?'


    Harry:

    'Pants.'



    The principal sat forward with his mouth hanging open.

    Ms. Brooks:
    'What goes in hard and pink then comes out soft and sticky?'

    The principal's eyes opened really wide and before he could stop the answer, Harry replied,
    'Bubble gum.'

    Ms. Brooks:
    'What does a man do standing up, a woman does sitting down and a dog does on three legs?'


    Harry:
    'Shake hands .'

    The principal was trembling.


    Ms.. Brooks:
    'What word starts with an 'F' and ends in 'K' that means a lot of heat and excitement?'


    Harry:

    'Firetruck.'


    The principal breathed a sigh of relief and told the
    teacher,
    'Put Harry in the fifth-grade, I got the last seven questions wrong..

    Forwarded by Gene and Joan

    This is an article submitted to a 1999 Louisville Sentinel contest to find out who had the wildest Christmas dinners. It won first prize.

    As a joke, my brother Jay used to hang a pair of panty hose over his fireplace before Christmas. He said all he wanted was for Santa to fill them.

    What they say about Santa checking the list twice must be true because every Christmas morning, although Jay's kids' stockings overflowed, his poor pantyhose hung sadly empty.

    One year I decided to make his dream come true. I put on sunglasses and went in search of an inflatable love doll. They don't sell those things at Wal-Mart. I had to go to an adult bookstore downtown.

    If you've never been in an X-rated store, don't go, you'll only confuse yourself. I was there an hour saying things like, 'What does this do?' 'You're kidding me!' 'Who would buy that?' Finally, I made it to the inflatable doll section.

    I wanted to buy a standard, uncomplicated doll that could also substitute as a passenger in my truck so I could use the car pool lane during rush hour.

    Finding what I wanted was difficult. 'Love Dolls' come in many different models. The top of the line, according to the side of the box, could do things I'd only seen in a book on animal husbandry. I settled for 'Lovable Louise.' She was at the bottom of the price scale.

    To call Louise a 'doll' took a huge leap of imagination.

    On Christmas Eve and with the help of an old bicycle pump, Louise came to life.

    My sister-in-law was in on the plan and let me in during the wee morning hours. Long after Santa had come and gone, I filled the dangling pantyhose with Louise's pliant legs and bottom. I also ate some cookies and drank what remained of a glass of milk on a nearby tray. I went home, and giggled for a couple of hours.

    The next morning my brother called to say that Santa had been to his house and left a present that had made him VERY happy, but had left the dog confused. She would bark, start to walk away, then come back and bark some more.

    We all agreed that Louise should remain in her pantyhose so the rest of the family could admire her when they came over for the traditional Christmas dinner.

    My grandmother noticed Louise the moment she walked in the door. 'What the hell is that?' she asked.

    My brother quickly explained, 'It's a doll.'

    'Who would play with something like that?' Granny snapped.

    I kept my mouth shut.

    'Where are her clothes?' Granny continued.

    'Boy, that turkey sure smells nice, Gran,' Jay said, to steer her into the dining room.

    But Granny was relentless. 'Why doesn't she have any teeth?'

    Again, I could have answered, but why would I? It was Christmas and no one wanted to ride in the back of the ambulance saying, 'Hang on Granny, hang on!'

    My grandfather, a delightful old man with poor eyesight, sidled up to me and said, 'Hey, who's the naked gal by the fireplace?' I told him she was Jay's friend.

    A few minutes later I noticed Grandpa by the mantel, talking to Louise. Not just talking, but actually flirting. It was then that we realized this might be Grandpa's last Christmas at home.

    The dinner went well. We made the usual small talk about who had died, who was dying, and who should be killed, when suddenly Louise made a noise like my father in the bathroom in the morning. Then she lurched from the mantel, flew around the room twice, and fell in a heap in front of the sofa. The cat screamed. I passed cranberry sauce through my nose, and Grandpa ran across the room, fell to his knees, and began administering mouth-to-mouth resuscitation.

    My brother fell back over his chair and wet his pants.

    Granny threw down her napkin, stomped out of the room, and sat in the car.

    It was indeed a Christmas to treasure and remember. Later in my brother's garage, we conducted a thorough examination to decide the cause of Louise's collapse. We discovered that Louise had suffered from a hot ember to the back of her right thigh.

    Fortunately, thanks to a wonder drug called duct tape, we restored her to perfect health..

    I can't wait until next Christmas.


    Forwarded by Ed Scribner

    A touching Christmas story.

    A couple was Christmas shopping at the mall on Christmas Eve and the mall was packed.

    Walking through the mall the surprised wife look up and noticed her husband was nowhere around and she was very upset because they had a lot to do.

    She used her cell phone to call her husband to ask him where he was because she was so upset.

    The husband in a calm voice said, "Honey, remember the jewelry store we went into 5 years ago where you fell in love with that diamond necklace that we could not afford and I told you that I would get it for you one day?"

    His wife said, crying, "Yes, I remember that jewelry store."

    He said, "Well, I'm in the bar right next to it."


    Forwarded by Tina

    Church Bulletin Bloopers

    The Fasting & Prayer Conference includes meals.
    ---------------------
    The sermon this morning: 'Jesus Walks on the Water.' The sermon tonight: 'Searching for Jesus.'
    ---------------------
    Ladies, don't forget the rummage sale. It's a chance to get rid of those things not worth keeping around the house. Bring your husbands.
    ---------------------
    Remember in prayer the many who are sick of our community. Smile at someone who is hard to love. Say 'Hell' to someone who doesn't care much about you.
    ---------------------
    Don't let worry kill you off - let the Church help.
    ---------------------
    Miss Charlene Mason sang 'I will not pass this way again,' giving obvious pleasure to the congregation.
    ---------------------
    For those of you who have children and don't know it, we have a nursery downstairs.
    ---------------------
    Next Thursday there will be tryouts for the choir. They need all the help they can get.
    ---------------------
    Scouts are saving aluminum cans, bottles and other items to be recycled. Proceeds will be used to cripple children.
    --------------------
    Irving Benson and Jessie Carter were married on October 24 in the church. So ends a friendship that began in their school days.
    ---------------------
    A bean supper will be held on Tuesday evening in the church hall. Music will follow.
    ---------------------
    At the evening service tonight, the sermon topic will be 'What Is Hell?' Come early and listen to our choir practice.
    ---------------------
    Eight new choir robes are currently needed due to the addition of several new members and to the deterioration of some older ones.
    ---------------------
    Please place your donation in the envelope along with the deceased person you want remembered.
    ---------------------
    The church will host an evening of fine dining, super entertainment and gracious hostility.
    ---------------------
    Potluck supper Sunday at 5:00 PM - prayer and medication to follow.
    ---------------------
    The ladies of the Church have cast off clothing of every kind. They may be seen in the basement on Friday afternoon.
    ---------------------
    This evening at 7 PM there will be a hymn singing in the park across from the Church. Bring a blanket and come prepared to sin.
    ---------------------
    Ladies Bible Study will be held Thursday morning at 10 AM. All ladies are invited to lunch in the Fellowship Hall after the B.S. is done.
    ---------------------
    The pastor would appreciate it if the ladies of the Congregation would lend him their electric girdles for the pancake breakfast next Sunday.
    ---------------------
    Low Self Esteem Support Group will meet Thursday at 7 PM . Please use the back door.
    ---------------------
    The eighth-graders will be presenting Shakespeare's "Hamlet" in the Church basement Friday at 7 PM. The congregation is invited to attend this tragedy.
    ---------------------
    Weight Watchers will meet at 7 PM at the First Presbyterian Church. Please use large double door at the side entrance.
    ---------------------
    The Associate Minister unveiled the church's new campaign slogan last Sunday: 'I Upped My Pledge - Up Yours.'


    Forwarded by Maureen

    Story from a Kansas State Highway Patrol officer :
     
     
     I made a traffic stop on an elderly lady the other day for speeding on U.S.
     166 Eastbound at Mile Marker 73 just East of Sedan, KS. I asked for her
     driver's license, registration, and proof of insurance. The lady took out
     the required information and handed it to me. In with the cards I was
     somewhat surprised (due to her advanced age) to see she had a conceal carry
     permit. I looked at her and ask if she had a weapon in her possession at
     this time.
     
     She responded that she indeed had a 45 automatic in her glove box.
     Something---body language, or the way she said it---made me want to ask if
     she had any other firearms. She did admit to also having a 9mm Glock in her
     center console. Now I had to ask one more time if that was all. She
     responded once again that she did have just one more, a .38 special in her
     purse. I then asked her what was she so afraid of.

     
     
    "Not a f'**king thing," she replied


    Forwarded by Katie

    Milk and eggs
    >>
    >>      This is a story which is perfectly logical to all males:
    >>
    >>      A wife asks her husband, "Could you please go shopping for me and
    >> buy one carton of milk, and if they have eggs, get 6."
    >>
    >>      A short time later the husband comes back with 6 cartons of milk.
    >> The wife asks him, "Why did you buy 6 cartons of milk?"
    >>
    >>      He replied, "They had eggs."


    Forwarded by Dr. Wolff

    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 $2,000.00 will only buy a used one.

    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 DAMN in GONE WITH THE WIND, 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 President.

    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 government. 

    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.

     


    Forwarded by a close friend

    ATTORNEY:  Now doctor, isn't it true that when a person dies in his sleep, he doesn't know about it until the next morning?
    WITNESS:  Did you actually pass the bar exam?
    ____________________________________

    ATTORNEY:  The youngest son, the 20-year-old, how old is he?
    WITNESS:      He's 20, much like your IQ.
    ___________________________________________
     
    ATTORNEY:  Were you present when your picture was taken?
    WITNESS:     Are you crapping
     me?
    _________________________________________
    (My Favorite)
    ATTORNEY:  So the date of conception (of the baby) was August 8th?
    WITNESS:     Yes.
    ATTORNEY:  And what were you doing at that time?
    WITNESS:     Getting laid
    ____________________________________________
    (Another favorite)
    ATTORNEY:  She had three children, right?
    WITNESS:     Yes.
    ATTORNEY:  How many were boys?
    WITNESS:   None.
    ATTORNEY:   Were there any girls?
    WITNESS:      Your Honor, I think I need a different attorney. Can I get a new attorney?
    ____________________________________________

    ATTORNEY:  How was your first marriage terminated?
    WITNESS:     By death!
    ATTORNEY:  And by whose death was it terminated?
    WITNESS:     Take a guess.
    ____________________________________________

    ATTORNEY:  Can you describe the individual?
    WITNESS:     He was about medium height and had a beard
    ATTORNEY:  Was this a male or a female?
    WITNESS:     Unless the Circus was in town I'm going with male.
    _____________________________________

    ATTORNEY:  Is your appearance here this morning pursuant to a deposition notice which I sent to your attorney?
    WITNESS:  No, this is how I dress when I go to work.
    ______________________________________

    ATTORNEY:  Doctor, how many of your autopsies have you performed on dead people?
    WITNESS:     All of them... The live ones put up too much of a fight.
    _________________________________________

    ATTORNEY:  ALL your responses MUST be oral, OK? What school did you go to?
    WITNESS:     Oral...
    _________________________________________

    ATTORNEY:  Do you recall the time that you examined the body?
    WITNESS:     The autopsy started around 8:30 PM
    ATTORNEY:  And Mr. Denton was dead at the time?
    WITNESS:     If not, he was by the time I finished.
    ____________________________________________

     
    And last:
    (Well OK, this is the best)
    ATTORNEY:  Doctor, before you performed the autopsy, did you check for a pulse?
    WITNESS:     No.
    ATTORNEY:  Did you check for blood pressure?
    WITNESS:     No.
    ATTORNEY:  Did you check for breathing?
    WITNESS:     No!
    ATTORNEY:  So, then it is possible that the patient was alive when you began the autopsy?
    WITNESS:     No.
    ATTORNEY:  How can you be so sure, Doctor?
    WITNESS:     Because his brain was sitting on my desk in a jar.
    ATTORNEY:  I see, but could the patient have still been alive, nevertheless?
    WITNESS:     Yes, it is possible that he could have been alive and practicing law.

     


    Paula's Recipe for Fruitcake

    Ingredients:

    * 2 cups flour
    * 1 stick butter
    * 1 cup of water
    * 1 tsp baking soda
    * 1 cup of sugar
    * 1 tsp salt
    * 1 cup of brown sugar
    * Lemon juice
    * 4 large eggs
    * Nuts * 2 bottles wine
    * 2 cups of dried fruit

    Sample the wine to check quality. Take a large bowl, check the wine again. To be sure it is of the highest quality, pour one level cup and drink. Repeat. Turn on the electric mixer. Beat one cup of butter in a large fluffy bowl. Add one teaspoon of sugar Beat again. At this point it's best to make sure the wine is still OK. Try another cup... Just in case. Turn off the mixerer thingy. Break 2 eggs and add to the bowl and chuck in the cup of dried fruit.

    Pick the frigging fruit up off floor. Mix on the turner.. If the fried druit gets stuck in the beaterers just pry it loose with a drewscriver. Sample the wine to check for tonsisticity. Next, sift two cups of salt. Or something. Check the wine. Now shift the lemon juice and strain your nuts. Add one table. Add a spoon of sugar, or some fink. Whatever you can find. Greash the oven. Turn the cake tin 360 degrees and try not to fall over. Don't forget to beat off the turner. Finally, throw the bowl through the window Finish the wine and wipe counter with the cat. Go to WALMART and buy cake.

    Bingle Jells!

     



    Humor Between December 1-31, 2011 --- http://www.trinity.edu/rjensen/book11q4.htm#Humor123111 

    Humor Between November 1 and November 30, 2011 --- http://www.trinity.edu/rjensen/book11q4.htm#Humor113011 

    Humor Between October 1 and October 31, 2011 --- http://www.trinity.edu/rjensen/book11q4.htm#Humor103111 

    Humor Between September 1 and September 30, 2011 --- http://www.trinity.edu/rjensen/book11q3.htm#Humor093011

    Humor Between August 1 and August 31, 2011 --- http://www.trinity.edu/rjensen/book11q3.htm#Humor083111 

    Humor Between July 1 and July 31, 2011 --- http://www.trinity.edu/rjensen/book11q3.htm#Humor073111

    Humor Between May 1 and June 30, 2011 --- http://www.trinity.edu/rjensen/book11q2.htm#Humor063011 

    Humor Between April 1 and April 30, 2011 --- http://www.trinity.edu/rjensen/book11q2.htm#Humor043011  

    Humor Between February 1 and March 31, 2011 --- http://www.trinity.edu/rjensen/book11q1.htm#Humor033111 

    Humor Between January 1 and January 31, 2011 --- http://www.trinity.edu/rjensen/book11q1.htm#Humor013111 




     

    And that's the way it was on December 31, 2011 with a little help from my friends.

    Bob Jensen's gateway to millions of other blogs and social/professional networks ---
    http://www.trinity.edu/rjensen/ListservRoles.htm

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

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    For an elaboration on the reasons you should join a ListServ (usually for free) go to   http://www.trinity.edu/rjensen/ListServRoles.htm
    AECM (Accounting Educators)  http://listserv.aaahq.org/cgi-bin/wa.exe?HOME
    The AECM is an email Listserv list which started out as an accounting education technology Listserv. It has mushroomed into the largest global Listserv of accounting education topics of all types, including accounting theory, learning, assessment, cheating, and education topics in general. At the same time it provides a forum for discussions of all hardware and software which can be useful in any way for accounting education at the college/university level. Hardware includes all platforms and peripherals. Software includes spreadsheets, practice sets, multimedia authoring and presentation packages, data base programs, tax packages, World Wide Web applications, etc

    Roles of a ListServ --- http://www.trinity.edu/rjensen/ListServRoles.htm
     

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    CPAS-L provides a forum for discussions of all aspects of the practice of accounting. It provides an unmoderated environment where issues, questions, comments, ideas, etc. related to accounting can be freely discussed. Members are welcome to take an active role by posting to CPAS-L or an inactive role by just monitoring the list. You qualify for a free subscription if you are either a CPA or a professional accountant in public accounting, private industry, government or education. Others will be denied access.
    Yahoo (Practitioners)  http://groups.yahoo.com/group/xyztalk
    This forum is for CPAs to discuss the activities of the AICPA. This can be anything  from the CPA2BIZ portal to the XYZ initiative or anything else that relates to the AICPA.
    AccountantsWorld  http://accountantsworld.com/forums/default.asp?scope=1 
    This site hosts various discussion groups on such topics as accounting software, consulting, financial planning, fixed assets, payroll, human resources, profit on the Internet, and taxation.
    Business Valuation Group BusValGroup-subscribe@topica.com 
    This discussion group is headed by Randy Schostag [RSchostag@BUSVALGROUP.COM

     


     

    Concerns That Academic Accounting Research is Out of Touch With Reality

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

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

     

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

     

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

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

     

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

     

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

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

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

    Free (updated) Basic Accounting Textbook --- search for Hoyle at
    http://www.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks

    CPA Examination --- http://en.wikipedia.org/wiki/Cpa_examination
    Free CPA Examination Review Course Courtesy of Joe Hoyle --- http://cpareviewforfree.com/
     


    Bob Jensen's Pictures and Stories
    http://www.trinity.edu/rjensen/Pictures.htm

     

    Bob Jensen's Homepage --- http://www.trinity.edu/rjensen/

     

     


     

     

    November 30, 2011

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

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

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

    Bob Jensen's Blogs --- http://www.trinity.edu/rjensen/JensenBlogs.htm
    Current and past editions of my newsletter called New Bookmarks --- http://www.trinity.edu/rjensen/bookurl.htm
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    Bob Jensen's Pictures and Stories
    http://www.trinity.edu/rjensen/Pictures.htm

     

    All my online pictures --- http://www.cs.trinity.edu/~rjensen/PictureHistory/

    Hasselback Accounting Faculty Directory --- http://www.hasselback.org/




    Humor Between November 1 and November 30, 2011 --- http://www.trinity.edu/rjensen/book11q4.htm#Humor113011 

    Humor Between October 1 and October 31, 2011 --- http://www.trinity.edu/rjensen/book11q4.htm#Humor103111 

    Humor Between September 1 and September 30, 2011 --- http://www.trinity.edu/rjensen/book11q3.htm#Humor093011

    Humor Between August 1 and August 31, 2011 --- http://www.trinity.edu/rjensen/book11q3.htm#Humor083111 

    Humor Between July 1 and July 31, 2011 --- http://www.trinity.edu/rjensen/book11q3.htm#Humor073111

    Humor Between May 1 and June 30, 2011 --- http://www.trinity.edu/rjensen/book11q2.htm#Humor063011   

    Humor Between April 1 and April 30, 2011 --- http://www.trinity.edu/rjensen/book11q2.htm#Humor043011  

    Humor Between February 1 and March 31, 2011 --- http://www.trinity.edu/rjensen/book11q1.htm#Humor033111 

    Humor Between January 1 and January 31, 2011 --- http://www.trinity.edu/rjensen/book11q1.htm#Humor013111 

    Some of Bob Jensen's Pictures and Stories
    http://www.trinity.edu/rjensen/Pictures.htm




    "I don't want to be a police officer, firefighter, jet pilot, pro quarterback, or President of the United States. I would rather be a tax accountant."
    Parents having a fantasy conversation with their little kid.

    "Here’s a Bunch of Cute Kids Explaining Why They Want to Be Tax Accountants," by Caleb Newquist, Going Concern, November 4, 2011 ---
    http://goingconcern.com/2011/11/heres-a-bunch-of-cute-kids-explaining-why-they-want-to-be-tax-accountants/#more-51244 

    Why are these kids given scripts to read?
    The answer is that they don't even know what a tax accountant is or does.
    Police officers, on the other hand, get to carry real guns, have cars with flashing lights. live on donuts, and never get speeding tickets.

    Does anybody under the age of 19-20 really want to become a tax accountant?

    The question is why do young people eventually change their minds about becoming accounting majors?
    In my opinion, parents are the main source of inspiration, followed by older accounting students who explain why they chose this major.
    Accounting teachers in college can also play a huge role if they explain career alternatives in a truthful (no hard sell) manner.

    Bob Jensen's threads on what makes young people change their minds to major in accounting?
    http://www.trinity.edu/rjensen/Bookbob1.htm#careers


    "Big four auditors face breakup to restore trust," by Huw Jones, Reuters, November 30, 2011 ---
    http://in.reuters.com/article/2011/11/30/eu-auditors-idINDEE7AT0CQ20111130

    The world's top four audit firms will have to split up and rename themselves under a far-reaching draft European Union law to crack down on conflicts of interest and shortcomings highlighted by the financial crisis.

    "Investor confidence in audit has been shaken by the crisis and I believe changes in this sector are necessary," Internal Market Commissioner Michel Barnier said on Wednesday.

    Large auditors said the plans won't improve audit quality, while smaller rivals accused Barnier of a climbdown.

    Policymakers have questioned why auditors gave a clean bill of health to many banks which shortly afterwards needed rescuing by taxpayers as the financial crisis began unfolding.

    Barnier said recent apparent audit failures at AngloIrish and Lehman Brothers banks, BAE Systems and Olympus "would strongly suggest that audit is not working as it should".

    More robust supervision is needed and "more diversity in what is an overly concentrated market, especially at the top end", he said.

    Just four audit firms -- Ernst & Young ERNY.UL, Deloitte DLTE.UL, KPMG KPMG.UL, and PwC PWC.UL -- check the books of 85 percent of blue-chip companies in most EU states, a situation the Commission said was "in essence an oligopoly".

    UK data shows the Big Four profit margins are 50 percent higher than the next four audit firms, the commission said.

    Under Barnier's plan, the four top firms will have to separate audit activities from non-audit activities, such as tax and other advisory services -- "to avoid all risks of conflict of interest".

    REBRANDING

    There would have to be legal separation of audit and non-audit services if over a third of revenues from auditing is from large listed companies and the network's total annual audit revenues are more than 1.5 billion euros in the EU.

    Claire Bury, one of Barnier's top officials, said these conditions, if approved by EU states and the European Parliament, would alter all the Big Four's business models and even one or two of the next tier down in some member states.

    Continued in article

    December 1, 2011 reply from Robert Bruce Walker in New Zealand

    What is set out below is a simulated scenario which discusses audit in New Zealand. I prepared the question for one of my staff who was doing the NZICA foundation course for admission. It just so happens that one of the topical issues she was preparing for arose from the recent enactment of the Audit Regulation Act.

    Interestingly the last issue of the Chartered Accountants Journal discussed this law change. The head of assurance a NZ EY (Simon O’Connor) wrote a very thoughtful piece in which he said, not in so many words: The big four will not even notice the change as they are already dealing with similar pieces of legislation overseas. He then said that all other firms will struggle, leaving the field open to the Big 4 in all spheres of audit. Essentially the cartel is complete – no other practitioner will be able to offer audit. Simon then went on to discuss the ‘audit expectation gap’ – the idea that an audit is much more modest in its ambition than the market expects – and makes a plea for proportionate sharing of responsibility upon failure. But he would say that, wouldn’t he?

    I have based my model answer on Simon’s analysis. As you will see it is very pessimistic. I consider audit a core skill of the accountant. Whilst it may be immodest of me to say so, I consider I could audit any entity providing I could build a team big enough.

    As I keep saying the fracture lines in our discipline are readily apparent. It reminds me of the engineer, being questioned yesterday at a commission of inquiry into the Christchurch earthquake, who said he didn’t think that the cracks in the building were very significant when he examined the building between the first earthquake and the killer. It fell down and killed 18 people.

    Question

    You are the technical director for a small to medium sized firm of accountants. The firm has 20 partners. Most of the services its sells is business advisory services. However, there is one full time audit partner and two other part time auditors who have a mix of government, not for profit and issuer audit clients. The issuers are about four in number, none of which is a listed company. They are involved in the wine and forestry industries. The firm does not have an international relationship with a global firm.

    About 50% of your workload is directly associated with the provision of auditing and financial reporting advice to the audit practice.

    You have told the managing partner that there are significant changes in the practice of audit. Having told her she becomes concerned about the firm’s involvement in the provision of audit services. She asks you to prepare a memorandum for the firm’s partners explaining the nature of the changes with a recommendation of what should be the strategic focus of the firm in this regard.

    The memorandum must contain the following:

    § An outline of the changes taking place.

    § The impact on the firm of those changes.

