Inside the Wall Street Collapse (Parts 1 and 2) first shown on March 14, 2010

Video 2 (Greatest Swindle in the History of the World) --- http://www.cbsnews.com/video/watch/?id=6298154n&tag=contentMain;contentAux

Video 3 (Swindler's Compensation Scandals) --- http://www.cbsnews.com/video/watch/?id=6298084n&tag=contentMain;contentAux

"Michael Lewis: The Economic Crisis -When Irish Eyes Are Crying," Vanity Fair via Simoleon Sense, February 2, 2011 ---
http://www.simoleonsense.com/michael-lewis-the-economic-crisis-when-irish-eyes-are-crying/

You can read more about the books and videos of Michael Lewis by scrolling down at
http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds 

"Ernst & Young dismissed from IndyMac shareholder case," by Amanda Bronstad, Law.com, June 8, 2012 ---
http://www.law.com/jsp/nlj/PubArticleNLJ.jsp?id=1202558691320&Ernst__Young_dismissed_from_IndyMac_shareholder_case&slreturn=1

Jensen Comments
The courts have been very kind to large auditing firms that allowed clients to grossly underestimate bad debt reserves and failed to detect (or at least report) insider frauds and going concern questions for nearly 2,000 clients that went bankrupt after 2007. This particular IndyMac case judge was also not a bit sympathetic with the SEC's case in general.

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

"Seeking True Financial Reform: Ending the Debt- Equity Distinction," by  Joseph B. Allen, William and Mary Business Law Review , Volume 3, Issue 1 ---
Click Here
http://scholarship.law.wm.edu/cgi/viewcontent.cgi?article=1035&context=wmblr&sei-redir=1&referer=http%3A%2F%2Fwww.google.com%2Furl%3Fsa%3Dt%26rct%3Dj%26q%3Dseeking%2520true%2520financial%2520reform%253A%2520ending%2520the%2520debt-equity%2520distinction%26source%3Dweb%26cd%3D1%26sqi%3D2%26ved%3D0CE0QFjAA%26url%3Dhttp%253A%252F%252Fscholarship.law.wm.edu%252Fcgi%252Fviewcontent.cgi%253Farticle%253D1035%2526context%253Dwmblr%26ei%3DV5PCT77kEuj3sQKM1ozhCQ%26usg%3DAFQjCNHrT51ZK1nKCvnFFcyJE8mHFtE1Cw#search=%22seeking%20true%20financial%20reform%3A%20ending%20debt-equity%20distinction%22

This Note identifies the failure of Congress to address tax incentives for leverage as a principal cause of the recent financial crisis and a fundamental flaw of recent financial reform legislation. Specifically, the Internal Revenue Code provides substantially disparate tax treatment for debt and equity financing by allowing firms to deduct interest payments on indebtedness, but not providing an equivalent deduction for equity funding. This “debt-equity distinction” artificially reduces the cost of capital for debt financing relative to equity financing and encourages firms to over-employ leverage in their capital structure. This in turn increases financial distress costs and externalities to the economy and increases the volatility of capital markets. Though some scholars have proposed to allow firms a deduction for dividends paid, such a scheme would create additional distortions and introduce the potential for corporate managers to substantially manipulate their taxable income. This Note offers an alternative solution by proposing: (1) that the deduction for interest on business indebtedness be eliminated, and (2) that policymakers return to the idea of the Cost-of-Capital-Allowance (COCA). A COCA deduction better aligns the incentives of firms with those of capital markets and economies writ large, and encourages managers to seek out the absolute cheapest sources of capital while removing tax shelter considerations from the decision-making process.

. . .

Encouraging debt over equity has consequences other than increased volatility. The distinction also shifts investment capital away from innovative, high-risk startup companies and towards relatively safer and more stable firms in established industries.92 Michael Knoll, Co-Director of the Center for Tax Law and Policy at the University of Pennsylvania Law School,93 points out that high-risk startup firms have less capacity for leverage in their capital structure because they do not have a consistent earnings history or steady cash flow.94 More established companies are in better positions to employ the interest deduction in devising their capital structure, substantially lowering their cost of capital.95 The overall cost of capital of a firm can act as a “hurdle rate” for judging new ventures and projects; managers and investors will pursue only those projects with an expected rate of return above the cost of capital.96 The interest deduction thus encourages greater investment in stable firms past their rapid growth period, increasing competition for startups in acquiring capital.