    § A recommendation as to what the firm should do.

    Memorandum

    To the Partners of XYZ

    Audit regulation and the future of auditing in the firm

    Introduction

    The purposes of this memorandum are to:

    § Provide a briefing on legislative changes that have taken place in the respect to audit and related matters.

    § Outline the implications for the firm and what its strategic response should be.

    Background

    In the field of auditing there have been two developments that will fundamentally change the practice of audit.

    Firstly, it became clear in the aftermath of the finance company collapses that audit has not performed the role which is expected of it. This is not really attributable to the so called ‘expectation gap’. There was true failure. The finance companies had taken enormous and unsustainable risks, and with the rotten balance sheets that ensued, continued to raise money from the public. Unfortunately, most, but not all, finance companies were audited by mid-tier and small accounting practices.

    Secondly, there has been a trend, since the failure of Enron, for overseas jurisdictions to establish quasi- governmental bodies to regulate audit and, in doing so, the responsibility for this regulation has been wrested away from the professional accounting bodies. The most obvious example is the Public Company Accounting Oversight Board created under the Sarbanes Oxley Act in the US. Other countries have followed this model.

    A related development has been the foundation of the External Reporting Board (XRB) under the Financial Reporting Act 1993. With the introduction of IFRS the Government established this organisation to ensure that New Zealand’s voice is heard in global standard setting process. XRB’s remit is not restricted to financial reporting standards. It also has responsibility for developing and giving legal effect to auditing standards as well.

    Legislative change

    The Government has perceived the need to respond to the crisis in auditing caused by the finance company collapses by enacting the Audit Regulation Act 2011 (ARA). This piece of legislation also has the added advantage, from the Government’s perspective, of aligning New Zealand practice with that of Australia. Those who practice audit will be inter-changeable across the Tasman, an objective consistent with long term policy to ensure the Australian and New Zealand markets operate as one.

    The ARA will establish a system of licensing of auditors under the auspices of the newly established Financial Markets Authority (FMA). It is important to understand that licensing will only apply to the audit of issuers. However, as will be seen below, the mere fact of licensing will have implications beyond the audit of issuers.

    The ARA does not specify the details of the licensing regime to be implemented. This has been delegated to the FMA and consultation is about to take place. Currently, the proposal is that enforcement, in respect to New Zealand chartered accountants at least, will remain with NZICA’s practice review process. The FMA will retain oversight and check on NZICA’s process to ensure the necessary standard of quality.

    The ARA envisages three possible punitive measures in the event of audit failure. These are licence restriction, suspension or cancellation.

    For any firm wishing to be licensed it will need to overcome two hurdles:

    § The grant of licence in the first instance.

    § The maintenance of licence across time as tested by the practice review process.

    The exact criteria have not yet been established. However, it is a safe bet that the criteria will be based on the principles in the Code of Ethics. Our firm is not likely to have difficulty with most of these principles. We will generally be able to demonstrate independence and integrity. Where I believe we may encounter difficulty is in the area of competence, or at least the perception of competence.

    As you will all be aware the Institute’s practice review has cast a very critical eye over our audit practice in the last two visits. The Institute seems to believe that unless a member is fully engaged in audit, he or she cannot ensure they have the necessary technical knowledge to effectively conduct audit. Further, the Institute seems to believe that there is a need for a critical mass of auditors to ensure the requisite internal oversight.

    A second factor that we would need to consider is that we will be compared, if only by implication, to the representatives of large international audit firms. These organisations benefit by having audit systems developed in much larger jurisdictions where the firms have the critical mass to develop more and more sophisticated audit approaches to align with developments in audit standards. These systems are transferred into New Zealand at basically no cost to the local firms.

    A third factor is the continuing development of audit standards themselves. With the advent of the XRB a new set of audit standards is being introduced, based on international models. To illustrate the level of complexity that entails it is to be noted that the number of ‘black letter’ standards under the NZICA audit standards is about 200, yet the new audit standards have over 500.

    A fourth factor that needs to be considered is the fracture line that has opened up or will open up in the financial reporting framework. With the introduction of IFRS there has been a realisation that these standards are too complex for general application amongst the closely held companies that are the mainstay of our practice. It seems to be official policy that differential adjustment is not possible. In consequence it is proposed that there be an entirely new framework of standards for application to the closely held company. In other words, it may gradually be the case that the opportunities for ‘cross-fertilisation’ from knowledge of full IFRS to financial statements of the bulk of clientele will diminish to a significant degree.

    Implications for our firm

    Our firm will, in short order, be confronted by a stark choice: do we attempt to continue to provide audit services to issuers or do we make a strategic decision to abandon this service?

    It first needs to be noted that licensing applies only the audit of issuers. Our audit clientele extends beyond the audit of issuers to delegated audit from Government and to the audit of not-for-profit entities such as charities, incorporated societies and the like. It will still be possible to provide audit services to organisations of that ilk. However, to practice without the benefit of a license will eventually limit our ability to compete in all audit markets. For example, how long will it take for the Auditor-General to restrict sub-contract to those with a licence even if that does not become official policy?

    The more immediate problem becomes whether or not we attempt to secure licences for some or all of our partners engaged in the provision of audit. To secure a licence it is clear that we will need to take steps to demonstrate competence. This matter has two dimensions to it.

    First, it is likely that there may be more issuer clients that become available as firms similar to ours abandon audit. There must, therefore, be a strategic opportunity available. However, we will have to compete with large firms for this market and there is no doubt that they will price keenly or the reasons given above – that is, they already have the systems in place. It is my calculation that unless we expand the number of issuers we audit, we will not be able to satisfy the Institute that we have the necessary continuing experience to prove competence.

    Second, if we were to take that strategic decision we will need to acquire the necessary audit systems to enable competence to be demonstrated. We can acquire such systems in one of two ways:

    § By developing them ourselves.

    § By joining some sort of co-operative that enables us to acquire those systems relatively cheaply.

    Whilst I have not scoped it out, my instinct is that the investment necessary to develop and continually up-grade an appropriate audit system is beyond us. And if it is not beyond us, it is likely to be a poor investment choice given the competitive nature of the audit market.

    The only alternative, therefore, is to join some international organisation and get the benefit of overseas developments in audit method and in overseas work opportunities for our partners and staff. Again, even if such opportunities are available, I doubt that it would be a costless decision. More importantly, if we did take that strategic decision we would need to be very careful about the company we would keep. There would be potential for reputational risk and, more importantly, financial risk that it would be difficult for us to manage.

    The only other matter that I think relevant is that at some point in the future there will be a realisation that ‘one size does not fit all’ with respect to audit such as prevails now in respect to financial reporting. If we abandon audit now we may not be in a position to re-enter the market if and when a ‘cut down’ audit process is developed for the smaller organisations that our practice currently specialises in. However, as no such regime is even proposed we would have to wait too long for such an opportunity even if it arises.

    Conclusion

    On balance I do not think it is cost effective for our firm to continue to offer audit services. My reasons for arriving at this conclusion are:

    § Audit practice, as expressed through audit standards, has become extremely complicated.

    § As matters stand, our firm would have difficulty demonstrating the necessary competence to obtain and maintain a licence to audit issuers.

    § Without a licence our ability to persuade existing and future non-issuer audit entities that we have the necessary skill and reputation will diminish significantly.

    § To maintain a licence we would need, one way or the other, to invest heavily in audit systems.

    § The market is not likely to be sufficiently lucrative to justify this investment as we would be competing with much larger organisations which have a better ‘economies of scale’ than we are likely to have.

    § The benefits to ‘corporate knowledge’ of practice of audit, in terms of financial reporting, might cease to exist in the near future.

    § There may come a time when there will be a differential audit regime suitable to our firm but this has not been mooted and we may need to wait too long for it to happen.

    Recommendation

    It is recommended that:

    1. The firm make a decision to not apply for an issuer audit licence under the Audit Regulation Act.

    2. The firm gradually disengage from its audit practice across all types of entity.

    Robert B Walker
    National Technical Director

    "European Commission Proposal will Hurt Audit Quality, says PwC," by Michael Foster, December 1, 2011 --
    http://www.big4.com/pricewaterhousecoopers/big4-com-exclusive-european-commission-proposal-will-hurt-audit-quality-says-pwc -

    In an exclusive interview with Big4.com, PwC Director of Global Communications Mike Davies insisted that the recent European Commission proposal to tighten auditing restrictions would lower auditing quality throughout the European Union.

    While PwC supports some of the ideas in the legislation proposed by EU Financial Services Commissioner Michel Barnier, Davies suggested that the restrictions go too far. Calling some of Barnier’s proposals “radical measures”, Davies told me that PwC is happy with the status quo. “We believe the audit market is already pretty competitive,” Davies said, adding that there are already “checks and safeguards in place and provisions about what you can and can’t provide to auditing clients”.

    At the same time, Davies acknowledged that steps could be taken to allow smaller auditing firms to compete with the Big4 firms such as PwC. “There’s always more that can be done in terms of how the market operates and how to get smaller firms to increase their share,” he added.

    However, Barnier and supporters of the EC proposal disagree. The commissioner’s final green paper pursued new rules that would make it illegal for firms to offer consulting services to auditing clients. This would essentially force the Big4 firms to split into separate consulting and auditing companies, which some believe is Barnier’s ultimate goal.

    Additionally, the new European legislation would require accounting firms to have a “cooling-off” period of several years before they could offer auditing services to the same clients. This practice, known as “firm rotation”, would require companies to hire more than one auditing company over a long period of time.

    While the legislation hopes that firm rotation would help remove conflicts of interest, Mike Davies insists that it would lower the quality of audits performed by all firms. “It would actually be detrimental to audit quality,” Davies said, adding that “there are quite a number of people who support our point of view.”

    Continued in article

    Bob Jensen's threads on professionalism and independence within auditing firms ---
    http://www.trinity.edu/rjensen/Fraud001c.htm


    "PCAOB Sees Decline in Audit Quality," by Michael Cohn, Accounting Today, November 5, 2011 ---
    http://www.accountingtoday.com/news/PCAOB-Sees-Decline-Audit-Quality-60375-1.html?CMP=OTC-RSS

    . . .

    Investors are demanding changes in the audit report to provide more disclosures. In many cases during the financial crisis, investors were surprised that within months of receiving an unqualified audit opinion, many financial institutions either went out of business or would have gone out of business if not for the bailout money they received from the federal government. Investors have questioned the value of the audit and why there wasn’t better disclosure of problems such as the many mortgage loans that lacked proper documentation.

    “The bottom line is that investors are clamoring for changes in the audit report,” said Baumann. “It’s just not working.”

     
    "Audit Flaws Revealed, at Long Last," by Floyd Norris, The New York Times, October 20, 2011 ---
    http://www.nytimes.com/2011/10/21/business/deloittes-failings-revealed-but-only-after-3-years.html?_r=1
    Thank you Beryl Simonson for the heads up.

    Where Were the Auditors Before the 2007-2008 failure of thousands of businesses that were audited?
    http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms


    In case you missed it, note how cheaply some Big Four auditing firms wiggled out of some major bank failure litigation. What could have been billions were settled for pennies on the dollar.

    "The Big Four Accounting Firms' Financial Tipping Point -- Time for a Fresh Look," by Jim Peterson, re:TheBalance, November 30, 2011 --- Click Here
    http://www.jamesrpeterson.com/home/2011/11/the-big-four-accounting-firms-financial-tipping-point-time-for-a-fresh-look-.html

    . . .

    Latest available figures for the Big Four indicate total annual global revenues of some $ 102 billion.

    Applied to those figures, the model indicates that the break-up threshold for any one of the Big Four firm’s litigation “worst-cases” would be in the range from a maximum of $ 6 billion down to $ 2.2 billion, if viewed at the global level.

    That is a considerable increase from the earlier numbers, owing to the great leap in total big-firm revenues in the intervening years.

    But cautions remain. Most importantly, cohesion of the international networks under the strain of death-threat litigation, or the extended availability of collegial cross-border financial support, cannot be assumed. Arthur Andersen’s rapid disintegration in 2002 with the flight of its non-US member firms is illustrative.

    So it is necessary to look at the bust-up range based on figures alone from the Americas, the most hazardous region. If left to their local resources, as was Andersen’s US firm, the disintegration range shrinks, from a maximum of less than $ 3 billion down to a truly frightening $ 675 million.

    Amounts at that level compare ominously with the litigation settlements recently extracted from the larger debacles of the last decade – examples led by Bank of America’s post-Countrywide mortgage-securities settlement of $8.5 billion (here) and including such investor settlements as Enron ($7.2 billion), WorldCom ($6.2 billion) and Tyco ($3.2 billion) (here).

    But those amounts were only available because inflicted on the investor-funded balance sheets of the corporations contributing to the settlements – resources not available to the private accounting partnerships. And they are even more darkly comparable with the exposures looming in the pending claims inventory.

    True, in recent months the large accounting firms have enjoyed remarkable success in disposing of large litigations for modest sums – examples include KPMG resolving Countrywide for $ 24 million (here) and New Century for $ 45 million (here), and Deloitte settling Washington Mutual for $ 18.5 million (here).

    However, hope for the indefinite continuation of such forbearance on the part of the plaintiffs is not a strategy, but only a wish.

    As the catastrophic impact of “black swan” events makes clear, it only takes one. And at that tipping point, all the marginal fiddling by Barnier, Doty and their ilk becomes academic.

     

    The auditors were giving out going concern opinions and hugely underestimating loan loss reserves when thousands of banks faiiled ---
    http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms


    If audit reform swaggered into a Luckenbach, Texas saloon, it would be "all hat and no horse"
    The ladies of the night would die laughing at that "itty-bitty thang" that walked in
    And it would need a ladder to peek over the top of the spittoon

    "FTSE-100 audit chairs question audit market reform," by Rachel Singh, Accountancy Age, November 1, 2011 ---
    http://www.accountancyage.com/aa/news/2121514/ftse-100-audit-chairs-question-audit-market-reform

    FTSE-100 audit committee chairs have questioned the rationale behind proposals currently being considered by the European Commission (EC) to reform the audit market.

    Many of the chairs believe that given the lack of evidence that failings in audit either caused or helped to speed up the credit crisis, means no case for reform has been made, according to research commissioned by the ICAEW.

    However, the research suggested that the current level of market concentration is not ideal, with BDO the only firm outside the Big Four to audit the FTSE-100.

    The research also made a number of recommendations, including increased competition and choice, continuing focus and reassurance on auditor independence and greater use of third-party and peer review of audit practices.

    ICAEW chief executive Michael Izza (pictured), said: "When considering its proposals, the European Commission cannot ignore the voice of business. As this research shows, there is scepticism over the rationale for these proposals, but a recognition that change is needed in a number of areas to ensure UK audit quality remains world leading."

    Continued in article

    "Recent Comments On European and U.S. Audit Reform," by Francine McKenna, re:TheAuditors, October 4, 2011 ---
    http://retheauditors.com/2011/10/04/recent-comments-on-european-and-u-s-audit-reform/

    Why did the auditors not question going concern issues when thousands of banks failed ---
    http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms

    Bob Jensen's threads on audit firm independence and professionalism ---
    http://www.trinity.edu/rjensen/Fraud001c.htm


    Chicken Feed in Bank Auditing Oopsie

    "PwC defends 'honest mistake' in JP Morgan audit disciplinary, By Rose Orlik, Accountancy Age, November 29*, 2011 ---
    http://www.accountancyage.com/aa/news/2128350/pwc-defends-honest-mistake-jp-morgan-audit-disciplinary

    PWC FOUGHT for minimal sanctions yesterday after it admitted audit failures in the case of JP Morgan Securities Limited.

    Appearing before a disciplinary panel, it argued JPMSL shortcomings were to blame as it omitted to flag up non-segregation of client assets for the seven years to 2008, not systemic audit failure.

    PwC committed an "honest error" as it "strove to test segregation and reconciliation of client assets", argued Tim Dutton of law firm Herbert Smith.

    Dutton said the firm's penalty should be in the region of £500,000 to £1m, saying it would be "appropriate to keep the fine at the lower end due to mitigating reasons".

    "Although the un-segregated sum of client assets was large, the real risk was modest," he added, noting no individuals were diversely affected by the failure.

    The Accountancy and Actuarial Discipline Board's counsel, Simon Browne-Williamson, said the "crystallisation of risk is irrelevant" and "serious misconduct will attract serious consequences" whether or not disaster struck.

    He argued the potential for loss of un-segregated funds -at times as much as $23bn (£14.8bn) - if JPMSL became insolvent was so great that the strictest penalties must apply.

    AADB executive counsel, Cameron Scott, said in his opinion, the repeated failure to flag up this infringement of asset rules amounted to institutional failure.

    When questioned by the panel, Browne-Williamson was unwilling to recommend a sum for the fine, and Scott said this was because the AADB queried whether it was "right for the prosecutor to suggest a penalty", calling it "a very difficult question".

    Instead, Browne-Williamson insisted upon "transparency", saying this was the best way to restore public confidence in the accounting profession and fulfil the AADB's mandate.

    The Financial Services Authority fined JPMSL £33.2m for the breach, equivalent to 1% of the average amount of client assets at risk over the eight years in question.

    Browne-Williamson urged the tribunal to adopt a similar tack, suggesting it might consider sums such as the £6.5m fees JPMSL paid to PwC during the period in question.

    PwC said: "We acknowledge that we did not maintain our usual high standards. PwC takes very seriously its reporting requirements to the FSA. We hope that the regulatory response will be proportionate to the issue."

    Continued in article

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

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

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

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

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

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

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

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

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

     


    "A Case for Mandatory Auditor Rotation? Sharp-Eyed Students Have a Look," by Jim Peterson, re:TheBalance, November 14, 2011 ---
    http://www.jamesrpeterson.com/home/2011/11/a-case-for-mandatory-auditor-rotation-sharp-eyed-students-have-a-look.html

    With comments due next month, the concept release on mandatory auditor rotation, issued by the Public Company Accounting Oversight Board on August 16 (here), provided an irresistible mid-term assignment for my class in Risk Management.

    It’s been stimulating this fall, to be with a group of students from the law and policy schools of the University of Chicago. We examine the sources of bias, misperception and flawed analysis in the behavior of those charged with governance and leadership – in business, politics and regulation. PCAOB chairman James Doty’s promotion and affection for auditor rotation was a natural.

    Ask a group of inquisitive students to find the three central themes in an assignment, and collectively they will find all six – but in this exercise, their insights are on target.

    Continued in article

    November 15, 2011 reply from Bob Jensen

    Hi Jim,

    This was a most interesting post.

    I would like to repeat my earlier concern that the
    PCAOB and other advocates of auditor rotation are not picking up on externalities as well as direct costs.

    Forcing auditors to become nomads has many
    externalities as well as direct costs to be taken into consideration. I think many of our best auditors will leave the profession before 40 years of service and many prospective auditors will never enter the profession because of having to become nomads. The problem is that as firms trade clients, local offices may be very disrupted since big clients being traded are often in different cities or even countries.

    I'm reminded of the time when
    KPMG was fired from the Fannie Mae audit. I don't know how many KPMG auditors had to be terminated and/or relocated to other cities, but my guess is that it was over 1,000.

    When
    Deloitte took over for KPMG on the Fannie Mae audit, Deloitte moved over 1,500 auditors into the city, although in this case the move for some was only temporary to clean up the mess left behind by KPMG. Over a million journal entries had to be made to revise the financial statements for one year --- the errors and fraudulent manipulations were primarily in accounting for derivative financial instruments and hedging activities. You can read more about the changing of the audit guard at Fannie Mae at
    http://www.trinity.edu/rjensen/Theory02.htm#Manipulation
    Also scroll deeply down at
    http://www.trinity.edu/rjensen/Fraud001.htm#KPMG

    This moving about of Fannie Mae auditors was not only costly to
    KPMG and Deloitte, there were externalities such as the impact on the lives of the families to say nothing of the transactions costs of selling homes and buying new homes. Deloitte auditors must've had sticker shock when faced with the prices of homes in Washington DC area. And if they moved into the city itself their children encountered one of the worst K-12 school systems in the United States.

    My point here, as mentioned in my earlier posts, is that the Big Four might on a macro level trade big clients back and forth in what seems like fair trades under a mandatory audit rotation requirement. But the big clients are often not located in the same cities such that thousands of local auditors and their families will have to be frequently relocated much like family life is like in the U.S. military. My wife was an Army brat who, after immigrating from Germany at Age 13 with her German mother and American soldier stepfather, had four years high school in four separate states --- Atlanta, Fort Knox, Yuma, and Tacoma.

    Many soldiers, sailors, marines, and air force men and women end their military careers before retirement age primarily because their families can no longer tolerate the constant moving about from base-to-base around the world. Similarly, if mandatory rotation of auditors is required, many auditors will leave the profession because of family pressures to cease moving about like nomads and incurring huge transactions costs of selling homes, buying homes, finding new schools, finding new friends, etc.


    In the 40 years of my career I moved my family from California to Michigan to Maine back to California (temporary for two think-tank years) back to Maine to Florida to Texas and lastly to New Hampshire (our children were grown up when we retired to New Hampshire). Some of these moves created all sorts of problems for some of our children. I do not recommend the nomadic life and would move less often if I could live my career over again.

    Actually the nomad analogy is probably misleading. Nomads on the dessert move in groups of permanent family and friends. Nomadic soldiers and auditors move as individual families and thus must seek new friends and support groups wherever they roam.

    Forcing auditors to become nomads has many
    externalities as well as direct costs to be taken into consideration. I think many of our best auditors will leave the profession before 40 years of service and many prospective auditors will never enter the profession because of having to become nomads.

    Respectfully,
    Bob Jensen

    The response of Ernst & Young to proposed audit firm rotation --- Click Here
    http://www.ey.com/Publication/vwLUAssets/CommentLetter_BB2219_FirmRotation_18November2011/%24FILE/CommentLetter_BB2219_FirmRotation_18November2011.pdf

    November 21, 2011 reply from Dennis Beresford

    The 64 letters submitted to date are all posted on the PCAOB website. E&Y is the only major firm that has responded to date. Of particular interest to me, a large number of the letters are from audit committee chairs.

    Denny Beresford

    As a follow up to my earlier message, if you’d like to read a very insightful and practical comment letter, look at number 35 from Jim Fuehrmeyer of the University of Notre Dame.  Jim is a former Andersen and Deloitte partner who discusses many of the issues involved with the changes that took place when Andersen went down and so many auditor switches were made.  He paints a pretty ugly picture of the accounting profession under mandatory rotation.

     

    My letter on the Concept Release is number 29.

     

    Denny Beresford

     

    PCAOB Docket 037 : Concept Release on Auditor Independence and Audit Firm Rotation

    Comment letters on these audit reform independence and rotation issues must be submitted to the PCAOB before December 14, 2011 ---
    http://pcaobus.org/Rules/Rulemaking/Pages/Docket037.aspx

    To view the comment letters, click on the hot words
    View Comment Letters

    As Denny Beresford mentioned, his letter is Number 29

    James L. Fuehrmeyer's letter in Number 35

    Ernst & Young's letter is Number 63

     


     


    Remember when the 2007/2008 severe economic collapse was caused by "street events":
    Fraud on Main Street         --- issuance of "poison" mortgages (many subprime) that lenders knew could never be repaid by borrowers.
                                                                        Lenders didn't care about loan defaults because they sold the poison mortgages to suckers like Fannie and Freddie.
                                                                        http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze
                                                                        For low income borrowers the Federal Government forced Fannie and Freddie to buy up the poisoned mortgages ---
                                                                        http://www.trinity.edu/rjensen/2008Bailout.htm#Rubble
     

    Math Error on Wall Street --- issuance of CDO portfolio bonds laced with a portion of healthy mortgages and a portion of poisoned mortgages.
                                                                       The math error is based on an assumption that risk of poison can be diversified and diluted using a risk diversification formula.
                                                                       The risk diversification formula is called the
    Gaussian copula function
                                                                       The formula made a fatal assumption that loan defaults would be random events and not correlated.
                                                                       When the real estate bubble burst, home values plunged and loan defaults became correlated and enormous.
     

     Fraud on Wall Street          --- all the happenings on Wall Street were not merely innocent math errors
                                                                      
     Banks and investment banks were selling CDO bonds that they knew were overvalued.
                                                                        Credit rating agencies knew they were giving AAA high credit ratings to bonds that would collapse.
                                                                        The banking industry used powerful friends in government to pass its default losses on to taxpayers.