Jensen Comment
This is more of an essay advocating elimination of interest deductions on corporate tax returns than it is a realistic paper on elimination of debt financial instruments. The author, for example, does not give adequate attention to the important role played by collateral (e.g., real estate mortgages and mortgages on jumbo jets) in debt financing. One of the reasons for lower cost of debt is that quality of the collateral contracted in that debt.

Bondholders generally do better than shareholders in bankruptcy court. The debt may be restructured by the courts, but the shareholders stand a much better chance of getting nothing. This is one of the main reasons investors opt for bonds rather than equity shares.

The author assumes that elimination of debt alternatives will ipso facto lower the cost of capital for high risk startup ventures. I just do not buy into his reasoning. Risk averse investors will avoid investing in the equity of risky ventures whether or not they have bond markets to turn to in making their portfolio selections.

The author also avoids the issue of how towns, counties, states, and the federal government finance capital projects and developments with bonds. These "debt" alternatives for investors will most likely still exist even if we ban bond investing for business firms.

The author also avoids the issue of global markets. The U.S. Congress cannot eliminate global bond markets. Eliminating bond markets in the U.S. will most likely mean that risk averse investors will increasingly seek more and more foreign bonds rather than plunge more money in risky equity investments.

My general conclusion is that this is a very superficial article that does not tackle the toughest issues of debt versus equity.

I would be more impressed if the author tied this article to the Modigliani-Miller Theorem ---
http://en.wikipedia.org/wiki/Modigliani%E2%80%93Miller_theorem
He shows no evidence of even being aware of M&M theory.

Interactive: Locating American Manufacturing ---
http://www.brookings.edu/research/interactives/manufacturing-interactive

"Taxing Gender: The Deductibility of Gender-Specific Medical Expenses and Proposals for Reform," by Anne K. Leung (J.D. 2011, Rutgers-Newark), Note, Westlaw, 32 Women's Rts. L. Rep. 224 (2011)
http://www.westlaw.com/find/default.asp?cite=32+Women%27s+Rts.+L.+Rep.+224&RS=WLW2.05&VR=1.0
Thank you Paul Caron for the heads up.

In this note, I will examine several types of medical expenses that are distinctly incurred by individuals of different genders, and their respective treatment under the federal system of taxation. I will study a recent Treasury determination declaring the non-deductibility of infant formula for mastectomy patient-taxpayers, as well as the implications of current social policy on the Code and past Tax Court rulings. Further, I will discuss the tax treatment of assisted reproductive technologies, including in vitro fertilization, egg and sperm donors, and surrogacy, and the effect of such treatment on taxpayers who do not fit the traditional nuclear family structure. Despite a recent Tax Court decision that denied a deduction for the cost of such procedures by an unmarried individual, various theories suggest that adherence to the Code may still be possible for non-traditional families. Such theories include a return to longstanding constructions of the Code, as well as a redefinition of fertility. Ultimately, arguments in favor of expanding deductibility for those outside of the traditional nuclear family structure will also, in turn, support and inform the struggle to allow deductions for those physically unable to breastfeed.

In light of ongoing change in social norms and behaviors, it has become clear that the Code alone no longer provides adequate guidance in several important areas. Treasury determinations, which include Revenue Rulings and Private Letter Rulings, as well as Tax Court and Board of Tax Appeals decisions, give supplementary but limited directive. Ultimately, the IRS must introduce change on a larger scale to address the needs of diverse taxpayers.

IRS Publication 502 ---
http://www.irs.gov/publications/p502/index.html

Bob Jensen's taxation helpers ---
http://www.trinity.edu/rjensen/Bookbob1.htm#010304Taxation

125 technology quick tips from the AICPA, by J. Carlton Collins, June 2012 ---
http://www.journalofaccountancy.com/Issues/2012/Jun/20114845.htm

Bob Jensen's helpers with new tools ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm

"GROUPON’S FEEBLE TAX ASSETS: WE TOLD YOU SO…AGAIN!" by Anthony H. Catanach and J. Edward Ketz, Grumpy Old Accoutants Bllog, June 11, 2012 ---
http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/685

Bob Jensen's threads on Groupon
Search for "Groupon" at
http://www.trinity.edu/rjensen/Fraud001.htm

Tax Reform:  France Versus the United States Versus Greece

France
"Tax Expenditure Theory and the Reform of French Loopholes," by Eric Pichet, SSRN, April 18, 2012 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2041897
Thank you Paul Caron for the heads up.

Abstract:
This study has a dual ambition. One is to develop, for the first time ever, a complete Theory of tax expenditures and, therefore, a proposal for reforming the French tax loophole system. Having noted the proliferation of such loopholes in France and elsewhere over the past 20 years or so, we provide a succinct analysis of their political origins and highlight the absolute necessity of stopping a deviation that risks undermining the very foundations of efficient and fair taxation, the only possible basis for a social consensus and citizens’ ongoing willingness to pay tax. The first section, from a theoretical point of view, offers our Theory of tax expenditures as well as a new and more complete definition of this construct, thereby tracing an idealized border between tax determination modalities, the elements that are inherent to any benchmark tax system and actual tax expenditures. The second section, from a pragmatical point of view, recalls three possible methodologies for assessing tax expenditures, evaluating the many different analysts that work in France (all deeply rooted in an initial spending paradigm) before offering our own methodology, one based on the double criteria of effectiveness and fairness. On this basis, we analyze France’s 17 main tax expenditures today in 2012 and invite the next Parliament to keep any legitimate tax expenditures (after modifying them, if need be) while eliminating many costly, ineffective and inadapted loopholes, along with any that generate windfall effects (what we might call illegitimate tax expenditures). Lastly, we suggest a new global architecture for tax expenditures, one relying on clear and coherent foundations.

United States
"Tax Reform Holds Promise, But if Not Done Carefully, Could Increase the Deficit and Inequality and Harm the Economy Policymakers Must Not Let Tax Reform Become 'Trap' That Produces Harmful Policies," by Chuck Marr and Chye-Ching Huang, Center for Budget and Policy Priorities, June 8, 2012 ---
http://www.cbpp.org/cms/index.cfm?fa=view&id=3792

Policymakers are increasingly discussing the need for tax reform, with a number of them calling for large cuts in tax rates — to levels well below the Bush tax rates — as a core element of reform. They contend that sweeping but unspecified cuts in tax expenditures (credits, deductions, and other tax preferences) will offset the cost of deep cuts in tax rates and, depending on the proposal, possibly generate some revenue to reduce deficits. Many who favor this approach go a step further and call for policymakers to commit to specific cuts in tax rates before they agree on any specific tax expenditures to reduce.

Such approaches pose big risks. They could produce tax “reform” that increases both deficits and inequality because while cutting “tax expenditures” sounds appealing in the abstract, cutting specific tax expenditures enough to offset the costs of substantial new rate cuts and contribute meaningfully to deficit reduction would likely prove difficult, if not impossible, to achieve. Indeed, the difficulty of cutting popular tax expenditures — from the mortgage interest deduction to 401(k) tax preferences to the deduction for charitable contributions to the exclusion for employer-sponsored health insurance — is why those who urge policymakers to commit upfront to specific, large rate cuts rarely specify any tax expenditures to cut. In fact, they often highlight tax expenditures that they would refuse to touch, such as the preferential tax rate for capital gains.

Continued in article

Greece
Tax Reform in Greece is Probably a Hopeless Cause ---
http://taxjustice.blogspot.com/2010/03/tax-evaders-freedom-fighters.html

"As Income Inequality Grows, Some Movement at the Top and Bottom," by Bruce Bartlett, The New York Times, June 19, 2012 ---
http://economix.blogs.nytimes.com/2012/06/19/as-income-inequality-grows-some-movement-at-the-top-and-bottom/?ref=economy

On June 11, the Federal Reserve published the latest results of its triennial survey of consumer finances. News reports focused on the decline in the median net worth of all families to $77,300 in 2010 from $126,400 in 2007, reflecting the devastating impact of the financial crisis. The data also demonstrates that there is some fluidity in income mobility at both the top and the bottom of the income tables.

The table below is from the Fed report. It examines the income of families in 2007 and the same families in 2009, distributed in 20 percent brackets. The numbers in bold show the percentage of each group in the same bracket in both 2007 and 2009. Thus, 69.4 percent of those in the lowest income bracket in 2007 were also in the lowest bracket two years later; 19.1 percent rose to the second quintile, 6.7 to the middle, 3 percent to the fourth and 1.9 percent went from the bottom bracket all the way to the top bracket.

Conversely, 75.1 percent of those in the top quintile remained in the top quintile, but 17.8 percent fell one bracket, 4 percent fell two brackets, 2 percent fell three brackets and 1.1 percent went from the top quintile to the bottom quintile in just two years.

¶ In a footnote, the Fed study breaks out the top 10 percent of families in 2007 and 2009. It says that 71.4 percent were in that bracket in both years; 17.2 percent fell to the 80th to 90th percentile from the 90th to 100th percentile – that is, from the top half of the top quintile to the bottom half. Only 11.4 percent of those in the top 10 percent fell into the bottom 80 percent of families. This suggests that income mobility at the top end may not be quite as high as the table implies.