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

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

    Some highlights:

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

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

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

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

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

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

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

     

    History (Long Term Capital Management and CDO Gaussian Coppola failures) Repeats Itself in Over a Billion Lost in MF Global

    "Models (formulas) Behaving Badly Led to MF’s Global Collapse – People Too," by Aaron Task, Yahoo Finance, November 21, 2011 ---
    http://finance.yahoo.com/blogs/daily-ticker/models-behaving-badly-led-mf-global-collapse-people-174954374.html

    "The entire system has been utterly destroyed by the MF Global collapse," Ann Barnhardt, founder and CEO of Barnhardt Capital Management, declared last week in a letter to clients.

    Whether that's hyperbole or not is a matter of opinion, but MF Global's collapse — and the inability of investigators to find about $1.2 billion in "missing" customer funds, which is twice the amount previously thought — has only further undermined confidence among investors and market participants alike.

    Emanuel Derman, a professor at Columbia University and former Goldman Sachs managing director, says MF Global was undone by an over-reliance on short-term funding, which dried up as revelations of its leveraged bets on European sovereign debt came to light.

    In the accompanying video, Derman says MF Global was much more like Long Term Capital Management than Goldman Sachs, where he worked on the risk committee for then-CEO John Corzine.

    A widely respected expert on risk management, Derman is the author of a new book Models. Behaving. Badly: Why Confusing Illusion with Reality Can Lead to Disaster, on Wall Street and in Life.

    As discussed in the accompanying video, Derman says the "idolatry" of financial models puts Wall Street firms — if not the entire banking system — at risk of catastrophe. MF Global was an extreme example of what can happen when the models — and the people who run them -- behave badly, but if Barnhardt is even a little bit right, expect more casualties to emerge.

    Jensen Comment
    MF Global's auditor (PwC) will now be ensnared, as seems appropriate in this case, the massive lawsuits that are certain to take place in the future ---
    http://www.trinity.edu/rjensen/Fraud001.htm

    New in Paperback!
     GLOBAL DERIVATIVE DEBACLES --- http://www.worldscibooks.com/economics/7141.html 
    From Theory to Malpractice
    by Laurent L Jacque (Tufts University, USA & HEC School of Management, France)

    336pp
    978-981-4366-19-9(pbk): US$29 / £19   US$20.30 / £13.30
    978-981-283-770-7: US$54 / £36   US$37.80 / £25.20
    978-981-283-771-4(ebook): US$70   US$49

    Table of Contents (80k)
    Preface (61k)
    Chapter 1: Derivatives and the Wealth of Nations (173k)

    Contents:

     

    Bob Jensen's Timeline of Derivative Financial  Instruments Frauds ---
    http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds


    Question
    How would you gild a horrible audit inspection report from the PCAOB?

    Hint
    Recall how MSNBC's infamous Keith Olbermann (before he resigned under pressure) would only interview members of his liberal choir  when he had a MSNBC show. Deloitte adopted the same tactic presumably to avoid embarrassing questions about its awful PCAOB inspection report.

    "We Read This Awful Interview with Deloitte’s Joe Echevarria So You Don’t Have To," by Caleb Newquist, Going Concern, November 21, 2011 ---
    http://goingconcern.com/2011/11/we-read-this-awful-interview-with-deloittes-joe-echevarria-so-you-dont-have-to/


    "Auditing Watchdog's Audit of PwC and KPMG Find Weaknesses," by Michael Rapoport, The Wall Street Journal, November 21, 2011 ---
    http://online.wsj.com/article/SB10001424052970203710704577052713862019288.html?mod=googlenews_wsj

    The government's auditing regulator found deficiencies in 28 audits conducted by PricewaterhouseCoopers LLP and 12 audits by KPMG LLP in its annual inspections of the Big Four accounting firms.

    The Public Company Accounting Oversight Board (PCAOB) said many of the deficiencies it found in its 2010 inspection reports of the two firms, released Monday, were significant enough that it appeared the firms didn't obtain sufficient evidence to support their audit opinions. The regulator hasn't yet issued its yearly reports on its inspections of the other Big Four firms, Ernst & Young LLP and Deloitte LLP.

    The 28 deficient PwC audits the inspectors found were out of 75 audits and partial audits reviewed, and were an increase from nine deficient audits found in the previous year's report. The deficiencies inspectors found in various audits concerned, among other areas, testing of "fair value" of the firm's assets, testing of revenue and receivables, derivatives accounting and asset impairments. In two cases, the companies involved later restated their financial statements; in a third case, the company later made "substantial adjustments."

    The board didn't identify the audit clients involved, in accordance with its practice.

    PwC is "focused on the increase" in the number of deficiencies reported over past years, and is "working to strengthen and sharpen the firm's audit quality, including making investments designed to improve our performance over both the short and long term," Robert Moritz, PwC's head partner and chairman, said in a statement.

    KPMG's 12 deficient audits were out of 54 audits and partial audits reviewed, and were an increase from eight deficient audits found the previous year. The accounting watchdog said the areas in which deficiencies were found included fair-value testing, receivables testing, goodwill and testing of loan-loss allowances. None of the deficiencies resulted in restatements, though one led to a "substantial adjustment" in an aspect of the company's financial statements.

    KPMG "shares a common objective with the PCAOB" to make sure high-quality audits are provided, and the board's inspectors "have measurably helped KPMG as we work to continuously improve our audit performance and strengthen our system of audit quality control," George Ledwith, a KPMG spokesman, said in a statement.

    The accounting watchdog conducts annual inspections of the biggest accounting firms, examining a sample of each firm's audits to assess their performance and make sure they're complying with auditing standards. Only part of the report is made public; a section in which the board assesses the firm's quality controls is sealed and never made public as long as the firm addresses any criticisms to the board's satisfaction within a year.

    Jensen Comment
    PCAOB Inspection Reports --- http://pcaobus.org/Pages/default.aspx

    Bob Jensen's threads on KPMG and PwC ---
    http://www.trinity.edu/rjensen/Fraud001.htm


    The Accounting Review 2011 Annual Report

    Hi Steve,

    Thank you so much for providing such a detailed and permanent 2011 TAR fiscal year annual report ended May 31, 2011 ---
    http://aaajournals.org/

    You are commended during your service as TAR Senior Editor for having to deal with greatly increased numbers of submissions. This must've kept you up late many nights in faithful service to the AAA. And writing letters of rejections to friends and colleagues must've been a very painful chore at times. And having to communicate repeatedly with so many associate editors and referees must've been tough for so many years. I can understand why some TAR editors acquired health problems. I'm grateful that you seem to still be healthy and vigorous.

    I'm also grateful that you communicate with us on the AECM. This is more than I can say for other former TAR editors and most AAA Executive Committee members who not only ignore us on the AECM, but they also do not communicate very much at all on the AAA Commons.

    I'm really not replying to start another round of debate on the AECM using your fine annual report. But I can't resist noting that I just do not see the trend increasing for acceptance of papers that are not accountics science papers appearing in TAR.

    One of the tables of greatest interest to me is Panel D of Table 3 which is shown below:

    What you define as "All Other Methods" comprises 7% leaving 93% for Analytical, Empirical Archival, and Experimental. However, this does not necessarily mean that 7% of the acceptances did not contain mathematical equations and statistical testing such that what I would define as accountics science acceptances for 2011 constitute something far greater than 93%. For example, you've already pointed out to us that case method and field study papers published in TAR during 2011 contain statistical inference testing and equations. They just do not meet the formal tests as having random samples.

    Presidential scholar papers are published automatically (e.g., Kaplan's March 2011) paper, such that perhaps only 15 accepted Other Methods papers passed through the refereeing process. Your July 2011 Editorial was possibly included in the Other Methods such that possibly only 13 Other Methods papers passed through the refereeing process. And over half of these were "Managerial" and most of those contain equations such that 2011 was a typical year in which nearly all the published TAR papers in 2011 meet my definition of accountics science (some of which do not have scientific samples) ---
    http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm

    We can conclude that in 2011 that having equations in papers accepted by referees was virtually a necessary condition for acceptance by referees in 2011 as has been the case for decades.

    Whatever happened to accounting history publications in TAR? Did accounting historians simply give up on getting a TAR hit?

    Whatever happened to normative method papers if they do not meet the mathematical tests of being Analytical?

    Whatever happened to scholarly commentary?

     

    November 22, 2011 reply from Steve Kachelmeier

    First, Table 3 in the 2011 Annual Report (submissions and acceptances by area) only includes manuscripts that went through the regular blind reviewing process. That is, it excludes invited presidential scholar lectures, editorials, book reviews, etc. So "other" means "other regular submissions."

    Second, you are correct Bob that "other" continues to represent a small percentage of the total acceptances. But "other" is also a very small percentage of the total submissions. As I state explicitly in the report, Table 3 does not prove that TAR is sufficienty diverse. It does, however, provide evidence that TAR acceptances by topical area (or by method) are nearly identically proportional to TAR submissions by topical area (or by method).

    Third, for a great example of a recently published TAR study with substantial historical content, see Madsen's analysis of the historical development of standardization in accounting that we published in in the September 2011 issue. I conditionally accepted Madsen's submission in the first round, backed by favorable reports from two reviewers with expertise in accounting history and standardization.

    Take care,

    Steve

    November 23, 2011 reply from Bob Jensen

    Hi Steve,

    Thank you for the clarification.

    Interestingly, Madsen's September 2011 historical study (which came out after your report's May 2011 cutoff date) is a heavy accountics science paper with a historical focus.

    It would be interesting to whether such a paper would've been accepted by TAR referees without the factor (actually principal components) analysis. Personally, I doubt any history paper would be accepted without equations and quantitative analysis. Once again I suspect that accountics science farmers are more interested in their tractors than in their harvests.

    In the case of Madsen's paper, if I were a referee I would probably challenge the robustness of the principal components and loadings ---
    http://en.wikipedia.org/wiki/Principle_components_analysis 
    Actually factor analysis in general like nonlinear multiple regression and adaptive versions thereof suffer greatly from lack of robustness. Sometimes quantitative models gild the lily to a fault.

    Bob Kaplan's Presidential Scholar historical study was published, but this was not subjected to the usual TAR refereeing process.

    The History of The Accounting Review paper written by Jean Heck and Bob Jensen which won a best paper award from the Accounting Historians Journal was initially flatly rejected by TAR. I was never quite certain if the main reason was that it did not contain equations or if the main reason was that it was critical of TAR editorship and refereeing. In any case it was flatly rejected by TAR, including a rejection by one referee who refused to put reasons in writing for feed\back to Jean and me.

    “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.

    I would argue that accounting history papers, normative methods papers, and scholarly commentary papers (like Bob Kaplan's plenary address) are not submitted to TAR because of the general perception among the AAA membership that such submissions do not have a snowball's chance in Hell of being accepted unless they are also accountics science papers.

    It's a waste of time and money to submit papers to TAR that are not accountics science papers.

    In spite of differences of opinion, I do thank you for the years of blood, sweat, and tears that you gave us as Senior Editor of TAR.

    And I wish you and all U.S. subscribers to the AECM a very Happy Thanksgiving. Special thanks to Barry and Julie and the AAA staff for keeping the AECM listserv up and running.

    Respectfully,
    Bob Jensen

     


    "SEC releases reports on IFRS in practice and US GAAP-IFRS differences," IAS Plus, November 17, 2011 ---
    http://www.iasplus.com/index.htm

    The staff of the United States Securities and Exchange Commission (SEC) have released two additional Staff Papers as part of the SEC's work plan for the consideration of incorporating IFRSs into the Financial Reporting System for U.S. Issuers.

    Analysis of IFRS in Practice

    The first paper, An analysis of IFRS in Practice, presents the Staff's observations regarding the application of IFRS in practice, based on an analysis of the most recent annual consolidated financial statements of 183 companies across 36 industries which prepare financial statements in accordance with IFRSs. The companies were selected from the Fortune Global 500 (the top 500 companies by revenue) and represented all those which prepared financial statements in accordance with IFRS in English. The 183 companies were domiciled in 22 countries, with the majority (approx 80%) being domiciled in the European Union, but with China and Australia also being represented with more than five companies.

    The Staff Paper summarises the research as follows:

    The Staff found that company financial statements generally appeared to comply with IFRS requirements. This observation, however, should be considered in light of the following two themes that emerged from the Staff’s analysis:

    • First, across topical areas, the transparency and clarity of the financial statements in the sample could be enhanced. For example, some companies did not provide accounting policy disclosures in certain areas that appeared to be relevant to them. Also, many companies did not appear to provide sufficient detail or clarity in their accounting policy disclosures to support an investor’s understanding of the financial statements, including in areas they determined as having the most significant impact on the amounts recognized in the financial statements... In some cases, the disclosures (or lack thereof) also raised questions as to whether the company’s accounting complied with IFRS....
    • Second, diversity in the application of IFRS presented challenges to the comparability of financial statements across countries and industries. This diversity can be attributed to a variety of factors. In some cases, diversity appeared to be driven by the standards themselves, either due to explicit options permitted by IFRS or the absence of IFRS guidance in certain areas. In other cases, diversity resulted from what appeared to be noncompliance with IFRS... While country guidance and carryover tendencies may promote comparability within a country, they may diminish comparability on a global level.

       

    IFRS - U.S. GAAP comparison

    A second paper, A Comparison of U.S. GAAP and IFRS, to provide an assessment of whether there is "sufficient development and application of IFRS for the U.S. domestic reporting system" by inventorying areas in which IFRS does not provide guidance or where it provides less guidance than U.S. GAAP. The Staff reviewed U.S. GAAP accounting requirements and compared those requirements to equivalent or corresponding IFRS requirements, as applicable. The Staff omitted from its review any U.S. GAAP requirements and the IFRS equivalents that are subject to the ongoing joint standard-setting efforts either through the Memorandum of Understanding (MoU) joint standard-setting projects of the FASB and the IASB, or other areas where the FASB and IASB had agreed to work together.

    Continued in article

    Click for:

    Bob Jensen's threads on accounting standard setting controversies ---
    http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting

    Comparisons of IFRS with Domestic Standards of Many Nations
    http://www.iasplus.com/country/compare.htm

    More Detailed Differences (Comparisons) between FASB and IASB Accounting Standards

    2011 Update

    "IFRS and US GAAP: Similarities and Differences" according to PwC (2011 Edition)
    http://www.pwc.com/us/en/issues/ifrs-reporting/publications/ifrs-and-us-gaap-similarities-and-differences.jhtml
    Note the Download button!
    Note that warnings are given throughout the document that the similarities and differences mentioned in the booklet are not comprehensive of all similarities and differences. The document is, however, a valuable addition to students of FASB versus IASB standard differences and similarities.

    It's not easy keeping track of what's changing and how, but this publication can help. Changes for 2011 include:

    • Revised introduction reflecting the current status, likely next steps, and what companies should be doing now
      (see page 2);
    • Updated convergence timeline, including current proposed timing of exposure drafts, deliberations, comment periods, and final standards
      (see page 7)
      ;
    • More current analysis of the differences between IFRS and US GAAP -- including an assessment of the impact embodied within the differences
      (starting on page 17)
      ; and
    • Details incorporating authoritative standards and interpretive guidance issued through July 31, 2011
      (throughout)
      .

    This continues to be one of PwC's most-read publications, and we are confident the 2011 edition will further your understanding of these issues and potential next steps.

    For further exploration of the similarities and differences between IFRS and US GAAP, please also visit our IFRS Video Learning Center.

    To request a hard copy of this publication, please contact your PwC engagement team or contact us.

    Jensen Comment
    My favorite comparison topics (Derivatives and Hedging) begin on Page 158
    The booklet does a good job listing differences but, in my opinion, overly downplays the importance of these differences. It may well be that IFRS is more restrictive in some areas and less restrictive in other areas to a fault. This is one topical area where IFRS becomes much too subjective such that comparisons of derivatives and hedging activities under IFRS can defeat the main purpose of "standards." The main purpose of an "accounting standard" is to lead to greater comparability of inter-company financial statements. Boo on IFRS in this topical area, especially when it comes to testing hedge effectiveness!

    One key quotation is on Page 165

    IFRS does not specifically discuss the methodology of applying a critical-terms match in the level of detail included within U.S. GAAP.
    Then it goes yatta, yatta, yatta.

    Jensen Comment
    This is so typical of when IFRS fails to present the "same level of detail" and more importantly fails to provide "implementation guidance" comparable with the FASB's DIG implementation topics and illustrations.

    I have a huge beef with the lack of illustrations in IFRS versus the many illustrations in U.S. GAAP.

    I have a huge beef with the lack of illustrations in IFRS versus the many illustrations in U.S. GAAP.

    I have a huge beef with the lack of illustrations in IFRS versus the many illustrations in U.S. GAAP.

    Bob Jensen's threads on accounting standards setting controversies ---
    http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting

     

    "Canadian regulator decides against allowing early adoption of recent IFRSs by certain entities," IAS Plus, November 1, 2011 ---
    http://www.iasplus.com/index.htm

    . . .

    In making its decision, the OSFI considered a number of factors such as industry consistency, OSFI policy positions on accounting and capital, operational capacity and resource constraints of Federally Regulated Entities (FREs), the ability to benefit from improved standards arising from the financial crisis and the notion of a level playing field with other Canadian and international financial institutions. OSFI concluded that FREs should not early adopt the following new or amended IFRSs, but instead should adhere to their mandatory effective dates:

    Continued


     

    Jensen Comment
    The clients, auditors, and the AICPA clamoring that U.S. firms should be able to voluntarily choose IFRS instead of U.S. GAAP even before it has not been decided that IFRS will ever replace FASB standards seem to ignore the problems that voluntary choice of IFRS might cause for investors and analysts. The above reasoning by the OSFI makes sense to me.

    But then outfits like the AICPA have a self-serving interest in earning millions of dollars selling IFRS training courses and materials.
     

    November 2, 2011 reply from Patricia Walters

    Does that mean you oppose options to early adopt standards in general, not just IFRSs?

    Pat

     

    November 2, 2011 reply from Bob Jensen

    Hi Pat,

    It's hard to say regarding early adoption of a particular national or international standard, because there can be unique circumstances. For example, FAS 123R simply altered how to make disclosures rather than alter the disclosures themselves since employee option expenses had to be disclosed before the FAS 123R adoption date. But even here early adoption of FAS 123R by Company A versus late adoption by Company B made simple comparisons of eps and P/E ratios between these companies less easy.

    There's a huge difference between early adoption of a particular standard and early adoption of an entire system of standards like switching from FASB accounting standards to IFRS.

    I think the Canadian position of early adoption of IFRS is probably correct because of the mess early adoption of IFRS makes with comparisons of companies using different accounting standards and the added costs of regulation of more than one set of standards. Also think of the added burden placed upon the courts to adjudicate disputes when differing sets of standards are being used.

    Even though we allow IFRS for SEC registered foreign companies, I think it would be a total mess for the SEC, the PCAOB, investors, analysts, educators, trainers, auditing, and even the IRS (where tax and reporting treatments must sometimes be reconciled) if our domestic corporations could choose between FASB versus IASB standards.

    There are hundreds of differences between FASB and IASB standards. Allowing companies domestic companies to cherry pick which system they choose before it is even known if there will ever be official replacement of FASB standards by IASB standards would be very, very confusing. What if there never is a decision to replace FASB standards? Do want to simply allow companies to choose to bypass FASB standards at their own discretion?

    Of course, if information were costless it might be ideal to require financial reporting where FASB and IASB outcomes are reconciled. But clients and auditors generally contend that the cost of doing this greatly exceeds benefits. And teaching financial accounting would become exceedingly complicated if we had to teach two sets of standards on an equal basis.

    I would certainly hate to face a CPA examination that had nearly equal coverage of both FASB and IASB standards simultaneously. I say this especially after viewing the hundreds of pages of complicated differences between the two standards systems.

    Respectfully,
    Bob Jensen

    Bob Jensen's threads on accounting standard setting controversies ---
    http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting
     


    Teaching Case on Fair Value Measurement and Financial Statement Analysis

    Here's a pop quiz: Bank of America in the third quarter generated:
    a) 56 cents a share in earnings,
    b) 27 cents,
    c) a loss of two cents, or
    d) all of the above.

    From The Wall Street Journal Accounting Weekly Review on November 4, 2011

    Wall Street Reaps Profit Volatility It Sowed
    by: David Reilly
    Oct 31, 2011
    Click here to view the full article on WSJ.com
     

    TOPICS: Banking, Fair Value Accounting, Fair-Value Accounting Rules, Financial Accounting Standards Board, SEC, Securities and Exchange Commission

    SUMMARY: Author David Reilly uses Bank of America's recent disclosures highlighting the impact of special items to say that analysts and others cannot clearly identify what results banks are achieving. He highlights the bank's use of the fair value option for structured notes-bank debt that was issue with an embedded derivative so that "the ultimate payout to the holder typically depends on changes in some other instrument such as the S&P 500...." Mr. Reilly expresses concern with comparability across bank financial statements because of differing disclosures about the effects of using the fair value option to account for structured debt. He calls for the SEC to "issue guidance so that all banks label these changes similarly and present them in the same way."

    CLASSROOM APPLICATION: The article is useful in advanced undergraduate or graduate level financial reporting classes to cover the qualitative characteristic of comparability and to discuss the fair value option banks are using in accounting for their own debt.

    QUESTIONS: 
    1. (Introductory) On what basis does the author of this article, David Reilly, argue that Bank of America's fourth quarter results could be measured in three ways?

    2. (Advanced) Define the terms "mark-to-market accounting" and "fair value option". What authoritative accounting guidance defines how to use these accounting methods?

    3. (Introductory) Why are banks opting to use fair value reporting for their structured notes even when not being required to do so? In your answer, define the term "structured notes" on the basis of the description in the article.

    4. (Advanced) What are the primary and supporting qualitative characteristics of financial information? Where are they found in authoritative accounting literature?

    5. (Advanced) Which qualitative characteristic does Mr. Reilly indicate is being violated in reporting by from big banks such as Citigroup, J.P. Morgan Chase, Morgan Stanley, and Goldman Sachs Group?

    6. (Introductory) What entity does Mr. Reilly indicate should solve the reporting issues highlighted in the article? Is this the only entity responsible for establishing financial reporting standards in this U.S.?
     

    Reviewed By: Judy Beckman, University of Rhode Island
     


    "Wall Street Reaps Profit Volatility It Sowed," by: David Reilly, The Wall Street Journal, October 31, 2011 ---
    http://online.wsj.com/article/SB10001424052970204505304577004223202476152.html?mod=djem_jiewr_AC_domainid

    Here's a pop quiz: Bank of America in the third quarter generated:
    a) 56 cents a share in earnings,
    b) 27 cents,
    c) a loss of two cents, or
    d) all of the above.

    The answer is "d," thanks to a dozen special items investors can include or exclude when trying to figure out how the bank actually performed. Chief among them were $6.2 billion in gains due to falls in the value of the bank's own debt.

    And investors may have to brace for more of the same in the current quarter. With the European crisis off the boil, debt values for big banks have regained some ground. The cost of protecting against default at Bank of America has fallen about 26% since Sept. 30, following a 170% increase in the third quarter. If the decline continues, last quarter's gains could reverse, resulting in fourth-quarter hits to profit.

    Confused? Plenty of investors are. Even analysts and bankers have had a tough time figuring out how to compare results at big banks like Bank of America, Citigroup, J.P. Morgan Chase, Morgan Stanley and Goldman Sachs Group. That's due to the counterintuitive nature of these gains. Since banks book them as their own debt loses value, a firm would theoretically mint money while going bankrupt. Making matters worse, individual banks often use different terms to describe these gains—and disclose them in different ways.

    This is spurring debate about whether accounting-rule changes are needed. But there's a little-known irony: The problem is largely of Wall Street's own making. And it highlights how big banks repeatedly play for short-term advantages that often end up working against them.

    To understand why, consider that banks aren't actually required to record most gains or losses due to changes in the value of their debt. (Unlike with derivatives, which must be marked.) They choose to do so. And when banks do mark debt, it tends to affect only small portions of their total liabilities. In the second quarter, Bank of America marked to market $60.7 billion out of $427 billion in long-term debt. That was equal to only about 3% of the bank's total liabilities, which totaled $2.04 trillion.