¶On June 15, the conservative Tax Foundation published data on the mobility of millionaires, that is, those reporting at least $1 million of adjusted gross income. Note that using adjusted gross income understates the true number of millionaires because things like tax-exempt interest on municipal bonds and unrealized capital gains are excluded.

¶The table below from the Tax Foundation study shows that half of those who reported $1 million or more of income did so only once between 1999 and 2007, 15 percent did so twice and only 6 percent did so every year.

Continued in article

A Heads  Up on "Tenacious" Barter Accounting and Bookkeeping

"Al Qaeda Offshoot Offers Camels for Obama's Head, Hens for Hillary Clinton's," Yahoo News, June 8, 2012 ---
http://news.yahoo.com/al-qaeda-offshoot-offers-camels-obamas-head-hens-165924543--abc-news-topstories.html

Jensen Comment
I think the promise of 78 virgins in the hereafter is more effective when recruiting tactic to attract suicide bombers. What good are camels and hens if you blow yourself up?

From an accounting standpoint these are barter transactions. It might be interesting in accounting courses to envision these three types of barter journal entries, but that probably would not be viewed as a politically correct assignment in most universities. Do we capitalize or expense human heads under Al Qaeda accounting standards? In theory, preserved heads have long-term earnings potential as tourist attractions, but what if some of the tourists are Navy Seals? That is one big contingent liability that's hard to book in the ledger ---
http://www.trinity.edu/rjensen/theory01.htm#TheoryDisputes

"Barter bookkeeping: A tenacious system," by Dale L. Flesher, Accounting Historians Journal, 1979, Vol. 6, no. 1, pp. 83-86 ---
http://umiss.lib.olemiss.edu:82/articles/1000211.225/1.PDF

"Barter: Development of accounting practice and theory," Silliard E.: Stone, Accounting Historians Journal, 1985, Volume 12, no. 2, pp. 95-108 ---
http://umiss.lib.olemiss.edu:82/articles/1000438.694/1.PDF

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

2011 IASB Annual Report ---
http://www.ifrs.org/NR/rdonlyres/72C50BCF-0C58-4BFA-A6FD-5DF4588B27C8/0/AR_2011.pdf
Its cash and income position improved substantially relative to 2010.

"IT Risk: Your Audit Checklist," by Rob Livingstone, CFO.com, June 19, 2012 ---
http://www3.cfo.com/article/2012/6/the-cloud_audit-checklist-for-public-cloud

Blog Entry from Jerry Trites on October 7, 2011 --- http://uwcisa-assurance.blogspot.com/

Web Application Security: Business and Risk Considerations

ISACA has a White Paper on its website with the above title. The paper is an excellent resource for those interested in cloud risks and how to address them. That includes a lot of people!

One of the interesting parts of the paper is the table listing the various types of vulnerabilities encountered in the cloud. These include SQL Injection, Cross-site scripting and Insecure Direct Object Reference, among others. The paper goes on to list some areas of security to focus on, including some specific guidance on the old stand-by's of executive support, training and support.

The paper concludes with assurance considerations, including the use of Cobit to strengthen controls.

An excellent paper. You can download it through this link.

"KMPG: 'Cloud is Now'; Technology Spend to Leap Next Year," SmartPros, October 6, 2011 ---
http://accounting.smartpros.com/x72834.xml

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

IASB's Updated Work Plan, June 2012

The International Accounting Standards Board (IASB) has publicly released a revised work plan updated the expecting timing of various due process steps in its projects. A number of expected timing of some projects have been deferred or clarified, and the IASB has formally added a project on IAS 8 effective date and transition methods.
Deloitte's IAS Plus, June 8, 2012 ---
http://www.iasplus.com/en/news/2012/june/iasb-issues-updated-work-plan

Bob Jensen Makes a Mistake and Now Has a New Worry About Forecasted Transactions of Lease Renewals
But he was not entirely wrong.
A Dual Model for Lease Accounting: 
Redrawing the Lines Into a Brick Wall of Forecasted Lease Renewal Controversy
http://www.cs.trinity.edu/~rjensen/temp/LeaseAccounting.htm

No increase in taxes for the middle class! Yeah Right!
For example, greatly reducing exemptions for school, town, county, and state bond interest could massively increase property taxes for the middle class.
Reducing tax breaks for health insurance and care will massively impact the poor and the middle class.
It's a good thing President Obama that most voters won't understand his budget before the 2012 election and that the liberal media will try to keep this a secret

"The President’s 2013 Budget: More Troubling Tax Increases in the Fine Print," by Curtis Dubay, The Heritage Foundation, June 25, 2012 ---
http://www.heritage.org/research/reports/2012/06/the-presidents-2013-budget-more-troubling-tax-increases-in-the-fine-print

Abstract: Buried in the fine print of President Obama’s FY 2013 budget proposal is an expansion of his cap on itemized tax deductions—to now include exemptions and exclusions. Applying the cap to exemptions and exclusions is yet another way the President has devised to increase the already sizeable tax burden shouldered by families and small businesses who earn $200,000 or more a year. This policy change so badly violates the basic tenets of sound taxation that it is little more than a move to further punish the most successful Americans with yet another confiscatory tax increase. Congress should reject the President’s cap, like it has in the past, and focus on revenue-neutral fundamental tax reform that would lower tax rates and improve neutrality to encourage economic growth.

It is generally known that President Barack Obama’s fiscal year (FY) 2013 budget calls for a massive $2 trillion tax increase. This amount is not explicitly in the budget because it hides several tax increases in the fine print. Also buried deep in the fine print is the President’s expansion of his cap on itemized deductions, which, unlike in previous years, now applies to tax exemptions and exclusions.

The devil really is in the details in this case. Applying the cap to exemptions and exclusions is yet another way the President has devised to increase the already sizeable tax burden shouldered by individuals and small businesses earning $200,000 a year or more ($250,000 for married couples). This makes it yet another growth-slowing tax increase in the long list of tax increases already proposed by the President.

President Obama’s cap would slow growth even further because it would also move taxes further from neutrality. A proper tax code does not influence economic decisions of families, businesses, investors, and entrepreneurs. Neutrality is the standard against which tax policies are compared in order to determine if they influence decisions. A neutral policy is one that does not influence, neither in a positive nor negative way, economic choices. Policies that move in the opposite direction of neutrality, like President Obama’s application of his cap to exemptions and exclusions, slow growth.

Congress has rightly rejected the President’s cap in previous years. The inclusion of exemptions and exclusions should give it even more reason to do so again.

Capping Exemptions and Exclusions

In each of his three previous budgets, President Obama proposed a cap on the itemized tax deductions of individuals and businesses earning $200,000 or more a year. The cap served different purposes in previous budgets. In 2009, it was a way to raise revenue for the impending health care bill. In 2010, it was a way to raise more revenue for general spending. In 2011, the President wanted a cap as a misguided way to “pay for” patching the alternative minimum tax (AMT) for middle-income taxpayers. This year, the cap is back as an intended revenue raiser.

In its first three iterations, the cap restricted taxpayers’ itemized deductions to the amount that those deductions would have reduced their tax bill had they paid the 28 percent marginal rate instead of the higher marginal rate they actually paid. This year, the cap still limits deductions to their value at the 28 percent marginal tax rate, but now also applies to tax exemptions and exclusions as well.

President Obama provided no details in his budget about how the expansion of the cap would work, but the Treasury Department reports that, at a minimum, President Obama’s cap would include the following exemptions or exclusions:

• State and local bond interest;
• Employer-sponsored health insurance paid for by employers or pre-tax employee dollars;
• Health insurance costs of self-employed individuals;
• Employee contributions to health savings accounts and Archer Medical savings accounts; and
• Contributions to defined-contribution retirement plans and individual retirement arrangements.

Job-Destroying Revenue Grab

Expanding the cap to exemptions and exclusions greatly expands the policy’s tax-hiking capacity. In President Obama’s FY 2012 budget, when the cap only applied to itemized deductions, the Treasury Department estimated that it would raise $321 billion over 10 years.[4] Now that the cap includes exemptions and exclusions, the Treasury Department estimates that it would raise $584 billion over 10 years.[5] That is an increase of more than 80 percent.

The extension of the cap to exemptions and exclusions is another way to raise the taxes of job creators, such as businesses that pay their taxes through the individual income tax, as well as investors and entrepreneurs. The President already wanted to raise their marginal tax rates, their tax rates on capital gains and dividends rates, and revive old provisions that phased out their personal exemptions and deductions (PEP and Pease).

By taking even more of these job creators’ earnings, President Obama would further erode their already diminished ability to make the investments that are necessary to create the jobs the economy so desperately needs.