    Plus, banks that mark portions of their debt often do so because they issue so-called structured notes. These notes are bonds with a twist—the ultimate payout to the holder typically depends on changes in some other instrument such as the S&P 500 index or a basket of commodities.

    Big banks like these instruments because they generally result in a cheaper cost of funding. By embedding a derivative in the instrument, they can also generates fees and may lead to more trading business. There was a catch, though. For accounting purposes, banks couldn't hedge that embedded derivative.

    So in the mid-2000s, Wall Street pushed for an accounting-rule change that allowed them to use market prices for almost anything on their balance sheet. This made it easier to avoid accounting mismatches. But it also meant Wall Street could mark these structured notes to market prices, allowing them to hedge the derivative for accounting purposes.

    At the time, banks weren't worried about big changes in the value of their own debt coming into play. Bonds were pretty stable, and the credit-default-swap market was nascent. The financial crisis changed that. As banks teetered, their bonds and default swaps moved sharply. This led to the kind of outsize gains and losses now whipsawing bank results.

    Continued in article

    Financial Reporting for Financial Institutions is an Exercise in Distortion and Deception
    "Distortions In Baffling Financial Statements," by Floyd Norris, The New York Times,  November 10, 2011 ---
    http://www.nytimes.com/2011/11/11/business/accounting-for-financial-institutions-is-a-mess.html?_r=1


    Frank Partnoy and Lynn Turner contend that Wall Street bank accounting is an exercise in writing fiction:
    Watch the video! (a bit slow loading)
    Lynn Turner is Partnoy's co-author of the white paper."Make Markets Be Markets"
    "Bring Transparency to Off-Balance Sheet Accounting," by Frank Partnoy, Roosevelt Institute, March 2010 ---
    http://www.rooseveltinstitute.org/policy-and-ideas/ideas-database/bring-transparency-balance-sheet-accounting
    Watch the video!

    Bob Jensen's threads on fair value accounting ---
    http://www.trinity.edu/rjensen/Theory02.htm#FairValue

    Bob Jensen's threads on financial statement analysis ---
    http://www.trinity.edu/rjensen/roi.htm

    "Citigroup Finds Obeying the Law Is Too Darn Hard: Jonathan Weil," by Jonothan Weil, Bloomberg News, November 2 , 2011 ---
    http://www.bloomberg.com/news/2011-11-02/citigroup-finds-obeying-the-law-is-too-darn-hard-jonathan-weil.html
    Thank you David Albrecht for the heads up.

    Five times since 2003 the Securities and Exchange Commission has accused Citigroup Inc. (C)’s main broker-dealer subsidiary of securities fraud. On each occasion the company’s SEC settlements have followed a familiar pattern.

    Citigroup neither admitted nor denied the SEC’s claims. And the company consented to the entry of either a court injunction or an SEC order barring it from committing the same types of violations again. Those “obey-the-law” directives haven’t meant much. The SEC keeps accusing Citigroup of breaking the same laws over and over, without ever attempting to enforce the prior orders. The SEC’s most recent complaint against Citigroup, filed last month, is no different.

    Enough is enough. Hopefully Jed Rakoff will soon agree.

    Rakoff, the U.S. district judge in New York who was assigned the newest Citigroup case, is saber-rattling again, threatening to derail the SEC’s latest wrist-slap. The big question is whether he has the guts to go through with it. Twice since 2009, Rakoff has put the SEC through the wringer over cozy corporate settlements, only to give in to the agency later.

    That the SEC went easy on Citigroup again is obvious. The commission last month accused Citigroup of marketing a $1 billion collateralized debt obligation to investors in 2007 without disclosing that its own traders picked many of the assets for the deal and bet against them. The SEC’s complaint said Citigroup realized “at least $160 million” in profits on the CDO, which was linked to subprime mortgages. For this, Citigroup agreed to pay $285 million, including a $95 million fine -- a pittance compared with its $3.8 billion of earnings last quarter. Looking Deliberate

    On top of that, the agency accused Citigroup of acting only negligently, though the facts in the SEC’s complaint suggested deliberate misconduct. The SEC named just one individual as a defendant, a low-level banker who clearly didn’t act alone. Plus, the SEC’s case covered only one CDO, even though Citigroup sold many others like it.

    Here’s what makes the SEC’s conduct doubly outrageous: The commission already had two cease-and-desist orders in place against the same Citigroup unit, barring future violations of the same section of the securities laws that the company now stands accused of breaking again. One of those orders came in a 2005 settlement, the other in a 2006 case. The SEC’s complaint last month didn’t mention either order, as if the entire agency suffered from amnesia.

    The SEC’s latest allegations also could have triggered a violation of a court injunction that Citigroup agreed to in 2003, as part of a $400 million settlement over allegedly fraudulent analyst-research reports. Injunctions are more serious than SEC orders, because violations can lead to contempt-of-court charges.

    The SEC neatly avoided that outcome simply by accusing Citigroup of violating a different fraud statute. Not that the SEC ever took the prior injunction seriously. In December 2008, the SEC for the second time accused Citigroup of breaking the same section of the law covered by the 2003 injunction, over its sales of so-called auction-rate securities. Instead of trying to enforce the existing court order, the SEC got yet another one barring the same kinds of fraud violations in the future.

    It gets worse: Each time the SEC settled those earlier fraud cases, Citigroup asked the agency for waivers that would let it go about its business as usual. (This is standard procedure for big securities firms.) The SEC granted those requests, saying it did so based on the assumption that Citigroup would comply with the law as ordered. Then, when the SEC kept accusing Citigroup of breaking the same laws again, the agency granted more waivers, never revoking any of the old ones. Legal Standard

    Rakoff seems aware of the problem, judging by the questions he sent the SEC and Citigroup last week. Noting that the SEC is seeking a new injunction against future violations by Citigroup, he asked: “What does the SEC do to maintain compliance?” Additionally, he asked: “How many contempt proceedings against large financial entities has the SEC brought in the past decade as a result of violations of prior consent judgments?” We’ll see if the SEC finds any. A hearing is set for Nov. 9.

    The legal standard Rakoff must apply is whether the proposed judgment is “fair, reasonable, adequate and in the public interest.” Among Rakoff’s other questions: “Why should the court impose a judgment in a case in which the SEC alleges a serious securities fraud but the defendant neither admits nor denies wrongdoing?” And this: “How can a securities fraud of this nature and magnitude be the result simply of negligence?”

    A Citigroup spokeswoman, Shannon Bell, said, “Citi has entered into various settlements with the SEC over the years, and there is no basis for any assertion that Citi has violated the terms of any of those settlements.” I guess it depends on the meaning of the words “settlement” and “violated.”

    Rakoff gained fame in 2009 when he rejected an SEC proposal to fine Bank of America Corp. (BAC) $33 million for disclosure violations related to its $29.1 billion purchase of Merrill Lynch & Co. Rakoff said the settlement punished Bank of America shareholders for the actions of its executives, none of whom were named as defendants.

    Months later, though, Rakoff approved a $150 million fine for the same infractions, on the condition that the money would be redistributed to Bank of America stockholders who supposedly were harmed. The stipulation was classic window dressing. Even so, Rakoff became something of a folk hero, simply for daring to question an SEC settlement. Most other judges are rubber stamps.

    Continued in article

     

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

    “As I look at the deficiencies cited in the letter, taken as a whole, it appears that Citigroup had a material weakness with respect to valuing these financial instruments,” said Ed Ketz, an accounting professor at Pennsylvania State University, who reviewed the OCC’s letter to Pandit at my request. “It just is overwhelming by the time you get to the end of it."

    "How Did Citigroup’s Internal Controls Cut the Mustard with KPMG?" by Caleb Newquist, Going Concern, February 24, 2011 ---
    http://goingconcern.com/2011/02/how-did-citigroups-internal-controls-cut-the-mustard-with-kpmg/#more-25882

    Jonathan Weil writes in his column today about Citigroup and their “acceptable group of auditors,” (aka KPMG) and he’s having trouble connecting the dots on a few things. Specifically, how a love letter (it was sent on February 14, 2008, after all) sent by the Office of the Comptroller of the Currency to Citigroup CEO Vikram Pandit:

    The gist of the regulator’s findings: Citigroup’s internal controls were a mess. So were its valuation methods for subprime mortgage bonds, which had spawned record losses at the bank. Among other things, “weaknesses were noted with model documentation, validation and control group oversight,” the letter said. The main valuation model Citigroup was using “is not in a controlled environment.” In other words, the model wasn’t reliable.

    Okay, so the bank’s internal controls weren’t worth the paper they were printed on. Ordinarily, one could reasonably expect management and perhaps their auditors to be aware of such a fact and that they were handling the situation accordingly. We said, “ordinarily”:

    Eight days later, on Feb. 22, Citigroup filed its annual report to shareholders, in which it said “management believes that, as of Dec. 31, 2007, the company’s internal control over financial reporting is effective.” Pandit certified the report personally, including the part about Citigroup’s internal controls. So did Citigroup’s chief financial officer at the time, Gary Crittenden.

    The annual report also included a Feb. 22 letter from KPMG LLP, Citigroup’s outside auditor, vouching for the effectiveness of the company’s financial-reporting controls. Nowhere did Citigroup or KPMG mention any of the problems cited by the OCC. KPMG, which earned $88.1 million in fees from Citigroup for 2007, should have been aware of them, too. The lead partner on KPMG’s Citigroup audit, William O’Mara, was listed on the “cc” line of the OCC’s Feb. 14 letter.

    Huh. There has to be an explanation, right? It’s just one of the largest banks on Earth audited by one of the largest audit firm on Earth. You’d think these guys would be more than willing to stand by their work. Funny thing – no one felt compelled to return JW’s calls. So, he had no choice to piece it together himself:

    [S]omehow KPMG and Citigroup’s management decided they didn’t need to mention any of those weaknesses or deficiencies. Maybe in their minds it was all just a difference of opinion. Whatever their rationale, nine months later Citigroup had taken a $45 billion taxpayer bailout, [Ed. note: OH, right. That.] still sporting a balance sheet that made it seem healthy.

    Actually, just kidding, he ran it by an expert:

    “As I look at the deficiencies cited in the letter, taken as a whole, it appears that Citigroup had a material weakness with respect to valuing these financial instruments,” said Ed Ketz, an accounting professor at Pennsylvania State University, who reviewed the OCC’s letter to Pandit at my request. “It just is overwhelming by the time you get to the end of it."

    "What Vikram Pandit Knew, and When He Knew It: Jonathan Weil," by Jonathon Weil, Bloomberg News, February 23, 2011 ---
    http://www.bloomberg.com/news/2011-02-24/what-vikram-pandit-knew-and-when-he-knew-it-commentary-by-jonathan-weil.html

    Yet somehow KPMG and Citigroup’s management decided they didn’t need to mention any of those weaknesses or deficiencies. Maybe in their minds it was all just a difference of opinion. Whatever their rationale, nine months later Citigroup had taken a $45 billion taxpayer bailout, still sporting a balance sheet that made it seem healthy.

    “As I look at the deficiencies cited in the letter, taken as a whole, it appears that Citigroup had a material weakness with respect to valuing these financial instruments,” said Ed Ketz, an accounting professor at Pennsylvania State University, who reviewed the OCC’s letter to Pandit at my request. “It just is overwhelming by the time you get to the end of it.”

    One company that did get a cautionary note from its auditor that same quarter was American International Group Inc. In February 2008, PricewaterhouseCoopers LLP warned of a material weakness related to AIG’s valuations for credit-default swaps. So at least investors were told AIG’s numbers might be off. That turned out to be a gross understatement.

    At Citigroup, there was no such warning. The public deserves to know why.

    Continued in article

    Bob Jensen's threads on the good things and not-so-good things done by KPMG are at
    http://www.trinity.edu/rjensen/Fraud001.htm


    "Barclays Bank Criticizes 'Fair Value' Accounting," SmartPros, November 14, 2011 ---
    http://accounting.smartpros.com/x73021.xml

    LONDON - The finance director of Barclays Bank has called for the abolition of an accounting rule that he believes distorts the profitability of banks.

    In a letter published Monday in the Financial Times, Chris Lucas criticized the "fair value accounting of own debt" which boosted the third-quarter results of several major banks, including Barclays. The gain is based on the deteriorating market value of debt, a price at which a bank could theoretically buy back the debt.

    Lucas wrote that this accounting rule "misrepresents actual business profitability," and he urged the European Commission and other regulators to move quickly to adopt a revised rule proposed by the International Accounting Standards Board.

    Bob Jensen's threads on fair value accounting are at
    http://www.trinity.edu/rjensen/theory02.htm#FairValue

    Don't Blame Fair Value Accounting Standards (except in terms of executive bonus payments)
                          This includes a bull crap case based on an article by the former head of the FDIC
    http://www.trinity.edu/rjensen/2008Bailout.htm#FairValue


    "Could Apprenticeships Replace College Degrees?" by Liz Sawyer, Good Education in Partnership with The University of Phoenix, November 16, 2011 ---
    http://www.good.is/post/could-apprenticeships-replace-the-college-degree/      
    Thank you Ramesh Fernando for the heads up

    Apprenticeship
    With college costs skyrocketing and the number of jobs for new grads on the decline, it’s no wonder that students are questioning whether a degree is worth the investment. But given that the jobs of the future are projected to require some form of post-secondary education, a key question is how to provide academic knowledge and industry-specific training that will prepare students for the future. The answer might come from a throwback to the Middle Ages: apprenticeships.

    Traditionally, we think of interning as the way for students to get on-the-job experience. But internships vary in quality and often aren’t paid, which means that students from low-income backgrounds are unable to take advantage of the opportunity. Apprenticeships offer a new model, combining paid on-the-job training with college or trade school classes.

    The demand for apprenticeships is particularly acute in the United Kingdom, where a recent BBC survey of high schoolers revealed that two-thirds say they'd forgo attending college in favor of entering an apprenticeship. Businesses there also support the apprenticeship revival. Adrian Thomas, head of resourcing for Network Rail, a company that maintains the U.K.’s rail infrastructure told The Independent that "the investment that we make in our apprentices is driven by needing people with the right skills coming in to support our maintenance teams." Thomas says organizing an apprenticeship program makes "both economic and safety sense," because without the trainees, his company would be in the position of having to look outside the country for employees, or retrain workers from other industries.

    Here in the United States, the Department of Labor is trying to expand apprenticeship models in high-demand fields like health care, green jobs, transportation, and information technology. One obstacle to the success of such programs is the need for students to commit to a field at a young age. It’s tough for a teenager, especially one from a low-income urban neighborhood, to sign up for a health care track if she doesn’t know whether the sight of blood will make her sick, or a computer apprenticeship if she’s never had any exposure to technology. And there's no easy way for students to figure out which employers are accepting apprentices or get in contact with them.

    That’s where tweaking the apprenticeship model to better align schools and employers could help. For example, a place like "P-Tech", a new high school in New York City that's the result of a partnership between IBM and the City University of New York, could prove to be a viable apprenticeship model. P-Tech students have the option of enrolling for six years of study—by graduation, they have hands-on experience, an associate’s degree in computer science, and a possible job offer from IBM.

    Continued in article

    Jensen Comment
    This is not a completely new idea, although in most cases at the undergraduate level it's typically a combination of semesters on campus and apprenticeship/internship semesters on the job. Probably the best known (and now defunct) internship/apprenticeship degree program was that of Antioch College where students spent a term on campus and a term or more in apprenticeship during each year college ---
    http://en.wikipedia.org/wiki/Antioch_College
    A new Antioch College has been conceived with mostly new faculty and must seek new accreditations. It's not really a revival of the historic accredited Antioch College that ceased operations in bankruptcy.

    There are a lot of speculations as to why Antioch College eventually failed, one being that it became a liberal hotbed of faculty that hated businesses supplying many of the apprenticeships. However, what led to its fall is that Antioch was failing to attract enough students to break even with expenses. The new Antioch College refuses to take on most of the faculty losing jobs in the former Antioch College.

    There are, I think, various schools, sometimes African American colleges, that have some programs that are quite similar to Antioch College. Florida A&M University, for example, years ago made extensive use of corporate internships in undergraduate accounting and business programs where students spent a term on campus and them an internship term in a major corporation such as IBM and GE every other semester. FAMU today is emerging from some deep financial fraud scandals and has such an inadequate Website that it's hard to find updated information on its current apprenticeship/internship model.

    Schools like Antioch and FAMU try to attract students who cannot afford traditional degree programs without having substantial on-the-job financial support. The key difference between being a part-time student an most any college and an apprenticed student at Antioch and FAMU is that the job training is for college credit and must have qualified academic content, including the writing of papers about the internship experiences.

    In accounting, however, there can be serious drawbacks. Must full-time campus accounting programs are geared toward passage of the CPA examination. It becomes much more difficult for students getting half their college credits in internships to pass the CPA examination. The CPA examination is an academic examination and not an examination on practical experience.

    I would contend that the early PhD programs in Europe, particularly in Germany, were essentially apprenticeship programs more than education and research programs as we know them today. Instead of having today's core courses and major courses, a doctoral student at Humboldt University was largely a slave doing the grunt work, including teaching, for Herr Professor Takingadvantageberg. The Herr Professor would assign research projects and even request that books be written that, when published, sometimes did not even give credit to the doctoral student authors of the books. A doctoral student's work was considered the work and property of his (I don't think there were many women doctoral students in those historic days) Herr Professor until that professor decided to confer a doctorate upon his slave that was required to write a final dissertation contributing to new knowledge (research). The route to becoming one of those Herr Professors was, and still is, a very lengthy process that can take upwards of 18 years after obtaining an undergraduate degree.

    One of the highlights of my life was an invitation to speak at a conference in Humboldt University in formerly East Berlin. I think Humboldt University is credited with being the first "university" in the world to depart from Medieval Europe ---
    http://en.wikipedia.org/wiki/Humboldt_University_of_Berlin

    You can read the following at
    http://en.wikipedia.org/wiki/PhD

    In the universities of Medieval Europe, study was organized in four faculties: the basic faculty of arts, and the three higher faculties of theology, (canonical and civil) law and medicine. All of these faculties awarded intermediate degrees (bachelor of arts, of theology, of laws, of medicine) and final degrees. Initially the titles of master and doctor were used interchangeably for the final degrees, but by the late Middle Ages the terms master of arts and doctor of theology/divinity, doctor of laws and doctor of medicine had largely become standard. The doctorates in the higher faculties were quite different from the current Ph.D. degree in that they were awarded for advanced scholarship, not original research. No dissertation or original work was required, only lengthy residency requirements and examinations

    This situation changed in the early nineteenth century through the educational reforms in Germany, most strongly embodied in the model of the Humboldt University. The arts faculty, which in Germany was labeled the faculty of philosophy, started demanding contributions to research, attested by a dissertation, for the award of their final degree, which was labeled Doctor of Philosophy (abbreviated as Ph.D.). Whereas in the Middle Ages the arts faculty had a set curriculum, based upon the trivium and the quadrivium, by the nineteenth century it had come to house all the courses of study in subjects now commonly (sic) referred to as sciences and humanities.

    These reforms proved extremely successful, and fairly quickly the German universities started attracting foreign students, notably from the United States. The American students would go to Germany to obtain a Ph.D. after having studied for a bachelor's degrees at an American college. So influential was this practice that it was imported to the United States, where in 1861 Yale University started granting the Ph.D. degree to younger students who, after having obtained the bachelor's degree, had completed a prescribed course of graduate study and successfully defended a thesis/dissertation containing original research in science or in the humanities.. The current triple structure of bachelor-master-doctor degrees in one discipline was therefore created on American soil by fusing two different European traditions - the medieval B.A. and M.A. degrees, awarded after a course of study and inherited from the British Universities, and the research based Ph.D. taken over from the early nineteenth century German educational reforms. Even though in Germany the name of the doctorate was adapted accordingly after the philosophy faculty started being split up - e.g. Dr. rer. nat. for doctorates in the faculty of natural sciences - in the Anglo-Saxon world the name of Doctor of Philosophy was retained for research doctorates in all disciplines.

    Continued in article

    Jensen Comment
    One of the major problems with apprenticeship/internship programs lies in maintaining consistent academic standards across all internships. Some are really academic learning experiences. I would imagine most computer science apprenticeships might be wonderful where students are required to become sophisticated programmers and systems analysts. Other internships might be more like part-time clerical jobs with deficient learning experiences.

    Maintaining academic standards across multiple companies and non-profit agencies is really, really difficult and sensitive. Accounting internship programs in place at most universities these days face problems of varying academic quality of those programs. But poor quality is not such a serious matter since the typical accounting  internship these days is only for one semester or only a half semester (in the Texas CPA firm internship model). These internships are vastly different from the Antioch College alternating semester model. There's a huge difference between graduating with eight internship credits versus 60 internship credits.

     


    Teaching Case of Bank Asset Valuation

    From The Wall Street Journal Accounting Weekly Review on November 18, 2011

    Bank Quandary: Valuing the Assets
    by: Liz Rappaport
    Nov 10, 2011
    Click here to view the full article on WSJ.com
     

    TOPICS: Banking, Fair Value Accounting, Fair-Value Accounting Rules, Historical Cost Accounting

    SUMMARY: Goldman Sachs Group, Inc., and Morgan Stanley became bank holding companies in September 2008 during the financial crisis in order to have access to liquidity provided by the Federal Reserve System. Now they are considering whether to reduce mark-to-market accounting and rely more heavily on traditional historical cost methods in their financial reporting. Goldman Sachs and Morgan Stanley executives are reported to hold widely varied opinions on the proposed change. Previously, during Congressional testimony on the causes of the financial crisis, Goldman Sachs Chairman Lloyd Blankfein lauded mark-to-market accounting which he said "...is better for investors...because they are 'better served with information that more closely reflects the judgment of the market.'" The last part of the article describes the impact of mark-to-market accounting on loans offered by Goldman and Morgan Stanley. "Morgan Stanley...has been making more long-term loans in conjunction with Japanese bank Mitsubishi UFJ Financial Group, Inc....Those loans are value using the historical-cost method...because the firms intend to hold most of these loans until they are repaid...." The related article is offered as another perspective questioning the use of fair value methods for regulating banks through financial reporting that was given by Warren Buffet during the financial crisis.

    CLASSROOM APPLICATION: The article is useful for discussing measurement methods in accounting in general, banks' use of fair value and historical-cost methods for investments, and comparison to historical cost methods for loans.

    QUESTIONS: 
    1. (Advanced) Where in U.S. authoritative accounting literature can you find guidance on using the measurement methods discussed in this article? Cite all major sources for this guidance.

    2. (Introductory) "Banks...typically value more than half their assets using the historical-cost method...." Why do banks have assets measured with a mixture of valuation techniques? What methods other than historical-cost are used?

    3. (Advanced) Name two types of bank assets, one measured at historical-cost and the other valued using an alternative measurement method.

    4. (Introductory) Goldman Sachs Chairman Lloyd Blankfein is quoted in the article from Congressional testimony as arguing for the benefits of fair value reporting. Consider also the related article about Warren Buffet's perspective on using that method for regulating banks. How might the issues in these statements form the basis for the banks considering this switch of accounting methods?

    5. (Introductory) How might the return to historical-cost basis reporting help Goldman Sachs and Morgan Stanley meet the objective of financial reporting in the converged conceptual framework in U.S. GAAP and IFRS?
     

    Reviewed By: Judy Beckman, University of Rhode Island
     

    RELATED ARTICLES: 
    Buffett's Unmentionable Bank Solution
    by Holman W. Jenkins Jr.
    Mar 11, 2009
    Page A13

     

    "Bank Quandary: Valuing the Assets," by: Liz Rappaport, The Wall Street Journal, November 10, 2011 ---
    http://online.wsj.com/article/SB10001424052970203537304577028422145660162.html?mod=djem_jiewr_AC_domainid

    Goldman Sachs Group Inc. and Morgan Stanley, which became bank-holding companies to help them survive the financial crisis, are considering an accounting change that would make them look even more like a traditional bank.

    Goldman Sachs Group Inc. and Morgan Stanley, which became bank-holding companies to help them survive the financial crisis, are considering an accounting change that would make them look even more like a traditional bank.

    If executives go through with the change, the two companies would increase their use of so-called historical-cost accounting, where assets generally are held at their original value or purchase price, these people said. Experience WSJ professional Editors' Deep Dive: Goldman Sachs Watch

    DOW JONES NEWS SERVICE Lehman Subpoenas Goldman Funds In Bankruptcy Probe The Guardian Uncut Aims To Recoup Goldmans' Pounds 10m Tax Dow Jones International News What Does Goldman See In ICBC?

    Access thousands of business sources not available on the free web. Learn More

    A decision by Goldman and Morgan Stanley officials isn't imminent, and there are wide differences of opinion among executives, people familiar with the matter said. Regulatory approval isn't required for such a move.

    Still, the fact that both companies are considering a tiptoe away from mark-to-market accounting shows how much has changed since the financial crisis. Banks such as J.P. Morgan Chase & Co. and Wells Fargo & Co. typically value more than half their assets using the historical-cost method, leaving them far less vulnerable to swings in asset values. In comparison, Goldman values about 97% of its assets using mark-to-market accounting.

    Goldman Chairman and Chief Executive Lloyd C. Blankfein has been a staunch defender of mark-to-market accounting, contending that wider use of the method might have stemmed the worst of the crisis by forcing financial firms to reckon with declining values of mortgages, loans and other assets on their balance sheets.

    "If more institutions had been required to recognize their exposures promptly and value them appropriately, they would have been likely to curtail the worst risks," Mr. Blankfein told the Financial Crisis Inquiry Commission in testimony last year. Mark-to-market accounting is better for investors, he said, because they are "better served with information that more closely reflects the judgment of the market."

    During the financial crisis, many banks avoided taking losses on loans and other assets until they were forced to sell them. By then, though, some assets were nearly worthless.

    Goldman and Morgan Stanley executives have grown increasingly frustrated that their dependence on mark-to-market accounting puts them at a competitive disadvantage. The problem is even more acute now that the securities firms' once-highflying trading businesses are being dragged down to earth by volatile financial markets and tighter regulations.

    Goldman and Morgan Stanley became bank-holding companies in 2008, giving them access to emergency funds from the Federal Reserve's discount window. In return, banking regulators now walk the halls of their offices and burrow into their books. Goldman and Morgan Stanley also must obtain approval for stock buybacks and dividends to shareholders.

    Since the financial crisis, Goldman and Morgan Stanley have put more emphasis on slower-growth but steadier businesses such as wealth management and investment banking.

    Morgan Stanley has openly embraced its banking operations, making more loans and bulking up on deposits, though executives have little or no interest in brick-and-mortar branches or most consumer-banking businesses.

    Goldman and Morgan Stanley had the option before the crisis to move away from mark-to-market accounting for certain loans but didn't, partly because other revenues offset the impact of any markdowns.

    Continued in article

    What Vikram Pandit Knew, and When He Knew It: Jonathan Weil," by Jonathon Weil, Bloomberg News, February 23, 2011 ---
    http://www.bloomberg.com/news/2011-02-24/what-vikram-pandit-knew-and-when-he-knew-it-commentary-by-jonathan-weil.html

    Jensen Comment
    One of the chronic problems of bank asset valuation is the long-time tendency to underestimate loan loss reserves and bad debt expenses. This is a problem excaderbated by CPA auditors who tend to go along with these underestimation of loss accruals
    http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms

    "Make Markets Be Markets"
     "Bring Transparency to Off-Balance Sheet Accounting," by Frank Partnoy, Roosevelt Institute, March 2010 ---
     http://www.rooseveltinstitute.org/policy-and-ideas/ideas-database/bring-transparency-balance-sheet-accounting
     Watch the video!

    Bob Jensen's threads on valuation of assets and liabilities ---
    http://www.trinity.edu/rjensen/Theory02.htm#FairValue

    Bob Jensen's threads on valuation of entire companies ---
    http://www.trinity.edu/rjensen/roi.htm

     


     


    From Ernst & Young AccountingLink Alerts


     
    14 November 2011

    To the Point: A new proposal for revenue recognition

    Today, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) (collectively, the Boards) issued a revised joint proposal to create a single, global revenue recognition model. While the overall framework is the same as in the 2010 exposure draft (ED), key parts of the proposal have changed. Some changes move the proposal closer to US GAAP than the 2010 ED. Others would significantly change current practice for some companies.

    The attached To the Point publication highlights changes from the 2010 ED and current practice. It is
    also available online.
    http://www.ey.com/Publication/vwLUAssets/TothePoint_BB2210_RevenueRecognition_14November2011/%24FILE/TothePoint_BB2210_RevenueRecognition_14November2011.pdf

    From Ernst & Young on November 10, 2011

    Technical Line: AICPA health care audit and accounting guide undergoes major surgery

    The American Institute of Certified Public Accountants (AICPA) issued a comprehensive revision of its Audit and Accounting Guide, Health Care Entities, for the first time in 15 years. The new Guide, issued last month, contains incremental health care accounting guidance from the Codification, addresses health care industry implementation practices and provides illustrative interpretations of auditing considerations. It also includes recommendations from the Financial Reporting Executive Committee (FinREC) on accounting, reporting and disclosure treatment of some transactions or events that are not included in the Codification and FinREC's preferences for certain practices when authoritative guidance is subject to interpretation. Our
    Technical Line publication highlights the major changes and recommendations.

    That link is --- Click Here
    http://www.ey.com/Publication/vwLUAssets/TechnicalLine_BB2208_AICPAAAG_7November2011/%24FILE/TechnicalLine_BB2208_AICPAAAG_7November2011.pd


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

    Bankers bet with their bank's capital, not their own. If the bet goes right, they get a huge bonus; if it misfires, that's the shareholders' problem.
    Sebastian Mallaby. Council on Foreign Relations, as quoted by Avital Louria Hahn, "Missing:  How Poor Risk-Management Techniques Contributed to the Subprime Mess," CFO Magazine, March 2008, Page 53 --- http://www.cfo.com/article.cfm/10755469/c_10788146?f=magazine_featured
    Now that the Fed is going to bail out these crooks with taxpayer funds makes it all the worse.

    Wall Street Remains Congress to the Core
    The boom in corporate mergers is creating concern that illicit trading ahead of deal announcements is becoming a systemic problem. It is against the law to trade on inside information about an imminent merger, of course. But an analysis of the nation’s biggest mergers over the last 12 months indicates that the securities of 41 percent of the companies receiving buyout bids exhibited abnormal and suspicious trading in the days and weeks before those deals became public. For those who bought shares during these periods of unusual trading, quick gains of as much as 40 percent were possible.
    Gretchen Morgenson, "Whispers of Mergers Set Off Suspicious Trading," The New York Times, August 27, 2006 ---
    Click Here

     

    "Should Some Bankers Be Prosecuted?" by Jeff Madrick and Frank Partnoy, New York Review of Books, November 10, 2011 ---
    http://www.nybooks.com/articles/archives/2011/nov/10/should-some-bankers-be-prosecuted/
    Thank you Robert Walker for the heads up!

    More than three years have passed since the old-line investment bank Lehman Brothers stunned the financial markets by filing for bankruptcy. Several federal government programs have since tried to rescue the financial system: the $700 billion Troubled Asset Relief Program, the Federal Reserve’s aggressive expansion of credit, and President Obama’s additional $800 billion stimulus in 2009. But it is now apparent that these programs were not sufficient to create the conditions for a full economic recovery. Today, the unemployment rate remains above 9 percent, and the annual rate of economic growth has slipped to roughly 1 percent during the last six months. New crises afflict world markets while the American economy may again slide into recession after only a tepid recovery from the worst recession since the Great Depression.

    n our article in the last issue,1 we showed that, contrary to the claims of some analysts, the federally regulated mortgage agencies, Fannie Mae and Freddie Mac, were not central causes of the crisis. Rather, private financial firms on Wall Street and around the country unambiguously and overwhelmingly created the conditions that led to catastrophe. The risk of losses from the loans and mortgages these firms routinely bought and sold, particularly the subprime mortgages sold to low-income borrowers with poor credit, was significantly greater than regulators realized and was often hidden from investors. Wall Street bankers made personal fortunes all the while, in substantial part based on profits from selling the same subprime mortgages in repackaged securities to investors throughout the world.

    Yet thus far, federal agencies have launched few serious lawsuits against the major financial firms that participated in the collapse, and not a single criminal charge has been filed against anyone at a major bank. The federal government has been far more active in rescuing bankers than prosecuting them.

    In September 2011, the Securities and Exchange Commission asserted that overall it had charged seventy-three persons and entities with misconduct that led to or arose from the financial crisis, including misleading investors and concealing risks. But even the SEC’s highest- profile cases have let the defendants off lightly, and did not lead to criminal prosecutions. In 2010, Angelo Mozilo, the head of Countrywide Financial, the nation’s largest subprime mortgage underwriter, settled SEC charges that he misled mortgage buyers by paying a $22.5 million penalty and giving up $45 million of his gains. But Mozilo had made $129 million the year before the crisis began, and nearly another $300 million in the years before that. He did not have to admit to any guilt.

    The biggest SEC settlement thus far, alleging that Goldman Sachs misled investors about a complex mortgage product—telling investors to buy what had been conceived by some as a losing proposition—was for $550 million, a record of which the SEC boasted. But Goldman Sachs earned nearly $8.5 billion in 2010, the year of the settlement. No high-level executives at Goldman were sued or fined, and only one junior banker at Goldman was charged with fraud, in a civil case. A similar suit against JPMorgan resulted in a $153.6 million fine, but no criminal charges.

    Although both the SEC and the Financial Crisis Inquiry Commission, which investigated the financial crisis, have referred their own investigations to the Department of Justice, federal prosecutors have yet to bring a single case based on the private decisions that were at the core of the financial crisis. In fact, the Justice Department recently dropped the one broad criminal investigation it was undertaking against the executives who ran Washington Mutual, one of the nation’s largest and most aggressive mortgage originators. After hundreds of interviews, the US attorney concluded that the evidence “does not meet the exacting standards for criminal charges.” These standards require that evidence of guilt is “beyond a reasonable doubt.”

    This August, at last, a federal regulator launched sweeping lawsuits alleging fraud by major participants in the mortgage crisis. The Federal Housing Finance Agency sued seventeen institutions, including major Wall Street and European banks, over nearly $200 billion of allegedly deceitful sales of mortgage securities to Fannie Mae and Freddie Mac, which it oversees. The banks will argue that Fannie and Freddie were sophisticated investors who could hardly be fooled, and it is unclear at this early stage how successful these suits will be.

    Meanwhile, several state attorneys general are demanding a settlement for abuses by the businesses that administer mortgages and collect and distribute mortgage payments. Negotiations are under way for what may turn out to be moderate settlements, which would enable the defendants to avoid admitting guilt. But others, particularly Eric Schneiderman, the New York State attorney general, are more aggressively pursuing cases against Wall Street, including Goldman Sachs and Morgan Stanley, and they may yet bring criminal charges.

    Successful prosecutions of individuals as well as their firms would surely have a deterrent effect on Wall Street’s deceptive activities; they often carry jail terms as well as financial penalties. Perhaps as important, the failure to bring strong criminal cases also makes it difficult for most Americans to understand how these crises occurred. Are they simply to conclude that Wall Street made well- meaning if very big errors of judgment, as bankers claim, that were rarely if ever illegal or even knowingly deceptive?

    What is stopping prosecution? Apparently not public opinion. A Pew Research Opinion survey back in 2010 found that three quarters of Americans said that government policies helped banks and financial institutions while two thirds said the middle class and poor received little help. In mid-2011, half of those surveyed by Pew said that Wall Street hurts the economy more than it helps it.

    Many argue that the reluctance of prosecutors derives from the power and importance of bankers, who remain significant political contributors and have built substantial lobbying operations. Only 5 percent of congressional bills designed to tighten financial regulations between 2000 and 2006 passed, while 16 percent of those that loosened such regulations were approved, according to a study by the International Monetary Fund.2 The IMF economists found that a major reason was lobbying efforts. In 2009 and early 2010, financial firms spent $1.3 billion to lobby Congress during the passage of the Dodd-Frank Act. The financial reregulation legislation was weakened in such areas as derivatives trading and shareholder rights, and is being further watered down.

    Others claim federal officials fear that punishing the banks too much will undermine the fragile economic recovery. As one former Fannie official, now a private financial consultant, recently told The New York Times, “I am afraid that we risk pushing these guys off of a cliff and we’re going to have to bail out the banks again.”

    The responsibility for reluctance, however, also lies with the prosecutors and the law itself. A central problem is that proving financial fraud is much more difficult than proving most other crimes, and prosecutors are often unwilling to try it. Congress could fix this by amending federal fraud statutes to require, for example, that prosecutors merely prove that bankers should have known rather than actually did know they were deceiving their clients.

    But even if Congress does not, it is not too late for bold federal prosecutors to try to bring a few successful cases. A handful of wins could create new precedents and common law that would set a higher and clearer standard for Wall Street, encourage more ethical practices, deter fraud—and arguably prevent future crises.

    Continued in article

    "How Wall Street Fleeced the World:  The Searing New doc Inside Job Indicts the Bankers and Their Washington Pals," by Mary Corliss and Richard Corliss, Time Magazine, October 18, 2010 ---
    http://www.time.com/time/magazine/article/0,9171,2024228,00.html

    Like some malefactor being grilled by Mike Wallace in his 60 Minutes prime, Glenn Hubbard, dean of Columbia Business School, gets hot under the third-degree light of Charles Ferguson's questioning in Inside Job. Hubbard, who helped design George W. Bush's tax cuts on investment gains and stock dividends, finally snaps, "You have three more minutes. Give it your best shot." But he has already shot himself in the foot.

    Frederic Mishkin, a former Federal Reserve Board governor and for now an economics professor at Columbia, begins stammering when Ferguson quizzes him about when the Fed first became aware of the danger of subprime loans. "I don't know the details... I'm not sure exactly... We had a whole group of people looking at this." "Excuse me," Ferguson interrupts, "you can't be serious. If you would have looked, you would have found things." (See the demise of Bernie Madoff.)

    Ferguson—whose Oscar-nominated No End in Sight analyzed the Bush Administration's slipshod planning of the Iraq occupation—did look at the Fed, the Wall Street solons and the decisions made by White House administrations over the past 30 years, and he found plenty. Of the docufilms that have addressed the worldwide financial collapse (Michael Moore's Capitalism: A Love Story, Leslie and Andrew Cockburn's American Casino), this cogent, devastating synopsis is the definitive indictment of the titans who swindled America and of their pals in the federal government who enabled them.

    With a Ph.D. in political science from MIT, Ferguson is no knee-jerk anticapitalist. In the '90s, he and a partner created a software company and sold it to Microsoft for $133 million. He is at ease talking with his moneyed peers and brings a calm tone to the film (narrated by Matt Damon). Yet you detect a growing anger as Ferguson digs beneath the rubble, and his fury is infectious. If you're not enraged by the end of this movie, you haven't been paying attention. (See "Protesting the Bailout.")

    The seeds of the collapse took decades to flower. By 2008, the financial landscape had become so deregulated that homeowners and small investors had few laws to help them. Inflating the banking bubble was a group effort—by billionaire CEOs with their private jets, by agencies like Moody's and Standard & Poor's that kept giving impeccable ratings to lousy financial products, by a Congress that overturned consumer-protection laws and by Wall Street's fans in academe, who can earn hundreds of thousands of dollars by writing papers favorable to Big Business or sitting on the boards of firms like Goldman Sachs.

    Who's Screwing Whom? In the spasm of moral recrimination that followed the collapse, some blamed the bright kids who passed up careers in science or medicine to make millions on Wall Street and charged millions more on their expense accounts for cocaine and prostitutes. After the savings-and-loan scandals of the late-'80s, according to Inside Job, thousands of executives went to jail. This time, with the economy bulking up on the steroids of derivatives and credit-default swaps, the only person who has done any time is Kristin Davis, the madam of a bordello patronized by Wall Streeters. Davis appears in the film, as does disgraced ex--New York governor Eliot Spitzer; both seem almost virtuous when compared with the big-money men. (See "The Case Against Goldman Sachs.")

    The larger message of both No End in Sight and Inside Job is that American optimism, the engine for the nation's expansion, can have tragic results. The conquest of Iraq? A slam dunk. Gambling billions on risky mortgages? No worry—the housing market always goes up. Ignoring darker, more prescient scenarios, the geniuses in charge constructed faith-based policies that enriched their pals; they stumbled toward a precipice, and the rest of us fell off.

    The shell game continues. Inside Job also details how, in Obama's White House, finance-industry veterans devised a "recovery" that further enriched their cronies without doing much for the average Joe. Want proof? Look at the financial industry's fat profits of the past year and then at your bank account, your pension plan, your own bottom line.

    Video:  Watch Columbia's Business School Economist and Dean Hubbard rap his wrath for Ben Bernanke
    The video is a anti-Bernanke musical performance by the Dean of Columbia Business School ---
    http://www.youtube.com/watch?v=3u2qRXb4xCU
    Ben Bernanke (Chairman of the Federal Reserve and a great friend of big banks) --- http://en.wikipedia.org/wiki/Ben_Bernanke
    R. Glenn Hubbard (Dean of the Columbia Business School) ---
    http://en.wikipedia.org/wiki/Glenn_Hubbard_(economics)

    "Cheat Sheet: What’s Happened to the Big Players in the Financial Crisis?" by Braden Goyette, Publica, October 26, 2011 ---
    http://www.propublica.org/article/cheat-sheet-whats-happened-to-the-big-players-in-the-financial-crisis

     

    Watch the video! (a bit slow loading)
     Lynn Turner is Partnoy's co-author of the white paper."Make Markets Be Markets"
     "Bring Transparency to Off-Balance Sheet Accounting," by Frank Partnoy, Roosevelt Institute, March 2010 ---
     http://www.rooseveltinstitute.org/policy-and-ideas/ideas-database/bring-transparency-balance-sheet-accounting
     Watch the video!

    The greatest swindle in the history of the world ---
    http://www.trinity.edu/rjensen/2008Bailout.htm#Bailout
     

    Bob Jensen's threads on how the banking system is rotten to the core ---
    http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking


    "Fraud Scandal Fuels Debate Over Practices of Social Psychology:  Even legitimate researchers cut corners, some admit," by Christopher Shea, Chronicle of Higher Education, November 13, 2011 ---
    http://chronicle.com/article/As-Dutch-Research-Scandal/129746/

    Jensen Comment
    This leads me to wonder why in its entire history, there has never been a reported scandal or evidence of data massaging in accountics (accounting) science. One possible explanation is that academic accounting researchers are more careful and honest than academic social psychologists. Another explanation is that accountics science researchers rely less on teams of student assistants who might blow the whistle, which is how Professor Diederik A. Stapel got caught in social psychology.

    But there's also a third possible reason there have been no scandals in the last 40 years of accountics research. That reason is that the leading accountics research journal referees discourage validity testing of accountics research findings ---
    http://www.trinity.edu/rjensen/TheoryTAR.htm

    Yet a fifth and more probable explanation is that there's just not enough interest in most accountics science findings to inspire replications and active debate/commentaries in either the academic journals or the practicing profession's journals.

    There also is the Steve Kachelmeir argument that there are indirect replications taking place that do not meet scientific standards for replications but nevertheless point to consistencies in some of the capital markets studies (rarely the behavioral accounting studies). This does not answer the question of why nearly all of the indirect replications rarely point to inconsistencies. It follows that accountics science researchers are just more accurate and honest than their social science colleagues.

    Yeah Right!
    Accountics scientists "never cut corners" except where fully disclosed in their research reports.
    We just know what's most important in legitimate science.
    Why can't real scientists be more like us --- ever honest and ever true?


    Billings for Services Never Rendered
    "SEC Charges Morgan Stanley Investment Management for Improper Fee Arrangement," SEC, November 14, 2011 ---
    http://sec.gov/news/press/2011/2011-244.htm
    Morgan Stanley settled the charges for $3.3 million fine

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


    "The 50 Most Influential Management Gurus," by Clayton Christensen, Harvard Business Review Blog, November 2011 ---
    http://hbr.org/web/slideshows/the-50-most-influential-management-gurus/1-christensen
    Of course there's no Harvard bias whispering into this selection --- no it's shouting!
    Watch the video --- http://www.thinkers50.com/


    Bloomberg Business Week loves to rank business education programs ---
    http://www.businessweek.com/business-schools/special-reports/best-parttime-business-schools-2011.html

     

    Jensen Comment
    Media rankings of colleges, universities, and degree programs (like accounting) are heavily influenced by both attributes selected as important for the rankings, the weightings of those attributes, and the people themselves who do the rankings. The above Bloomberg Business Week rankings are based heavily upon opinions of alumni.

    The US News rankings are based upon responses presidents, deans, or other administrators on selected criteria. The US New Rankings probably the rankings influenced based heavily upon research reputations of universities and programs within universities. The non-media rankings of university programs and faculty based upon academic studies of journal hits such as the BYU (David Wood) studies are even more heavily based upon research publications.

    The Wall Street Journal Rankings of business and accounting programs are based upon opinions of recruiters.

    The Economist rankings are based upon opinions of student applicants based upon why they chose to apply to particular programs.

    Various ranking outcomes and controversies are summarized at
    http://www.trinity.edu/rjensen/HigherEdControversies.htm#BusinessSchoolRankings

    Updated BYU Study (especially David Wood):  Universities Ranked According to Accounting Research ---
    Issues in Accounting Education, November 2010, Volume 25, Issue 4, pp. 613-xv
    http://www.byuaccounting.net/rankings/univrank/rankings.php

    The rankings presented via the links . . .  are based on the research paper Accounting Program Research Rankings By Topic and Methodology, forthcoming in Issues In Accounting Education . These rankings are based on classifications of peer reviewed articles in 11 accounting journals since 1990. To see the set of rankings that are of interest to you, click on the appropriate title.

    Each cell contains the ranking and the (number of graduates) participating in that ranking. The colors correspond to a heat map (see legend at bottom of table) showing the research areas in which a program excels. Move your mouse over the cell to see the names of the graduates that participated in that ranking

    Jensen Comment
    I'm impressed by the level of detail in the above BYU study,

    I repeat my cautions about rankings that I mentioned previously about the earlier study. Researchers sometimes change affiliations two, three, or even more times over the course of their careers. Joel Demski is now at Florida. Should Florida get credit for research published by Joel when he was a tenured professor at Stanford and at Yale before moving to Florida?

    There is also a lot of subjectivity in the choice of research journals and methods. Even though the last cell in the table is entitled "Other Topic, Other Material," there seems to me to be a bias against historical research and philosophical research and a bias for accountics research. This of course always stirs me up ---
    http://www.trinity.edu/rjensen/Theory01.htm#WhatWentWrong

    In future updates I would like to see more on accounting history and applied accounting research. For example, I would like to see more coverage of the Journal of Accountancy. An example article that gets overlooked research on why the lattice model for valuing employee stock options has key advantages over the Black-Scholes Model:

    "How to “Excel” at Options Valuation," by Charles P. Baril, Luis Betancourt, and John W. Briggs, Journal of Accountancy, December 2005 --- http://www.aicpa.org/pubs/jofa/dec2005/baril.htm

    The Journal of Accountancy and many other applied research/professional journals are not included in this BYU study. Hence professors who publish research studies in those excluded journals are not given credit for their research, and their home universities are not given credit for their research.

    Having said all this, the BYU study is the best effort to date in terms of accounting research rankings of international universities, accounting researchers, and doctoral student research.

    574 Shields Against Validity Challenges in Plato's Cave
    An Appeal for Replication and Other Commentaries/Dialogs in an Electronic Journal Supplemental Commentaries and Replication Abstracts
    http://www.trinity.edu/rjensen/TheoryTAR.htm

    Various ranking outcomes and controversies are summarized at
    http://www.trinity.edu/rjensen/HigherEdControversies.htm#BusinessSchoolRankings

     


    Hoopla is the German translation for Oops!
    "Germany Discovers Extra $78 Billion On Major Accounting Error," Reuters via Huffington Post, October 29. 2011 ---
    http://www.huffingtonpost.com/2011/10/29/germany-accounting-error_n_1065158.html

    Germany is 55.5 billion euros ($78.7 billion) richer than it thought due to an accountancy error at the bad bank of nationalized mortgage lender Hypo Real Estate (HRE), the finance ministry said.