Step in Wrong Direction. Expanding the cap to exemptions and exclusions would slow economic growth not merely by taking resources from job creators, but also by moving taxes further from neutrality. It would also make repairing the broken health insurance market more difficult. The new cap would do these things by levying tax on the following exemptions or exclusions:

Continued in article

Jensen Comment
What most voters least understand is that governments at all levels, especially school districts, towns, counties, and states, will increase the Federal tax revenues that result in less revenue for them in President Obama's proposed budget. And the poor pay rent such they there will be rent increases to cover the increases in property taxes to say nothing about the added sales taxes and fees.

If you like watching the drama of gridlock in Washington DC, you're going to love watching the forthcoming budget legislation wars in Congress. And in the meantime you can watch the trillion-dollar deficits grow into ten-of-trillions of dollars in deficits.

Hi Pat,

I was able to download this paper for free from the Trinity University Library Database Service
Other faculty members can probably do the same using their employer's library database service.

"Does IFRS Stand for InFormation RiSk?" by Ginny W. Frings, Michael C. Frings, CFA, and M. Christian Mastilak," Financial Analysts Journal, Vol. 68, June 2012, pp 17-21

 

In the wake of the recent financial crises, corporations, accounting firms, and regulatory bodies are debating the design of new regulations to improve the integrity of publicly available financial information. Contrary to the positions of the FASB and IASB, the convergence of current U.S. GAAP rules–based standards with proposed IFRS principles–based regulations would increase financial information risk. The veneer of similarity is not enough to ensure comparability of reported financial information across the globe.

. . .

Page 17
Although the quality of accounting information has many definitions, we will focus on the issue of information risk. We define information risk as the risk that investors rely on materially misstated information, or misinterpret vague information, in an entity’s financial statements when making investment decisions. According to Statement of Financial Accounting Concepts No. 2 of the Financial Accounting Standards Board (FASB), decision-useful financial information is relevant, representationally faithful, verifiable, timely, understandable, and comparable. To the extent that the profession does not meet its charge to provide such information, investors bear information risk. Generally, as information risk increases, so too does the cost of capital, because capital markets price information risk just as they do other risks.

. . .

Veneer of Similarity
Page 18
Although global adoption of IFRS could result in comparability of financial reporting standards, there is no guarantee that comparability of standards would result in comparability of actual financial reporting practice, owing to local differences in economic factors as well as differences in local interpretation and application of IFRS. Research has demonstrated that important differences among countries and cultures can affect reporting even within common standards.2 These differences include the importance of capital markets, stringency of and corruption within enforcement regimes, code versus common law legal structures, and the political environment. An analogy can be made to the difficulty of uniting Europe’s different cultures, economies, and politics under a single currency.

Jensen Comment
We are already seeing an example of this in the EU where thousands of European banks are limiting portfolio fair value downward adjustments to only "permanent" adjustments and then not viewing most lowered prices, including prices of Greek bond investments, as "permanent." What is defined as "permanent" may vary globally around the world, which is not what the IASB intended for fair value adjustments of financial instruments.

IFRS will not eliminate these real economic and cultural differences. Rather, we fear that common standards will hide significant underlying differences among companies domiciled and operating in different countries, papering over useful, decision-relevant information about country-level differences with a veneer of similarity. We fear that investors will lose information about real, economically significant differences among companies. Anecdotally, we have heard that auditors often “fall back on” either local or U.S. GAAP when interpreting IFRS principles–based standards. For example, U.S. subsidiaries of foreign parents sometimes determine their accounting under U.S. GAAP to comply with reporting requirements in the United States and then roll that accounting into the foreign parents’ IFRS financial statements. To the extent that this happens differently in different countries, the comparability and understandability of IFRSbased financial statements are undermined.

Another effect of this veneer of similarity occurs in the area of fair value accounting. In determining the figures for assets and liabilities, IFRS relies on fair value. For any fair value model, fair value is based on a transaction between market participants. Note that when defining market participants in valuation models, we must recognize that the United States operates within a different economic environment than countries that have already adopted the proposed IFRS; therefore, our sets of market participants will differ. And different market participants may value an asset or liability using different methods, thus arriving at different values.

Moreover, we recognize that financial statements that serve as an information source are interpreted differently by different decision makers (e.g., from an analyst’s perspective or an accountant’s perspective). By increasing the number of assets and liabilities for which companies must

. . .

Increased Use of Managerial Discretion
Page 18
IFRS offers managers increased discretion, owing to fewer specific “bright-line” standards and a relative lack of industry-specific guidance compared with U.S. GAAP. This increased discretion allows managers more leeway to report on the true, underlying economic activity of the entity, thus increasing representational faithfulness. However, it also allows managers more freedom to respond to their own personal reporting incentives, hindering the representational faithfulness of IFRS-based financial statements. Further, the increased discretion means that managers have less future accountability for their reporting choices. If more reporting discretion is allowed, then more reporting choices are allowable, and management’s reporting is less constrained by the threat of future litigation or other actions.