    Europe's largest economy now expects its ratio of debt to gross domestic product to be 81.1 percent for 2011, 2.6 percentage points less than previously forecast, it said.

    The HRE-linked bad bank FMS Wertmanagement FMSWA.UL was set up after HRE was nationalized in 2009, so that HRE could transfer the worst non-performing assets to an off-balance sheet bank guaranteed by the German state.

    "Apparently it was due to sums incorrectly entered twice," said a ministry spokesman on Friday, adding the reason for the error still needed to be clarified.

    The government nonetheless welcomed the news which pointed to a further reduction of Germany's debt mountain, which remains above the European Union's Maastricht requirement for 60 percent of GDP.

    However, the opposition Social Democrats (SPD) expressed astonishment at the extent of the accountancy error, for which they see the government as responsible.

    "This is not a sum that the Swabian housewife hides in a biscuit tin and forgets," said SPD parliamentary leader Thomas Oppermann. "To overlook such a sum is completely irresponsible."

    Swabians, from the south-west of Germany, are renowned for their savings skills.

    Of the total sum uncovered at FMS, 24.5 billion euros is for 2010 and 31 billion euros is for 2011.

    Continued in article

    From the IFAC:  Public Sector/Sovereign Debt Crises Point to Accounting Weaknesses
    http://www.ifac.org/issues-insights/public-sector/sovereign-debt

    The financial and sovereign debt crises have brought to light the need for better financial reporting by governments worldwide, and the need for improvements in the management of public sector resources.

    Many governments operate on a cash-basis and do not account for many significant items, such as liabilities for public sector pensions and financial instruments. Accrual accounting is a fundamental tenet of strong accounting and reporting for public companies, and so it should be for governments as well. IFAC advocates the adoption of accrual accounting in the public interest—which will result in a more comprehensive and accurate view of financial position, and help ensure that governments and other public sector entities are transparent and accountable.

    A fundamental way to protect the public interest is to develop, promote, and enforce internationally recognized standards as a means of ensuring the credibility of information upon which investors and other stakeholders depend.
    The International Public Sector Accounting Standards Board (IPSASB), an independent standard-setting board supported by IFAC, has developed and issued a suite of 31 accrual standards, and a cash-basis standard for countries moving toward full accrual accounting.

    Bob Jensen's threads on the sad state of governmental accounting and Accountability are at
    http://www.trinity.edu/rjensen/Theory02.htm#GovernmentalAccounting

     


    Human Resource Accounting for Financial Statements

    The value of human resource employees in a business is currently not booked and usually not even disclosed as an estimated amount in footnotes. In general a "value" is booked into the ledger only when cash or explicit contractual liabilities are transacted such as a bonus paid for a professional athlete or other employee. James Martin provides an excellent bibliography on the academic literature concerning human resource accounting ---
    http://maaw.info/HumanResourceAccMain.htm

    Bob Jensen's threads on human resource accounting are at
    http://www.trinity.edu/rjensen/theory02.htm#TripleBottom

    What turned into a sick joke was the KPMG Twist applied to valuing the executives of Worldcom who later went to prison:

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

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

     

    Early experiments to book human resource values into the ledger usually were abandoned after a brief experiment. Investors and analysts placed little, if any faith, in human resource value estimates such as the R.G. Barry experiments years ago.

    There are many problems with assigning an estimated value to human resources. Aside from being able to unattribute future cash flow streams to particular employees, there's the enormous problem that employees are no longer slaves that can be bought, sold, and traded without their permission. And employees may simply resign at will outside the control of their employers, although in some cases they do so by paying contractual penalties that they agreed to when signing employment contracts.

    Another problem is bifurcation of the value of a valuable employee from the subset of other employees and circumstances such as group esprit de corps ---
    http://en.wikipedia.org/wiki/Esprit_de_corps_%28disambiguation%29
    A great pitcher needs a great catcher and seven other players on the field that can make great defensive plays. The President of the United States may be less important than the staff surrounding that President. A bad staff can do a lot to bring down a President. This had a lot to do with the downfall of President Carter.

    Another problems is that greatness of an employee may vary dramatically with circumstances. Winston Churchill was a great leader and inspiration in the darkest days of World War II. But his value should've been subject to very rapid accelerated depreciation. He was a lousy leader after the end of the war, including making some awful choices such as chemical weapons use on some tribes in Iraq.

    "Power From the People:  Can human Capital Financial Statements Allow Companies to Measure the Value of Their Employees?," by David McCann, CFO Magazine, November 2011, pp. 52-59 ---
    http://www.cfo.com/article.cfm/14604427?f=search

    If a company's most important assets are indeed its people, as corporate executives parrot endlessly, that's news to investors, analysts, and even, as it turns out, many companies.

    It is hardly a secret that the industrial economy that prevailed for two centuries has evolved into a talent-driven, knowledge-based economy. Still, extant accounting standards define "assets" mostly in terms of cash, receivables, and hard goods like property, equipment, and inventory, even though the value of many companies lies chiefly in the experience and efforts of their employees.

    Public companies are required to disclose virtually nothing about their human capital other than the compensation packages of top executives, and most are happy to report only that. The furthest most companies will go in reporting on human capital within their public filings is to mention "key-man" risks and executive succession plans.

    More than two decades ago, Jac Fitz-enz and Wayne Cascio separately pioneered the idea that metrics could shine a light on human-capital value. From their work grew the notion that formal reporting of such metrics could add value to financial statements. That discussion simmered quietly for many years, but recently it has grown more bubbly, as some of the best minds in human-capital management and workforce analytics work hard to influence the acceptance of such reporting.

    Some are crafting detailed structures for what they generally refer to as human-capital financial statements or reports, which would complement (but not replace) traditional financial reporting. Their goal is to quantify a company's financial results as a return on people-related expenditures, and express a company's value as a measure of employee productivity.

    To be sure, finance and human-resources executives alike have long considered many important aspects of human-capital value to be unquantifiable. That's why an effort by the Society for Human Resource Management, less-granular than some similar efforts but very well organized, shows promise to have a sizable impact. SHRM's Investor Metrics Workgroup, in conjunction with American National Standards Institute (ANSI), is developing recommendations for broad standards on human-capital reporting. The group plans to release its recommendations for public comment early in 2012. Should ANSI certify the standards, the next phase would be a marketing campaign aimed at investor groups and analysts, encouraging them to demand that companies provide the information.

    If demand for that data were to reach a critical mass, then presumably accounting-standards setters would eventually look at adopting some type of human-capital reporting, and the Securities and Exchange Commission and other regulators would subsequently get involved. Of course, that's a grand vision, and even its most optimistic proponents admit that it will take at least a decade, and probably twice that long, to fully materialize.

    But the SHRM group's chair, Laurie Bassi, is confident that the effort will succeed, however long it may take. "It's going to serve as a catalyst for change," says Bassi, a labor economist and human-capital-management consultant. "When investors start to demand this information, it's going to be a wake-up call for many, many companies. For some well-managed, well-run firms it won't be a stretch, but others will be hard-pressed to produce the information in a meaningful way."

    Bassi says that the driving forces behind the effort boil down to two things: "supply and demand, or, you might say, opportunity and necessity."

    On the supply/opportunity side, advancing technology and lower computing costs have greatly eased the collection and crunching of people-related data, enabling companies to get their arms around what's going on with their human capital in a much more analytic, metrics-driven way than was possible a few years ago. The demand/necessity side is that, driven by macroeconomic forces, human-capital management is emerging as a core competency for employers, particularly those in high-wage, developed nations.

    Something for (Almost) Everyone Investors and analysts aren't demanding human-capital reporting yet, but they might not need much prodding. Upon hearing for the first time about SHRM's project, Matt Orsagh, director of capital-markets policy for the CFA Institute, says that "it sounds fabulous. I want all the transparency and inputs I can have. Quantifying the worth of human capital would be fantastic, because right now you have to take it on faith, and I don't know if I can trust it."

    Predictably, some CFOs are less enthusiastic. "It's a fair point that the balance sheet doesn't recognize the value of human capital, and certainly not the full value of your intellectual property," says John Leahy, finance chief at iRobot, a publicly traded, $400 million firm. "For a high-growth technology company like ours, there is significant intrinsic value in the know-how and innovation of our people, which is why we've traded over the last couple of years at a fairly attractive multiple.

    Continued in article

    "The 50 Most Influential Management Gurus," by Clayton Christensen, Harvard Business Review Blog, November 2011 ---
    http://hbr.org/web/slideshows/the-50-most-influential-management-gurus/1-christensen
    Of course there's no Harvard bias whispering into this selection --- no it's shouting!
    Watch the video --- http://www.thinkers50.com/

    Bob Jensen's threads on human resource accounting are included at
    http://www.trinity.edu/rjensen/theory02.htm#TripleBottom 


    Question
    Why did Joe Paterno sell his relatively modest home to his wife for $1?"

    "Paterno Passed On Home to His Wife for $1," by Mark Viera and Pete Thamel, The New York Times, November 15, 2011 ---
    http://www.nytimes.com/2011/11/16/sports/ncaafootball/in-july-paterno-transferred-ownership-of-home-to-his-wife-for-1.html?_r=3

    Joe Paterno transferred full ownership of his house to his wife, Sue, for $1 in July, less than four months before a sexual abuse scandal engulfed his Penn State football program and the university.

    Documents filed in Centre County, Pa., show that on July 21, Paterno’s house near campus was turned over to “Suzanne P. Paterno, trustee” for a dollar plus “love and affection.” The couple had previously held joint ownership of the house, which they bought in 1969 for $58,000.

    ¶ According to documents filed with the county, the house’s fair-market value was listed at $594,484.40. Wick Sollers, a lawyer for Paterno, said in an e-mail that the Paternos had been engaged in a “multiyear estate planning program,” and the transfer “was simply one element of that plan.” He said it had nothing to do with the scandal.

    ¶ Paterno, who was fired as the football coach at the university last week, has been judged harshly by many for failing to take more aggressive action when he learned of a suspected sexual assault of a child by one of his former top assistants.

    ¶ Some legal experts, in trying to gauge the legal exposure of the university and its top officials to lawsuits brought by suspected victims of the assistant, Jerry Sandusky, have theorized that Paterno could be a target of civil actions. On Nov. 5, Sandusky, Penn State’s former defensive coordinator, was charged with 40 counts related to the reported sexual abuse of eight boys over 15 years. Paterno, 84, was among those called to give testimony before a grand jury during the investigation, which began in 2009.

    ¶ Experts in estate planning and tax law, in interviews, cautioned that it would be hard to determine the Paternos’ motivation simply from the available documents. It appears the family house had been the subject of years of complex and confusing transactions.

    ¶ Lawrence A. Frolik, a law professor at the University of Pittsburgh who specializes in elder law, said that he had “never heard” of a husband selling his share of a house for $1 to his spouse for tax or government assistance purposes.

    ¶ “I can’t see any tax advantages,” Frolik said. “If someone told me that, my reaction would be, ‘Are they hoping to shield assets in case if there’s personal liability?’ ” He added, “It sounds like an attempt to avoid personal liability in having assets in his wife’s name.”

    ¶ Two lawyers examined the available documents in recent days. Neither wanted to be identified because they were not directly involved in the case or the property transaction. One of the experts said it appeared to be an explicit effort to financially shield Joe Paterno. The other regarded the July transaction, at least on its face, as benign.

    Continued in article

    Jensen Comment
    Ruth Madoff was not allowed to keep assets in her name except for assets that were not gifts from her husband or passed through her husband's financial transactions. For example, I think she was allowed to keep her family inheritance.

    This kind of "fraud" is extremely common, albeit illegal, where home titles and other assets of a parent are passed on to children in anticipation of having Medicaid pay for the parent's eventual nursing home care. Medicare does not pay for long-term nursing home care, and Obamacare just eliminated this extremely expensive benefit that would've greatly driven up the price of medical insurance.


    Question
    How can a company that's "technically insolvent" have any sort of IPO success?

    "GROUPON IS TECHNICALLY INSOLVENT," by Anthony H. Catach Jr. and J. Edward Ketz, Grumpy Old Accountants, October 21, 2011 ---
    http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/362

    Two Update Teaching Cases on Groupon:  IPO, Working Capital, and Cash Flow

    From The Wall Street Journal Weekly Accounting Review on November 11, 2011

    Case 1
    Exclusive Deal Floats Groupon
    by: Rolfe Winkler
    Nov 05, 2011
    Click here to view the full article on WSJ.com
    Click here to view the video on WSJ.com WSJ Video
     

    TOPICS: business combinations, Financial Analysis, Goodwill, Impairment

    SUMMARY: Groupon filed its initial public offering (IPO) on Friday, November 4, 2011, selling only a total of 6.4% of the company's total shares. The IPO proceeds brought in $805 million, the third smallest total for all IPOs since 1995, only larger than the IPOs of Vonage Holdings and Orbitz in total proceeds. In terms of the percent of outstanding shares sold, only Palm has sold a smaller percentage in that same time frame. Quoting from the related article, "Silicon Valley and Wall Street took Groupon's stock market debut as a sign that investors are still willing to make risky bets on fast-growing but unprofitable young Internet companies....Groupon shares rose from their IPO price of $20 by 40% in early trading, and ended at the 4 p.m. market close at $26.11, up 31%. The closing price valued Groupon at $16.6 billion...."

    CLASSROOM APPLICATION: Questions focus on measuring the implied fair value of an entire business from the value of only a portion. The concept is used in accounting for business combinations and in goodwill impairment testing.

    QUESTIONS: 
    1. (Introductory) Summarize the Groupon initial public offering (IPO). How many shares were sold? At what price?

    2. (Introductory) Describe the market activity of the stock on its first day of trading. How does that activity show that "investors are...willing to make risky bets on...young Internet companies"?

    3. (Advanced) How has the Groupon stock fared to the date you write your answer to this question?

    4. (Advanced) Define the term "implied fair value". How did sale of only 6.3% of the shares outstanding translate into an overall firm valuation of $12.8 billion? Show your calculation.

    5. (Advanced) Given the range of trading reported in the article and your answer to question 3 above, what is the range of total firm value shown during this short time of public trading of Groupon stock? Again, show your calculations. How does the small percentage of shares contribute to the size of this range?
     

    Reviewed By: Judy Beckman, University of Rhode Island
     

    RELATED ARTICLES: 
    Groupon IPO Cheers Valley
    by Shayndi Raice and Randall Smith
    Nov 05, 2011
    Page: B3

     

    "Exclusive Deal Floats Groupon," by: Rolfe Winkler, The Wall Street Journal, November 5, 2011 ---
    http://online.wsj.com/article/SB10001424052970203716204577017892088810560.html?mod=djem_jiewr_AC_domainid

    Even by dot-com standards, Groupon's initial public offering is puny in terms of the number of shares it actually sold to the public. According to Dealogic, dating back to 1995 just three U.S. tech companies floated a smaller percentage of their shares in their IPOs. Palm sold 4.7% of its shares in a $1 billion offering; Portal Software sold 6.2% in a tiny $64 million offering, and Ciena sold 6.2% in a $132 million offering. Then comes Groupon, which sold 6.3% this week as part of its $805 million offering.

    That is well below the median of 21% for the 50 largest technology IPOs dating back to 1995, according to Dealogic.

    Groupon's limited float strategy isn't new. Two of this year's other big Internet IPOs, LinkedIn and Pandora Media also sold a limited number of shares, just 9.4% of the total outstanding for both companies. Those deals were also led by Morgan Stanley.

    Considering doubts about Groupon's business model, in order to ensure a strong first day's trading, the underwriters not only limited the free-float, but they also scaled back their original valuation target.

    At Friday's close of trading, Groupon shares were at $26.11 apiece, 31% above the IPO price. That puts Groupon's market capitalization at about $17 billion, or roughly eight times next year's likely revenue. That is steep, considering that the daily-deals Internet company is still unprofitable and that growth appears to be slowing quickly.

     

    Case 2
    Groupon Holds Cash Tight
    by: Sarah E. Needleman and Shayndi Raice
    Nov 10, 2011
    Click here to view the full article on WSJ.com
    Click here to view the video on WSJ.com WSJ Video
     

    TOPICS: Cash Flow, Cash Management, Financial Statement Analysis

    SUMMARY: Groupon finally completed its IPO on Friday, November 4, 2011, and interest in the company is therefore naturally high. Competitors to Groupon attempt to obtain market share from the newly public company by offering quicker payment terms to the small business which provide the merchant benefits offered by Groupon. Small businesses need their working capital as fast as possible and therefore some complain about the Groupon terms. Groupon argues that its terms are designed to ensure that merchant suppliers cannot use Groupon for a quick infusion of cash just prior to closing operations.

    CLASSROOM APPLICATION: Questions ask students to analyze Groupon's financial statements-particularly its working capital components-to assess the issues with the company's payment terms.

    QUESTIONS: 
    1. (Introductory) What are Groupon's payment terms? How do those terms help Groupon's customers, the buyers of its electronic coupons?

    2. (Introductory) How do Groupon's payment terms help Groupon's own financial position and operating results? In your answer, define the financial concepts of cash flow and working capital mentioned in the article.

    3. (Advanced) Groupon issued its initial public offering of stock (IPO) on Friday, November 4, 2011. Access the S-1 registration statement filed with the SEC for this offering on June 2, 2011. It is available on the SEC web site at http://www.sec.gov/Archives/edgar/data/1490281/000104746911005613/a2203913zs-1.htm Click on the link to the Table of Contents, then on Index to Consolidated Financial Statements, then on Consolidated Balance Sheets. As of December 31, 2010, how much working capital did the company have? Did this amount improve through the quarter ended March 31, 2011?

    4. (Advanced) Given your measurement of Groupon's working capital, how easy do you think it would be for Groupon to address its competition by changing its payment terms? Support your answer.

    5. (Advanced) Continue working with the Groupon audited consolidated financial statements as of December 31, 2010 and the unaudited quarterly statements. What items comprise Groupon's Accounts Receivable? How collectible are these amounts?

    6. (Advanced) What items comprise Groupon's Accounts Payable, accrued Merchants Payable, and Accrued Expenses? Given your knowledge of Groupon's payment terms, can you identify how soon each of these payments must be made?

    7. (Advanced) Consider how you would schedule a detailed estimate of the timing of Groupon's cash flows for the three current liabilities discussed above.
     

    Reviewed By: Judy Beckman, University of Rhode Island

    "Groupon Holds Cash Tight by: Sarah E. Needleman and Shayndi Raice, The Wall Street Journal, November 10, 2011 ---
    http://online.wsj.com/article/SB10001424052970204358004577027992169046500.html?mod=djem_jiewr_AC_domainid

    Rivals of Groupon Inc. are threatening the daily deal site leader by offering quicker payment to merchants, possibly jeopardizing a key part of Groupon's business model.

    Groupon keeps itself in cash by collecting money immediately when it sells its daily coupons to consumers while extending payments to the merchants over 60 days. For instance, a hair salon might run a deal offering $100 of services for just $50 on Groupon's website, which then keeps as much as half of the total collected and sends the remainder to the salon in three installments about 25 to 30 days apart.

    "The payment timing is so erratic you can't count on any of that money helping to pay your bills," says Mark Grohman, owner of Meridian Restaurant in Winston-Salem, N.C.

    After running three Groupon promotions this year and last, Mr. Grohman says he won't use the service again in part because it puts too big a strain on his cash flow. "With smaller margins in restaurants, you need that capital in the bank as fast as possible," he says.

    Heissam Jebailey, co-owner of two Menchie's frozen-yogurt franchises in Winter Park, Fla., says he also has begun to view Groupon's installment payments as too slow.

    Enlarge Image SBGROUPON SBGROUPON

    "You want to get paid in full as quickly as possible," says Mr. Jebailey, who has run deals with both Groupon and its rival LivingSocial Inc. offering customers $10 of frozen yogurt for $5. He says both promotions were successful but that he'd only use Groupon again if the service promises to pay faster. "We're the ones that have to cover the cost of goods for giving away everything at half price," he says. "I will not do another deal with Groupon unless they agree to my terms."

    Groupon executives have no plans to change payments terms, said a person familiar with the matter. Because Groupon has a backlog of 49,000 merchants in line to offer a deal with the site, executives feel confident that they don't need to make any changes to payment terms, said another person.

    While Groupon pays merchants in installments of 33% over a period of 60 days, LivingSocial and Amazon.com Inc.'s Amazon Local pay merchants their full share in 15 days. Google Inc.'s Google Offers promises 80% of the merchant's cut within four days, and the remainder over 90 days.

    Groupon pays in installments for a reason, according to a person familiar with the matter: It has seen some merchants try to use Groupon to get a quick infusion of cash before going out of business, leaving customers with vouchers that can't be redeemed.

    The Chicago-based start-up has a policy of offering refunds to customers who aren't satisfied, and as a result it is cautious about doing deals with merchants who may not carry through on their end, says the person familiar with the matter.

    Groupon also says it pays merchants before they provide services to customers and will accelerate payments if merchants experience unusually fast consumer redemption.

    "We believe Groupon's payment terms are fair to merchants and important to protect consumers," says Julie Mossler, director of communications for Groupon.

    It also is in Groupon's best interest to stretch out payments to its customers for as long as possible, says John Hanson, a certified public accountant and executive director at Artifice Forensic Financial Services LLC in Washington, D.C. "It makes their cash position look stronger on their books."

    Steady cash flow has helped fuel the valuation of Groupon, which first sold shares to the public last week. Groupon's stock was down nearly 4% Wednesday, bringing its share price of $23.98 closer to the company's IPO price of $20 a share. Based on the 5.5% of shares that trade, the company has a valuation of about $15 billion. But its working-capital deficit has ballooned to $301.1 million as of Sept. 30, and the amount it owes its merchants is also way up.

    Groupon's "accrued merchant payable" balance increased to $465.6 million as of Sept. 30, from $4.3 million at year-end 2009, its filings say. This merchant payable balance exceeded Groupon's cash and contributed to the company's working capital deficit, according to the company's filing.

    Offering merchants faster payment terms could hurt its cash flow and force it to raise funds to cover its day-to-day cash needs, Groupon said in a recent securities filing. In international markets, the company pays merchants only once a coupon has been redeemed.

    Every one-day reduction in Groupon's merchant payables represents a risk of about $14 million in free cash flow, according to estimates by Herman Leung, a Susquehanna analyst. "It's a key driver of cash flow dollars and a key assumption in the Groupon model," he says of the 60-day payment period. "It's highly sensitive."

    To be sure, Groupon has faced waves of competition for more than a year, and many of those challengers already have come and gone.

    Continued in article

    Teaching cases on the accounting scandals at Groupon (especially overstatement of revenues) and its auditor (Ernst & Young) ---
    http://www.trinity.edu/rjensen/Fraud001.htm#Ernst


    Accounting Career Network --- http://www.searchaccountingjobs.com/

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


    Audit Failure: The GAO Reported No Problems Amidst All This Massive Fraud

    Note that most of these particular workers retire long before age 65 and are fraudulently collecting full Social Security and Medicare benefits intended for truly disabled persons
    "The Public-Union Albatross What it means when 90% of an agency's workers (fraudulently)  retire with disability benefits," by Philip K. Howard, The Wall Street Journal, November 9, 2011 ---
    http://online.wsj.com/article/SB10001424052970204190704577024321510926692.html?mod=djemEditorialPage_t

    The indictment of seven Long Island Rail Road workers for disability fraud last week cast a spotlight on a troubled government agency. Until recently, over 90% of LIRR workers retired with a disability—even those who worked desk jobs—adding about $36,000 to their annual pensions. The cost to New York taxpayers over the past decade was $300 million.

    As one investigator put it, fraud of this kind "became a culture of sorts among the LIRR workers, who took to gathering in doctor's waiting rooms bragging to each [other] about their disabilities while simultaneously talking about their golf game." How could almost every employee think fraud was the right thing to do?

    The LIRR disability epidemic is hardly unique—82% of senior California state troopers are "disabled" in their last year before retirement. Pension abuses are so common—for example, "spiking" pensions with excess overtime in the last year of employment—that they're taken for granted.

    Governors in Wisconsin and Ohio this year have led well-publicized showdowns with public unions. Union leaders argue they are "decimat[ing] the collective bargaining rights of public employees." What are these so-called "rights"? The dispute has focused on rich benefit packages that are drowning public budgets. Far more important is the lack of productivity.

    "I've never seen anyone terminated for incompetence," observed a long-time human relations official in New York City. In Cincinnati, police personnel records must be expunged every few years—making periodic misconduct essentially unaccountable. Over the past decade, Los Angeles succeeded in firing five teachers (out of 33,000), at a cost of $3.5 million.

    Collective-bargaining rights have made government virtually unmanageable. Promotions, reassignments and layoffs are dictated by rigid rules, without any opportunity for managerial judgment. In 2010, shortly after receiving an award as best first-year teacher in Wisconsin, Megan Sampson had to be let go under "last in, first out" provisions of the union contract.

    Even what task someone should do on a given day is subject to detailed rules. Last year, when a virus disabled two computers in a shared federal office in Washington, D.C., the IT technician fixed one but said he was unable to fix the other because it wasn't listed on his form.

    Making things work better is an affront to union prerogatives. The refuse-collection union in Toledo sued when the city proposed consolidating garbage collection with the surrounding county. (Toledo ended up making a cash settlement.) In Wisconsin, when budget cuts eliminated funding to mow the grass along the roads, the union sued to stop the county executive from giving the job to inmates.

    No decision is too small for union micromanagement. Under the New York City union contract, when new equipment is installed the city must reopen collective bargaining "for the sole purpose of negotiating with the union on the practical impact, if any, such equipment has on the affected employees." Trying to get ideas from public employees can be illegal. A deputy mayor of New York City was "warned not to talk with employees in order to get suggestions" because it might violate the "direct dealing law."

    How inefficient is this system? Ten percent? Thirty percent? Pause on the math here. Over 20 million people work for federal, state and local government, or one in seven workers in America. Their salaries and benefits total roughly $1.5 trillion of taxpayer funds each year (about 10% of GDP). They spend another $2 trillion. If government could be run more efficiently by 30%, that would result in annual savings worth $1 trillion.

    What's amazing is that anything gets done in government. This is a tribute to countless public employees who render public service, against all odds, by their personal pride and willpower, despite having to wrestle daily choices through a slimy bureaucracy.

    One huge hurdle stands in the way of making government manageable: public unions. The head of the American Federation of State, County and Municipal Employees recently bragged that the union had contributed $90 million in the 2010 off-year election alone. Where did the unions get all that money? The power is imbedded in an artificial legal construct—a "collective-bargaining right" that deducts union dues from all public employees, whether or not they want to belong to the union.

    Some states, such as Indiana, have succeeded in eliminating this requirement. I would go further: America should ban political contributions by public unions, by constitutional amendment if necessary. Government is supposed to serve the public, not public employees.

    America must bulldoze the current system and start over. Only then can we balance budgets and restore competence, dignity and purpose to public service.

    Bob Jensen's threads on the entitlements disaster are at
    http://www.trinity.edu/rjensen/Entitlements.htm

    Audit Failure:  The GAO Reported No Problems Amidst All This Fraud
    This is what a union site claims about the Long Island Rail Road workers for disability ---
    http://www.railroad.net/forums/viewtopic.php?f=63&t=55668&start=300

    What you won't read in Newsday or the New York Times from non-copyrighted labor source:

    GAO Audit Gives Railroad Occupational Disability Program a Clean Bill of Health

    The United States Government Accountability Office (GAO) just issued its second review of the Railroad Retirement Board Occupational Disability Program. And once again it found no problems.

    “This was a major accomplishment for rail labor,” says TCU President Bob Scardelletti. “Occupational Disability is a vitally important program for members who need it. It’s the best in the country, and this Report will help keep it that way.”

    The increased government attention on Occupational Disability began when New York politicians and newspapers began a full scale campaign targeting Long Island Rail Road workers’ alleged abuse of the program. After extensive scandalous press reports, public hearings, wild allegations, and a congressionally requested GAO investigation, no improprieties were found.

    The Railroad Retirement Board did institute some oversight measures specific to Long Island Rail Road to make sure that no abuses were occurring, reflecting the fact that the rate of applications for occupational disability were higher than on any other railroad. But these oversight procedures wound up finding that all Long Island applications that were approved were properly reviewed, legitimate and in accordance with existing law and regulations. And that fact was endorsed by the first GAO audit of Long Island Rail Road claims in a report released in September, 2009.

    Not satisfied with the GAO’s findings, two Congressman – John Mica of Florida and Bill Shuster of Pennsylvania – on March 18, 2009 formally requested the GAO to “conduct a systematic review of RRB’s occupational disability program”, not just limited to Long Island Rail Road.

    The Congressmen’ request prompted yet another GAO review of the occupational disability program. In their just-issued response to the two Congressmen, the GAO reported they found no improprieties and made no recommendations.

    Once again efforts to find fault with the occupational disability have come up empty,” says President Scardelletti. “That’s because the program is functioning as it was intended – to be a last resort for rail workers who because of illness or injury can no longer perform their jobs. It is a necessary benefit and it is not abused by those who unfortunately must apply for it. We will continue to do everything in our power to preserve it as is.

    Jensen Comment
    The program seems to be "working as intended." Either 90% of all the railroad's workers are becoming disabled on the job or the system is "intended" to defraud the taxpayers. One sign of that it was a fraud is that the same doctor (now indicted) was receiving millions of dollars from the union to sign phony disability claims.

    And there are some who advocate that the GAO take over the private sector auditing because there will be less fraud, greater independence, and more competent auditors than anything the Big Four and other auditing firms can come up with. Baloney!

    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)

    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

     

    Bob Jensen's threads on the entitlements disaster are at
    http://www.trinity.edu/rjensen/Entitlements.htm

    Audit Failure:  The GAO Reported No Problems Amidst All This Fraud
    This is what a union site claims about the Long Island Rail Road workers for disability ---
    http://www.railroad.net/forums/viewtopic.php?f=63&t=55668&start=300

    What you won't read in Newsday or the New York Times from non-copyrighted labor source:

    GAO Audit Gives Railroad Occupational Disability Program a Clean Bill of Health

    The United States Government Accountability Office (GAO) just issued its second review of the Railroad Retirement Board Occupational Disability Program. And once again it found no problems.

    “This was a major accomplishment for rail labor,” says TCU President Bob Scardelletti. “Occupational Disability is a vitally important program for members who need it. It’s the best in the country, and this Report will help keep it that way.”

    The increased government attention on Occupational Disability began when New York politicians and newspapers began a full scale campaign targeting Long Island Rail Road workers’ alleged abuse of the program. After extensive scandalous press reports, public hearings, wild allegations, and a congressionally requested GAO investigation, no improprieties were found.

    The Railroad Retirement Board did institute some oversight measures specific to Long Island Rail Road to make sure that no abuses were occurring, reflecting the fact that the rate of applications for occupational disability were higher than on any other railroad. But these oversight procedures wound up finding that all Long Island applications that were approved were properly reviewed, legitimate and in accordance with existing law and regulations. And that fact was endorsed by the first GAO audit of Long Island Rail Road claims in a report released in September, 2009.

    Not satisfied with the GAO’s findings, two Congressman – John Mica of Florida and Bill Shuster of Pennsylvania – on March 18, 2009 formally requested the GAO to “conduct a systematic review of RRB’s occupational disability program”, not just limited to Long Island Rail Road.

    The Congressmen’ request prompted yet another GAO review of the occupational disability program. In their just-issued response to the two Congressmen, the GAO reported they found no improprieties and made no recommendations.

    Once again efforts to find fault with the occupational disability have come up empty,” says President Scardelletti. “That’s because the program is functioning as it was intended – to be a last resort for rail workers who because of illness or injury can no longer perform their jobs. It is a necessary benefit and it is not abused by those who unfortunately must apply for it. We will continue to do everything in our power to preserve it as is.

    Jensen Comment
    The program seems to be "working as intended." Either 90% of all the railroad's workers are becoming disabled on the job or the system is "intended" to defraud the taxpayers. One sign of that it was a fraud is that the same doctor (now indicted) was receiving millions of dollars from the union to sign phony disability claims.

    And there are some who advocate that the GAO take over the private sector auditing because there will be less fraud, greater independence, and more competent auditors than anything the Big Four and other auditing firms can come up with. Baloney!


    "Europe's Entitlement Reckoning From Greece to Italy to France, the welfare state is in crisis," The Wall Street Journal, November 9, 2011 ---

    In the European economic crisis, all roads lead through Rome. The markets have raised the price of financing Italy's mammoth debt to new highs, and on Tuesday Silvio Berlusconi became the second euro-zone prime minister, after Greece's George Papandreou, to resign this week. His departure may keep the world's eighth largest economy solvent for the time being, but it hardly addresses the root of the problem.

    In Italy, as in Greece, Spain and Portugal and eventually France, the welfare-entitlement state has hit a wall. Successive governments on the Continent, right and left, have financed generous entitlements with high taxes and towering piles of debt. Their economies have failed to grow fast enough to keep up, and last year the money started to run out. The reckoning has arrived.

    If the first step in curing an addiction is to acknowledge it, there is little sign of that in Europe. The solutions on offer are to spend still more money, to have the Germans bail out everybody else, or to ditch the euro so bankrupt countries can again devalue their own currencies. France's latest debt solution includes raising corporate, capitals gains and sales taxes.

    Yet Europe's problem isn't the euro. If it were, Hungary, Iceland and Latvia—none of which use the euro—would have been spared their painful days of reckoning. The same applies for Britain. Europe is in a debt spiral brought about by spendthrift, overweening and inefficient governments.

    This is a crisis of the welfare state, and Italy is a model basket case. Mario Monti, who is tipped to lead a new government of technocrats, once described the Italian economy as a case of "self-inflicted strangulation." Government debt is 120% of GDP, making Italy the world's third largest borrower after the U.S. and Japan. Its economy last grew at more than 2% a year in 2000.

    An aging and shrinking population is a symptom, but not a leading cause, of the eurosclerosis. A fifth of Italy's 60 million people are 65 or older and make increasingly expensive claims on state-paid pensions and other benefits. In fast-growing Turkey, only 6.3% fit that demographic. Italian women have on average 1.2 children, putting the country's birth rate at 207th out of 221 countries.

    But the bulk of the responsibility lies with politicians. Mr. Berlusconi, Italy's richest man, promised a shake up each time he ran for office (in 1994, 1996, 2001, 2006 and 2008). He was the longest serving premier in post-war Italy, from 2001 to 2006, controlled parliament and could have pushed through reforms. He didn't. Promises to lower taxes and hack away at regulations and protections for Italy's powerful guilds—from taxi drivers to pharmacists to journalists—were broken.

    "It is not difficult to rule Italy," Benito Mussolini once said, "it is useless." The so-called concertazione, or concert, of Italian coalition politics that brings together numerous parties in the Parliament makes for unstable and indecisive governments. So does the fear prominent in many European countries that any serious reform will provoke street protests. An unhappy byproduct of a welfare state is that it creates powerful interests that will fight to the last to preserve their free lunch, no matter the cost to the country.

    But now hard choices can no longer be postponed. And the solution to Europe's debt crisis must begin with reforming, if not dismantling, the welfare state. Europe rose from the economic grave in the 1960s, it rode the Reagan-Thatcher reform wave to more modest growth in the 1980s-'90s, and it can grow again. A decade ago, Germany was called the "sick man of Europe," bedeviled by Italian-like economic problems. But a center-left coalition, supported by trade unions and German society, overhauled labor and welfare codes and set the stage for the current (if still modest) export-led revival in Germany.

    The road from Rome may now lead to Paris, Madrid and other debt-ridden European countries. But this is no cause for U.S. chortling, because that same road also leads to Sacramento, Albany and Washington. America's federal debt was 35.7% of GDP in 2007, but it was 61.3% last year and is rising on an Italian trajectory. The lesson of Italy, and most of the rest of Europe, is never to become a high-tax, slow-growth entitlement state, because the inevitable reckoning is nasty, brutish and not short.

     

    Japan Adopted the Worst Entitlements Practices of the United States (and the same baby boomer mistakes following WW II)

    "The Italy of Asia:  Japan's entitlement dilemmas are a warning to Washington," The Wall Street Journal, January 6, 2011 ---
    http://online.wsj.com/article/SB10001424052748704723104576061332542456172.html#mod=djemEditorialPage_t

    Japanese politics is once again in turmoil, with the government's approval ratings around 20%. Prime Minister Naoto Kan is trying to force out his rival within the Democratic Party of Japan, Ichiro Ozawa, which might boost his own popularity but would probably cause enough defections to destroy a precarious majority. And he has chosen as his New Year initiative an increase in the consumption tax—a hugely unpopular policy that cost him the upper house election last year and would surely harm the economy.

    Looks like it's almost time for another change of leader in Tokyo, which is becoming the Italy of Asia. Whoever it is, he will have to tackle Japan's problems before unpleasant outcomes are forced upon it. Without cuts to entitlements and tax cuts to promote growth, Tokyo will continue turning into Athens.

    Mr. Kan's claims to fiscal rectitude are belied by the draft fiscal 2011 budget released late last month. It calls for another year of near-record addition to a national debt already approaching 200% of GDP. The budget includes $867 billion of spending, though total government revenue amounts to just $501 billion. The budget proposes trimming discretionary spending only marginally, cuts that are overwhelmed by the uncontrolled growth of entitlement programs, which make up 53% of total spending.

    Japan is foundering on the promises made by past generations of politicians that are coming due in a rapidly aging society. These include unfunded pensions and medical care for the elderly. And it will only get worse—2012 is expected to be a watershed year when the biggest wave of baby boomers begins to retire.

    As two lost decades since the bursting of the bubble show, Japan's consensus-based political system seizes up when it comes to allocating societal losses. In the 1990s, that meant that the government encouraged banks to sit on bad loans rather than undergo the kind of cathartic restructuring the U.S. is now undergoing, at least in some parts of the economy. That made Japan appear more stable, but without creative destruction the economy was unable to return to growth. This time the leverage is spread across generations, with the lack of growth making the promises to the old a bigger burden, which in turn makes it impossible to pursue pro-growth policies.

    Payments on the national debt next year are projected at an already substantial $263 billion, but this assumes a payout of no more than 2% on 10-year bonds. Yields may remain well below this level for now, but in recent auctions signs have emerged that investors are losing their appetite for government bonds. The national debt is forecast to exceed household savings in the next year, as retirees continue to spend down savings. As long as growth remains slow, corporations will probably continue to save. But if Tokyo is forced to look abroad for funding, it will have to pay much higher rates.

    That has the potential to blow out the budget in spectacular fashion. With central and local government debt now estimated at over $11 trillion, each one percentage point increase in yields will cost $110 billion. Adding in its unfunded liabilities, Japan has already reached the point at which its debt load will continue to increase regardless of how much it cuts spending or raises taxes.

    In other words, Japan is about to run into the late economist Herb Stein's obvious but oft-overlooked law, which states that if something cannot continue it won't. The crunch is coming in one form or another.

    Continued in article

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

     

     


    An Inquiry from John Anderson on November 7, 2011

    On Mon, Nov 7, 2011 at 4:18 PM, John Anderson <jcanderson27@comcast.net> wrote:
     

    I know the CPA List Serve has been shut-down.  Therefore I am looking for help and direction from the members of this AECM List Serve. 

    My question is completely US-based, but I would be very interested in learning about billing models and conventions used in other countries as well. 

    Back in the 1980’s I had the privilege of participating in the creation of the Environmental Industry.  My company was involved with Hazardous Waste, which is Chemical Waste; not radioactive waste and not simple trash.  Therefore my colleagues and I are very well versed in DOT Regulations for Transportation, OSHA and of course the RCRA Act.  We are also very savvy when it comes to CERCLA/Superfund and Superfund’s independent definition of its “Dangerous Materials.” 

    Now I am involved with a very exciting Start-up involving some old friends and new friends, which is channeling me into some areas which are new to me. 

    I need to identify the Controlling Rules and Regulations governing these areas or else have a discussion with people who are experts in any of the following areas:

    ·       US Medical Third Party Billing to Insurance Carriers

    ·       Processes for Qualifying new Medical Services for Reimbursement in this system (Specifically approval of additional procedures under the auspices of “Improvement in Patient Care”) 

    1.     Medicare Approval? 

    2.     Legal Requirement? 

    3.     What other means? 

    ·       Oncology Billing and how Oncology Medications are billed differently in the follow instances:

    1.     Hospitalized patients who are infused and remain in the hospital

    2.     Versus, Outpatient services where a patient is infused by appointment at the hospital and then immediately sent home;

    3.     Versus, purely Home Infusion administered by a Visiting Infusion Technician or Oncology Nurse and the patient never goes to the hospital for the infusion. 

    4.     Doctor ordered for patient administration (those in oral or topical applications).

    Any help and insight in understanding any of these areas and processes would be greatly appreciated! 

    As we are also actively talking to Angel Groups and Venture Funds interested in these areas, if anyone knows of an Environmental Fund looking to identify companies addressing new, untapped Environmental Markets, the timing is certainly right … and we would be very happy to talk to those Funds as well! 

    Thanks! 

    Best Regards! 

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

    Financial & IT Business Consultant
    14 Tanglewood Road
    Boxford, MA
    01921

     

    November 7, 2011 reply from Bob Jensen

    Hi John,

    You provided a lot of help over the years to subscribers on the CPAS-L listserv.

    On your question of claims filing:

    You might take a shot in the dark and contact Tennessee Rep. Jim Cooper.
    http://www.owen.vanderbilt.edu/vanderbilt/faculty-and-research/faculty-directory/faculty-profile.cfm?id=185

    Jim Cooper, Adjunct Professor, Health Care Management at Vanderbilt University
    U.S. Congressman, Tennessee (1982-1994, 2002-present) - Elected as youngest congressman in America - Budget, Armed Services, Energy & Commerce, Financial Services, and Small Business Committees - Authored chief rival to Clinton Health Care Plan (see, e.g. "The System: The Death of Health Care Reform, 1993-1994" by Haynes Johnson and David Broder (Little Brown, 1997) - Unsuccessful U.S. Senate race, 1994 Investment Banker (1995-2002) - Equitable Securities, and co-founder of Brentwood Capital Advisors - Public offerings and private placement of institutional equity Corporate Board Member of several public and private companies (1995-2002) - Chaired the Audit Committee of three public companies Attorney (1980-1982) - Waller Lansden Dortch & Davis - $80 million Subordinated Convertible Eurodollar Debenture Offering for HCA Recent Publications: - "Don't Give Up on Markets Yet," a book review of "Toward a Twenty-First Century Health Care System: The Contributions and Promise of Prepaid Group Practice," edited by Alain C. Enthoven and Laura A. Tollen (Jossey-Bass, 2004), Health Affairs, July/August, 2004. - "Is American Ready for Rationing?" a book review of "Can We Say No? The Challenge of Rationing Health Care," by Henry J. Aaron and William B. Schwartz with Melissa Cox (Brookings Institution Press, 2005), Health Affairs, November/December, 2005. Recently won the 2006 Judge Edward R. Finch Law Day Speech Award, top award in an annual competition sponsored by the American Bar Association.

    Jensen Comment
    My old friend Germain Boer is an accounting professor in the MBA Program at Vanderbilt. Much of Germain's research in recent years has been on health care accounting and management. I've been out of touch with Germain in recent years, but he is a cool professor and a good teacher.

    Here are some sites that might help:

    This may be a very good site to look at
    http://www.rmlibrary.com/lib/claimsmanagement/claimsfiling.php

    A U.S. Department of Labor Sites
    http://www.dol.gov/ebsa/publications/filingbenefitsclaim.html

    Resources

    For the EBSA regional office nearest you or a copy of any EBSA publications, call toll free: 1.866.444.EBSA (3272), or visit EBSA’s Web site at: www.dol.gov/ebsa

    This publication has been developed by the U.S. Department of Labor, Employee Benefits Security Administration. For a complete list of the agency's publications, call our toll free number at 1.866.444.EBSA (3272). This material will be made available in alternate format upon request: Voice phone: 202.693.8664, TTY: 202.501.3911.

    This booklet constitutes a small entity compliance guide for purposes of the Small Business Regulatory Enforcement Act of 1996.

    Also see
    http://www.cms.gov/ElectronicBillingEDITrans/08_HealthCareClaims.asp

    Also see Health Benefits Advisor ---
    http://www.dol.gov/elaws/ebsahealth.htm

    U.S. Department of Health and Human Services Site
    http://www.cms.gov/ElectronicBillingEDITrans/08_HealthCareClaims.asp

    This has some discussion of hazardous waste exposure ---
    http://www.fdmny.com/pdf/GuidetoFilingClaims.pdf

    AARP --- http://answers.healthinsurancefinders.com/What-steps-filing-AARP-health-insurance-claim-form-q1520.aspx

    Medicaid --- http://assistedliving.about.com/od/runningyourbusiness/a/Filing-A-Claim-With-Medicaid.htm

    The Veteran's Survival Guide: How to File and Collect on VA Claims [Paperback] ---
    http://www.amazon.com/Veterans-Survival-Guide-Collect-Claims/dp/1574884158
    Also note the Tricare guide at
    http://www.mytricare.com/internet/tric/tri/mtc_nprov.nsf/sectionmap/ElctrncClmsFlng_ElctrncClmsFlng?Opendocument&dispPage=yes

    This looks like a good site for health care providers ---
    http://www.insurance.ca.gov/0100-consumers/0060-information-guides/0050-health/healthcareguidecomplaintprocess.cfm

    Fema --- http://www.fema.gov/rebuild/recover/claim.shtm

    A great site for 2011 Health Statistics --- http://www.census.gov/prod/2011pubs/11statab/health.pdf

     

    Bob Jensen's helpers for small businesses ---
    http://www.trinity.edu/rjensen/Bookbob1.htm#SmallBusiness

    Scott Bonacker suggested --- http://www.healthlawyers.org/hlresources/Pages/default.aspx

     

     


    Ernst & Young
    Practical matters for the c-suite: Financial instruments convergence project moves forward in fits and starts

    Our latest issue of Practical matters for the c-suite, Financial instruments convergence project moves forward in fits and starts, explores in more detail how the deliberations regarding last year's exposure draft on financial instruments would affect an organization's finance, tax, IT systems and business processes. The Practical matters for the c-suite series is produced by our Financial Accounting Advisory Services (FAAS) group and is intended to help companies assess the potential effect of proposals on their organizations. This issue complements other recent Ernst & Young publications on the potential changes to financial instruments accounting standards including:
    Jensen Comment
    You can also read about financial instruments accounting standard differences between IASB and FASB standards at
    "IFRS and US GAAP: Similarities and Differences" according to PwC (2011 Edition)
     http://www.pwc.com/us/en/issues/ifrs-reporting/publications/ifrs-and-us-gaap-similarities-and-differences.jhtml
     Note the Download button!
     Note that warnings are given throughout the document that the similarities and differences mentioned in the booklet are not comprehensive of all similarities and differences. The document is, however, a valuable addition to students of FASB versus IASB standard differences and similarities.
     
    Ernst & Young  


    To the Point: Consolidation models may move closer together

    The Financial Accounting Standards Board (FASB) issued an exposure draft that would affect how all reporting entities evaluate whether they should consolidate another entity. For VIEs and voting partnerships, a reporting entity’s decision maker would evaluate three qualitative factors to determine whether it is using its power as a principal or an agent. Principals would be required to consolidate. The proposal also would align the consideration of participating rights in the Voting Model with the Variable Interest Model.

    This To the Point publication is available online. --- http://lyris.ey.com/t/566832/1613618/3813/0/

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


    "FASB CHAIRMAN DISCUSSES KEY ACCOUNTING ISSUES IN NASBA ADDRESS," Accounting Education News, October 26, 2011 ---
    http://www.accountingeducation.com/index.cfm?page=newsdetails&id=151744

    On October 24, 2011, FASB Chairman Leslie Seidman gave a speech to the National Association of State Boards of Accountancy (NASAB) in Nashville, Tennessee, in which she addressed three major accounting issues: (1) the status of convergence between IFRS and US GAAP; (2) the condorsement approach discussed in a recent SEC staff paper; and (3) the setting of accounting standards for private companies.