Jensen Comment
These criticisms of principles-based standards have been raised over the years repeatedly on the AECM ---
http://www.trinity.edu/rjensen/Theory01.htm#BrightLines

. . .

Increased Use of Footnote Disclosure
Page 19
Recognition is the technical term for including information in the numbers in the financial statements. Thus, recognition means that the information affects earnings, ratios, and other numerical summaries of the company’s performance. IFRS recognition standards are less precise than those of U.S. GAAP, and balancing out the decreased precision with increased levels of disclosure in the footnotes to the financial statements gives rise to several potential sources of information risk. First, research has shown that information disclosed in footnotes but not recognized on the face of the financial statements is often not captured and used by capital market participants (see Healy and Palepu 2001; KPMG 2011). Earnings releases receive the lion’s share of publicity, and disclosure of information in increasingly arcane footnotes is often tantamount to no disclosure at all.

Second, the increase in disclosure can lead to information overload. IFRS-based financial statements have continually increased in length over time, forcing investors and analysts to wade through ever-increasing word counts to learn what they can about the company.

Jensen Comment
I this changing era of technology advances in dealing with information overload, I'm really not overly concerned about added footnote disclosures.

 

Market Responses to Increased Information Risk
Pages 19-20

 

. . .

Conclusion
Pages 20-21

. . .

We believe that U.S. GAAP is superior to IFRS, at least for U.S. investors and U.S. companies. Therefore, we predict an increase in information risk and, thus, cost of capital for U.S. companies following the implementation of the proposed IFRS. And so, contrary to the argument made by proponents, we predict that IFRS will hurt, rather than help, the competitiveness of U.S. companies.

As noted earlier, we are skeptical of the benefits of IFRS for U.S. companies, and we recommend that standard-setters and other debate participants consider the costs of increased financial statement information risk to U.S. companies when assessing the net benefits of the adoption of IFRS. We believe that the adoption of IFRS would impose substantial costs on investors and that those costs would be priced into U.S. companies’ securities. Thus, we believe that the net benefits of the adoption of IFRS in the United States, for both U.S. investors and U.S. companies, would be somewhat less than its proponents estimate. Finally, we realize that many of these predictions are speculative, and we invite comments from readers.

Jensen Comment
I don't think the authors made a convincing case of the superiority of US GAAP relative to IFRS.

Furthermore I don't think the key issue is a comparison of IFRS versus FASB/SEC standards at any point in time. This key issue in my mind is the difference in the political process of introducing and revising standards and interpretations.

I am totally frightened by Shyam Sunder's warnings of FASB abuse of monopoly power ---
http://faculty.som.yale.edu/shyamsunder/Jamal Sunder Stds Dec 14.pdf

The U.S, is having a great deal of trouble with political lobbying as witnessed by the past overrides of standards (e.g., cost amortizing of dry holes in oil and gas) and threatened overrides (e.g., a bill in Congress to override the emerging standard on lease accounting).

Think of the problems we will have after the honeymoon of convergence of IFRS and U.S. GAAP with the political lobbying of over 100 nations. Some nations, especially enemies of the U.S., may view lobbying the IASB as a means of disrupting the power of the United State in global finance in general and a means of pushing for socialism in the world. For example we may see a much more concerted effort to impose Sharia laws of finance ---
http://en.wikipedia.org/wiki/Sharia

June 27, 2012
Hi again Tom,

This exchange is interesting in that it begs the question of what is a "derivative" financial instrument.

In the context of FAS 133, a "derivative" is mapped to a price/rate/credit index such as a standardized grade corn price, LIBOR, or credit rating of an investor's collateralized bond. FAS 133 scopes in derivative contracts in commodity prices, interest rates, and credit ratings.

FAS 133 scopes out weather indexes such as average daily rainfall in Kossuth County during July. We can certainly have a derivative financial instrument such as a call option based upon a weather index, but these contracts are not scoped into FAS 133.