    Ms. Seidman began by noting that the opinions expressed in the speech were her own rather than an official position of the FASB. She then proceeded to review the status of the various completed and ongoing convergence projects. She concluded this portion of her speech by offering her opinion of why some convergence projects under the Memorandum of Understanding (MOU) have been more successful than others. She stated these factors were conducive to success:

    (1) Agreed-upon, clear objectives;
    (2) Fully integrated staff teams from both sides;
    (3) Conducting deliberations and outreach jointly; and
    (4) Coordinated timing.

    Regarding the condorsement framework outlined in an SEC staff paper issued in May 2011, Ms. Seidman said that it had "many positive aspects" and stated that it:

    (1) Shows U.S. support for the ongoing development of global accounting standards.
    (2) Adopts the very practical approach of retaining the label “U.S. GAAP.”
    (3) Calls for some level of U.S. involvement in the establishment of any new standards.
    (4) Recognizes that there should be a gradual approach to dealing with the remaining differences between U.S. GAAP and IFRS.

    Finally, with respect to standards-setting for private companies, Ms. Seidman recognized that the
    recent proposal of the FAF Trustees had "...generated heated criticism in some quarters, largely because the Trustees felt it was important to maintain the FASB’s role as the sole standard-setting board for U.S. GAAP through the ratification mechanism." But she emphasized that "that the Trustees adopted virtually every other recommendation that the Blue-Ribbon Panel made" and stated "...It is hard enough to get the FASB members to agree; trying to get two independent organizations to agree is demonstrably difficult, despite strong commitment to the goal; adding a third organization to the mix makes it even harder, and adds unnecessary complexity, in my opinion."

    Full Text of Her Speech --- Click Here
    http://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable=MungoBlobs&blobkey=id&blobwhere=1175823158680&blobheader=application%2Fpdf

    Bob Jensen's threads on accounting standard setting controversies ---
    http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting


    "Teaching Carnival 5.03," by Delaney Kirk, Chronicle of Higher Education, November 1, 2011 ---
    http://chronicle.com/blogs/profhacker/teaching-carnival-5-04/37021?sid=wc&utm_source=wc&utm_medium=en

    [October’s Teaching Carnival was compiled by Delaney Kirk, a management professor at the University of South Florida Sarasota-Manatee. You can reach her via email or on Twitter .  Delaney is both an educator and an edublogger--ask her a question or check out her tips on teaching effectiveness at Ask Dr. Kirk. This month she gathers tips on teaching, advice to share with our students, ways to utilize technology in the classroom, and suggestions for personal development, along with a challenge to write that academic book you’ve been putting off. –Billie Hara]

    Know of a blog post (perhaps your own) that should be included in the next Teaching Carnival…?

    1. Email the next host directly with the address to the permalink of your blog post, and/or
    2. Tag your post in Delicious (or Diigo or other bookmarking service) with teaching-carnival.

    Tips on Teaching

    Tips on Using Technology

    Tips for Our Students

    Tips on Personal Development

    ♦  ♦  ♦  ♦  ♦

    And if you’ve been putting off writing that academic book or dissertation, Charlotte Frost invites us all to participate in the first Academic Book Writing Month challenge (tweet about it using hash tag #AcBoWriMo). You can also join NaNoWriMo to start that novel you’ve been telling people you plan to write someday. Both challenges begin on November 1st.

    Continued in article

    Bob Jensen's threads on previous Teaching Carnival articles ---
    http://www.trinity.edu/rjensen/000aaa/thetools.htm#Ideas
    Scroll down to the Teaching Carnival links and quotations


    "Sex Matters: Gender and Prejudice in the Mutual Fund Industry," by Stefan Ruenzi and Alexandra Niessen-Ruenzi, SSRN, October 13, 2011 ---
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1943576

    Abstract:
    We suggest customer based discrimination as one potential explanation for the low fraction of females in the mutual fund industry. Consistent with investors being prejudiced and stereotyping female fund managers as less skilled, we find that female managed funds experience significantly lower inflows. This result is obtained using market data as well as experimental data. While we document some behavioral differences between male and female fund managers, performance is virtually identical. This shows that rational statistical discrimination can not explain the lower inflows into female managed funds. Evidence based on an implicit association test conducted in a laboratory setting supports the notion that there is prejudice against females in finance.

    "Gender Gaps in Higher Ed Around the World," Inside Higher Ed, November 7, 2011 ---
    http://www.insidehighered.com/quicktakes/2011/11/07/gender-gaps-higher-ed-around-world

    Bob Jensen's threads on Controversial Issues in Affirmative Action ---
    http://www.trinity.edu/rjensen/HigherEdControversies.htm#AffirmativeAction

    Also search the AAA Commons for "Gender" ---
    http://commons.aaahq.org/pages/home
    AAA Members Only


    Specialized Programs in Graduate Business (SPGB forums run by selected private universities) --- http://www.msbusinessdegrees.com/about
    Thank you Eliot Kamlet for the heads up

    Jensen Comment
    This consortium features forums for prospective students to graduate programs in a selected subset of well-known universities.

    It would be helpful is the online degree programs were linked at this site. Most of these universities probably do not have fully online masters programs, although some of the schools have more online course offerings than other schools. Some also have partnerships with foreign universities where some of the courses taught are online and some are onsite. Of course distance education can be discussed in the forums.


    Question
    What should a public accounting firm do when it discovers that it's client is operated by mobsters in organized crime?
    Are your knee caps and fingers in jeopardy if you drop a mobster-run client?

    Japan's Olympus Corp replaced its KP:MG audit firm in 2009 after a disagreement over how to account for criminal offshore Enron-like SPVs, but Olympus decided not to reveal the dispute to investors, an internal document shows.

    We're grateful that the fired KPMG auditors still have all their fingers, toes, and kneecaps. The motto in Japan may be to go quickly and quietly when fired as a fired auditor!

    "Buffett May Be No Match for Mobsters With Tattoos: William Pesek," by William Pesek, Bloomberg News, November 22, 2011 ---
    http://www.bloomberg.com/news/2011-11-22/buffett-may-be-no-match-for-mobsters-with-tattoos-william-pesek.html

    News that Warren Buffett is looking for opportunities in Japan is as good as it gets for a nation that has had an awful year.

    All Japan needs to do is convince the most famous value investor that it’s deserving of his money. Yet a curious juxtaposition involved in Buffett’s first-ever Japan visit showed why that’s easier said than done.

    Buffett was touring a tool plant in Fukushima prefecture, where a nuclear-power plant damaged by the tsunami in March has contaminated the surrounding area. There, he was asked about another calamity putting Japan in a harsh and negative spotlight: the Olympus Corp. scandal. The Berkshire Hathaway Inc. chairman said: “The fact that Olympus happens here or Enron happens in the U.S. doesn’t affect our attitudes at all.”

    Think about it, though. The most-watched market guru is standing near one crisis caused by political corruption and being queried about another involving corporate malfeasance. At the heart of both storylines are growth-killing dynamics that have long given Buffett and his ilk pause. While different in their details and magnitude they show how Japan may be too wedded to the past to thrive in a world of intensifying competition.

    The Yakuza Question

    Olympus, as venerable a name as there is in Japan, demonstrates the point. Investigators want to know what happened to at least $4.9 billion they say is unaccounted for at the camera maker. Of all the bizarre questions surrounding this sordid tale, the role of organized crime groups, or yakuza, is the most tantalizing. Police are looking into how much of the missing cash went into the pockets of these gangs.

    “No one can be sure what will be found until the digging is done,” says Jake Adelstein, author of the 2009 book “Tokyo Vice” and a well-known crime reporter in Japan.

    With their full-body tattoos and amputated fingers, the yakuza have long held a unique place in the public imagination. Unfortunately, that goes for Japan’s economy, too. Adelstein calls the yakuza “Goldman Sachs with guns” because of the prowess with which their groups’ roughly 80,000 members infiltrate companies through extortion and intimidation.

    Olympus is the latest reminder of the extent to which the yakuza is intertwined with the corporate culture, and it’s hardly the only household name to get ensnared. In 2009, Fujitsu Ltd. (6702) ousted its president for alleged ties to “antisocial forces,” a euphemism in Japan for organized crime. The question is this: If Olympus was mixed up with such sinister forces, which other Nikkei 225 Stock Average companies are?

    Mysterious Payoffs

    Prime Minister Yoshihiko Noda is worried that Olympus will sully Japan’s reputation as a well-regulated market economy. Michael Woodford’s travel schedule shows why it may be too late. The former Olympus chief executive-turned-whistleblower forwarded to the whole Olympus board some letters detailing his concerns about mysterious payoffs before he was fired last month. Then Woodford left Japan, fearing for his safety. This week, he will be under police protection as he returns for the first time to meet with investigators.

    Seriously? In a Group of Seven nation? Yes, these things can still happen in Japan thanks to a corporate and political aversion to digging to weed out nefarious interests. A compliant media can only make that worse.

    A similar conclusion can be drawn from events in Fukushima more than eight months after a record earthquake. It was incestuous ties between government bureaucrats and the power industry that left high-tech Japan so vulnerable to the low-tech ways of Tokyo Electric Power Co., the owner of the damaged Fukushima reactor.

    Organized Corruption

    When we think of the mob, we don’t tend to think of publicly traded utilities like Tepco. But how can anyone look at the ways politicians enabled Tepco and its shocking safety lapses over the years and not call it organized corruption? How can the government, knowing what it does now, rally around the nuclear industry?

    Woodford’s soul mate in politics, former Prime Minister Naoto Kan, was shown the door in August for asking hard questions. Kan wanted to hold Tepco accountable for the radiation leaking into Tokyo’s food supply. Noda quietly let matters return to the status quo ante for the nuclear-industrial complex that Tepco represents. The losers are the Japanese people who worry about another Chernobyl when the next giant earthquake hits.

    All this shows how Japan is shunning the change needed to compete in an age when China sets the pace. Just as illustrative is the ability of rice farmers to imperil passage of international-trade deals. And then there’s corporate Japan with its poison pills, takeover defenses and protection of inefficiencies.

    Continued in article

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

    Now the new Olympus auditors from Ernst & Young must worry about their fingers, toes, and kneecaps!

    "Olympus removed auditor after accounting," by Nathan Layne and Kirstin Ridley, Reuters, November 4, 2011 ---
    http://www.reuters.com/article/2011/11/04/us-olympus-auditor-idUSTRE7A32VR20111104

    Olympus has lost 55 percent of its market value since its former chief executive blew the whistle on a series of strange deals over the past five years, including the payment of a massive $687 million advisory fee.

    In May 2009, Tsuyoshi Kikukawa, the then president of the camera-maker and medical equipment firm, announced that the contract for its then auditor, KPMG, had ended and that another global accounting firm, Ernst & Young, would take over.

    Kikukawa made no mention of any row with KPMG, although Japanese disclosure rules require companies to notify investors of "any matters concerning the opinions" of an outgoing auditor.

    In a confidential internal document, Kikukawa wrote to executives in the United States and Europe, revealing that there had been a disagreement with KPMG which he did not plan to disclose to the stock market.

    "The release to be published today says that the reason of this termination is due simply to expiry of accounting auditors' terms of office," Kikukawa said in the letter dated May 25, 2009, which was written in English.

    "I, however, would like to personally tell both of you about the circumstances behind this decision for your understanding."

    Kikukawa outlined a rift between management and KPMG over the goodwill impairment of some consolidated firms and over its $2.2 billion purchase of UK medical device firm Gyrus in 2008.

    That acquisition is central to the scandal engulfing Olympus because of the huge advisory fee, the biggest in M&A history.

    "There are the substantial difference of views on the below mentioned issues between us including the (internal) company auditors and KPMG AZSA; the view of impairment test on goodwill of some consolidated companies, the view of purchase price allocations and impairment test of Gyrus acquisition."

    The discovery of incomplete or improper disclosure about a changing of auditors would prompt disciplinary action from the Tokyo Stock Exchange, such as being placed on a watchlist or being required to submit an improvement plan.

    But that infraction alone would not trigger a delisting, said bourse spokesman Naoya Takahashi.

    It would likely draw the attention of Japan's securities industry regulator, which has started looking into past Olympus acquisitions, and has made disclosure a key focus of the probe, sources have told Reuters.

    JAPAN ACCOUNTING IN SPOTLIGHT

    Yoshiaki Yamada, manager of Olympus' public and investor relations department, said he could not comment on the letter because it was not something that had been disclosed by the company. He reiterated that Olympus changed auditors because KPMG's term had ended.

    KPMG's Japan practice, KPMG AZSA LLC, declined to comment, as did Ernst & Young ShinNihon LLC, citing its duty of confidentiality as auditor.

    The confidential letter was given to Reuters by former Olympus CEO Michael Woodford who was ousted after just two weeks in the job on October 14 for what he says was his persistent questioning over the Gyrus advisory fee and other odd-looking acquisitions.

    Woodford says the letter was addressed to him in his role as head of Olympus Europe at the time and to Mark Gumz, then head of Olympus Corp America.

    "I want you to understand our decision and cooperate for smooth transition of accounting auditor," Kikukawa concluded in the letter.

    Woodford, a Briton who spent most of his 31-year Olympus career outside Japan, went on to replace Kikukawa as group president in April this year, a rare foreigner in charge of a Japanese blue chip, and Kikukawa became executive chairman.

    But last week, after Woodford's sacking had sparked a firestorm and led to a meltdown in the shares of the 92-year-old Japanese firm, Kikukawa quit as chairman and Olympus launched its own independent inquiry into the affair.

    Continued in article

    Bob Jensen's threads on both KPMG and Ernst & Young are at
    http://www.trinity.edu/rjensen/Fraud001.htm


    Question
    How is the current Olympus scandal in Japan related to the Enron scandal?

    Hint:
    Think Special Purpose Vehicles (SPVs)

    Accounting Fraud in Japan
    Olympus Urged to Extend Purge of Executives Over Hidden Losses

    At least eight Cayman Islands entities have been linked to Olympus acquisitions that are suspected of playing a role in the accounting scandal. Five of those no longer exist, according to a search of the Caymans registry, which doesn’t give details on the individuals behind the companies.

    Olympus President Shuichi Takayama yesterday said the company was looking into the role played by special purpose funds in hiding the losses, which date back to the 1990s.

    After he was fired, Woodford went public with his concerns over the advisory fees and writedowns on three other transactions. All involved payments to Cayman Islands companies or special purpose vehicles whose beneficiaries are not known.

     

    "Olympus Urged to Extend Purge of Executives Over Hidden Losses," Business Week, November 8, 2011 ---
    http://www.businessweek.com/news/2011-11-08/olympus-urged-to-extend-purge-of-executives-over-hidden-losses.html

    Olympus Corp.’s admission that three of its top executives colluded to hide losses from investors fails to address the roles played by other officials, according to the company’s biggest overseas shareholder.

    The Japanese camera maker’s shares slumped 29 percent yesterday after it reversed weeks of denials that there was any wrongdoing in past acquisitions. The company fired Executive Vice President Hisashi Mori over his role in covering up the losses with former Chairman Tsuyoshi Kikukawa, who resigned last week, and said auditor Hideo Yamada would step down.

    Olympus’ biggest overseas shareholder is now demanding investor relations head Akihiro Nambu go too because of his role as a director of Gyrus Group Plc, the U.K. takeover target used to funnel more than $600 million in inflated advisory fees to a Cayman Islands fund. And after Nambu, the rest of the board must follow, said Josh Shores, a London-based principal for Southeastern Asset Management Inc.

    “Even if they didn’t know the specific details around where payments were going and exactly why, they knew that cash was going out the door and they also failed to raise their hands to ask questions,” Shores said. “I don’t know who else is involved, but somebody else is. There is a third party somewhere who received this money.”

    Olympus President Shuichi Takayama yesterday said the company was looking into the role played by special purpose funds in hiding the losses, which date back to the 1990s.

    Cayman Links

    At least eight Cayman Islands entities have been linked to Olympus acquisitions that are suspected of playing a role in the accounting scandal. Five of those no longer exist, according to a search of the Caymans registry, which doesn’t give details on the individuals behind the companies.

    Kikukawa, Mori and Nambu became the three directors of Gyrus in June 2008 following the $2 billion acquisition of the U.K. medical equipment maker in February that year. They were also directors of three companies set up to handle the takeover, including the decision to pay out advisory fees that amounted to more than a third of the acquisition’s value, filings show.

    Olympus declined a request to interview Kikukawa and Mori. In six attempts to talk to Kikukawa at his home, the former chairman didn’t appear. Mori’s home address given in U.K. filings leads to a house under renovation in Kawasaki city, about an hour from central Tokyo. Nobody answered the doorbell on a recent visit to Nambu’s home in a seven-story condominium about 27 kilometers from the city center.

    Japanese and U.S. regulators are probing allegations by former chief executive officer Michael C. Woodford that more than $1.5 billion was siphoned through offshore funds. That money may have been used to cancel out non-performing securities that Olympus was keeping off its books, according to a report in the Shukan Asahi magazine, which cited people familiar with the process.

    Cockroaches

    Yesterday’s plunge in Olympus shares pulled other Japanese equities lower on concerns the country hasn’t escaped corporate governance weaknesses that have dogged it since the stock market bubble burst at the end of 1989. Olympus shares have lost 70 percent of their value since Woodford took his accusations public after he was axed on Oct. 14.

    “Institutional investors will stay away from Japan’s market until they confirm this is an isolated case,” said Koichi Kurose, chief economist in Tokyo at Resona Bank Ltd. Some “investors probably think that if there’s one cockroach, there may be 10 more,” he said.

    ‘Tobashi’

    Olympus’ revelations echo the practice of hiding losses known as “tobashi” that became widespread in Japan in the late 1980s and led to the failure of Yamaichi Securities Co., according to Yasuhiko Hattori, a professor at Ritsumeikan University in Kyoto. Yamaichi used overseas paper companies to hide problematic securities, until it failed in 1997 with 260 billion yen ($3.3 billion) in hidden impairments.

    Takayama declined to comment on the involvement of any securities firms in Olympus’ cover-up. The Topix Securities and Commodity Futures Index fell 11 percent, the most of any industry group in the broader gauge. Nomura Holdings Inc. tumbled 15 percent to the lowest in 37 years.

    “There is speculation in the market that Nomura may somehow be involved in this Olympus case,” said Shoichi Arisawa, an Osaka-based manager at IwaiCosmo Holdings Inc. “Individual investors in particular probably sold after seeing a high volume of Nomura’s shares being traded.”

    Nomura didn’t participate in Olympus’s concealment of losses, said Hajime Ikeda, managing director of corporate communications for the securities firm.

    Nomura Unaware

    “We are not aware of any involvement by Nomura in Olympus’s hiding of losses in the 1990s, and we weren’t involved when Olympus wrote off the losses” between 2006 and 2008, Ikeda said in a telephone interview in Tokyo yesterday.

    Olympus plunged by its 300 yen daily limit in Tokyo trading, closing at 734 yen. The Topix ended 1.7 percent lower, the worst-performing Asian stock index.

    The Tokyo Stock Exchange said it’s considering moving the shares in Olympus, the world’s biggest maker of endoscopes, to a watchlist for possible delisting. Takayama pledged to continue with the investigation into the losses, which he said were probably inherited by Kikukawa.

    “The investigation must continue to determine how much rot there is,” said David Herro, chief investment officer of Harris Associates LP. “All responsible must, at a minimum, leave. Also, since the management’s credibility is nearly nonexistent, all of what they say must be verified.”

    Bowed in Apology

    Harris held 10.9 million Olympus shares as of June 30, a 4 percent stake that makes it the company’s second-biggest overseas investor. Southeastern had a 5 percent stake as of Aug. 16, according to data compiled by Bloomberg.

    Olympus President Takayama yesterday said he was unaware of the hidden losses until he was told by Mori and Kikukawa the previous evening. At the press conference, he bowed three times in seven minutes to apologize.

    In the weeks running up to his dismissal, Woodford was engaged in an exchange of letters with Kikukawa and Mori in which he detailed the allegations and which were copied to all member of the board.

    After he was fired, Woodford went public with his concerns over the advisory fees and writedowns on three other transactions. All involved payments to Cayman Islands companies or special purpose vehicles whose beneficiaries are not known.

    Olympus paid a total of 73.4 billion yen to increase stakes in Altis Co., News Chef Co. and Humalabo Co. between 2006 and 2008, which was also used to hide losses, it said yesterday. Olympus wrote down 55.7 billion yen, or 76 percent of the acquisition value, in March 2009, the company said in a statement Oct. 19.

    “It’s beyond belief that Mr. Takayama claims he only found out about it last night,” Woodford said in a telephone interview yesterday. “If he didn’t know before I started writing my letters then he should have known after.”

    Continued in article

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

    "ENRON: what happened and what we can learn from it," by George J. Benston and Al L. Hartgraves, Journal of Accounting and Public Policy, 2002, pp. 125-127 
    The following are excerpts only.

    Abstract

    Enron's accounting for its non-consolidated special-purpose entities (SPEs), sales of its own stock and other assets to the SPEs, and mark-ups of investments to fair value substantially inflated its reported revenue, net income, and stockholders' equity, and possibly understated its liabilities.  We delineate six accounting and auditing issues, for which we describe, analyze, and indicate the effect on Enron's financial statements of their complicated structures and transactions.  We next consider the role of Enron's board of directors, audit committee, and outside attorneys and auditors.  From the foregoing, we evaluate the extent to which Enron and Andersen followed the requirements of GAAP and GAAS, from which we draw lessons and conclusions.

    The accounting issues

    The transactions involving SPEs at Enron, and the related accounting issues are, indeed, very complex.  This section summarizes some of the key transactions and their related accounting effects.  The Powers Report, a 218-page document, provides in great detail a discussion of a selected group of Enron SPEs that have been the central focus of the Enron investigations.  While very much less detailed than the Powers Report, the discussion in the following section (which may seem laborious at times), supplemented with additional material that became available after publication of the Report, should provide the reader with insight into how Enron sought to bend the accounting rules to their advantage.  However, even a cursory review of this section will give the reader a sense of the complex financing structures that Enron used in an attempt to create various financing, tax, and accounting advantages.

    Six accounting and auditing issues are of primary importance, since they were used extensively by Enron to manipulate its reported figures: (1) The accounting policy of not consolidating SPEs that appear to have permitted Enron to hide losses and debt from investors.  (2) The accounting treatment of sales of Enron's merchant investments to unconsolidated (though actually controlled) SPEs as if these were arm's length transactions.  (3) Enron's income recognition practice of recording as current income fees for services rendered in future periods and recording revenue from sales of forward contracts, which were, in effect, disguised loans.  (4) Fair-value accounting resulting in restatements of merchant investments that were not based on trustworthy numbers.  (5) Enron's accounting for its stock that was issued to and held by SPEs.  (6) Inadequate disclosure of related party transactions and conflicts of interest, and their costs to stockholders.

    Continued in article at
    http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm

     


    "ENRON’S TENTH ANNIVERSARY: THE CRIMES," by Anthony H. Catanach and J. Edward Ketz, Grumpy Old Accountants, November 7, 2011
    http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/357#more-357

    Bob Jensen's threads on the Enron, Worldcom, and Andersen scandals ---
    http://www.trinity.edu/rjensen/FraudEnron.htm


    "Cattles Claims ‘Gross Misstatement’ of Debt in PwC Audits," Bloomberg Business Week, by Eric Larson and Kit Challet, November 2, 2011 ---
    http://www.businessweek.com/news/2011-11-02/cattles-claims-gross-misstatement-of-debt-in-pwc-audits.html

    Cattles Plc, the U.K. subprime lender sold this year to creditors including Royal Bank of Scotland Group Plc, accused PricewaterhouseCoopers Plc of accounting failures before its shares were suspended in 2009.

    Cattles has claims against PwC tied to the firm’s audits of its finances from 2005 through 2007 that could result in “substantial damages,” according to an outline of the case by Judge Henry Bernard Eder in London, who ruled yesterday on preliminary issues. The company said PwC’s audit led to a “gross misstatement” of the company’s bad debt.

    While an official complaint hasn’t yet been filed, Cattles was awarded some legal costs against PwC in an evidentiary dispute. Cattles claims groups of loans that were “ostensibly” set aside for debt collection were in reality just buckets for bad debt, Eder said in the ruling, which didn’t address the merits of the case. “Once the misstatements became clear, the group could not continue trading and became worthless.”

    The company, based in Batley, England, lent to customers with poor credit histories and is winding down its loan book after recording an extra 700 million pounds ($1.12 billion) of writedowns following the a