The contracted index constitutes the "underlying" of a derivative financial instruments contract. In virtually all derivative financial instruments contracts the index measurement is verifiable and becomes the basis for ultimate contract settlement. For example, when settling a call option on corn price, the CBOE contracted strike price of corn is net settled against the CBOE ( http://www.cboe.com/default.aspx  ) spot price (which is the underlying). The CBOE defines "standard" contracts for this index in terms of detailed chemical grading of corn (not any old puny corn qualifies for the CBOE grading standard). Interestingly, the hedged item might be puny corn but the farmer may net settle hedging CBOE corn derivative financial instruments contracts on CBOE-quality corn he's unable to grow. From a FAS 133 standpoint, this can lead to ineffectiveness of a hedge contract that is actually hedging the farm yield of puny corn.

I think the definitional implication is that contracting parties are "takers" and not "makers" as far as the underlying is concerned. Derivative financial instruments are then "derived" from fluctuations in that underlying index outside the control of the contracting parties in a derivative financial instrument.

My main point is that a given farmer cannot control the CBOE spot price of corn or the rainfall in Kossuth County in July that are used as an underlying in a derivative financial instrument. He can control to some extent the price of the corn he actually grows or what he's willing to pay to lease his crop land.

In my opinion, the contract is no longer a derivative financial instrument if both the party and the counterparty totally or partially "make" the index. Hence I assume that an option contract renew a lease is not a derivative financial instrument contract if the contracting parties negotiate the rent rather than use some rent index outside their control. I don't think a rent index exists for most operating leases in the same sense that commodity price and interest rate indexes exist in such places as the CBOE, CBOT, and CME markets.

The bottom line is that what we call lease renewal options and some other types of options are not derivative financial instruments contracts that are defined in FAS 133 or IAS 39 (soon to be IFRS 9). Hence, when we write that a business firm has an "option" contract that contract is not necessarily a derivative financial instrument. To be a derivative financial instrument it must have an underlying that contracting parties take rather than make in the market. Additionally, FAS 133 requires that to be eligible for hedge accounting there must also be a net (cash) settlement provision based upon that index rather than a requirement for physical delivery of the commodity in question.

Lease renewal contracts are more apt to be financial instruments rather than derivative financial instruments.
As such, they are accounted for as other financial instruments. However, there can be huge complications when attempting to carry lease renewal contracts at fair value. The leased property is almost always highly unique and not a fungible item.. The leased Gate 12 at the Manchester, NH airport is very different from the leased Gate 57 in Baltimore. The CBOE has no standardized contracts for airport gate rentals, building rentals, and equipment rentals like it has for a chemical grade of corn in CBOE options contracts.

The main problem with lease renewals is that for operating leases these are typically forecasted transactions that are not contracts. This is outside the paradigm of an accounting Conceptual Framework built upon the paradigm of contracts. I discuss this in greater detail at
 

A Dual Model for Lease Accounting: 
Redrawing the Lines Into a Brick Wall of Forecasted Lease Renewal Controversy
http://www.cs.trinity.edu/~rjensen/temp/LeaseAccounting.htm

Respectfully,
Bob Jensen

June 29, 2012
Hi Tom,

Perhaps I can get to you on a different tack. A "spot price" in finance is the current price of an item at a current point in time say the end of the trading day on June 30, 2012 where we can look up the current spot price of of hundreds of commodities  in the newspaper or at the CBOE Web site --- http://www.cboe.com/default.aspx

On June 30, 2012 there is is a vector of pre-determined future prices to accompany any spot price for each of those hundreds of commodities.

For Example, on June 30, 2012 we might have the following for Commodity C at the close of the day on the CBOE:
 

• $850 June 30, 2012 Spot Price                                     set at the end of June 30, 2012
  
  VECTOR of forward prices set at the end of June 30, 2012
   
• $900 June 30 forward price set for June 30, 2013    set at the end June 30, 2012      
  (On 6/30/2013 the spot price later turned out to be $940)
  
  
   
• $1,089 June 30 forward price set for June 30, 2014  set at the end June 30, 2012      
  (On 6/30/2014 the spot price later turned out to be $930)
  
  
   
• $1,198 June 30 forward price set for June 30, 2015  set at the end June 30, 2012       
  (On 6/30/2015 the spot price later turned out to be $767)

I assume if you are going to use the term "forward contract" that you have a distinction between "forward" and "spot" prices that are determined at the start of the contract period (June 30, 2012). Spot prices on the CBOE go up and down every hour of every day into the future whereas June 30, 2012 forward prices are history written into June 3, 2012 contracts for purposes of computing cash settlements based on those historic prices and current spot prices.

Now my questions to you, Tom, focus on your $900, $1,089 and $1,198  presumably forward prices negotiated on June 30, 2012:
 

1. Have you made any distinction between a vector of three forward prices set on June 30, 2012 and a single spot price on June 30, 2012?
   
    
2. Have you made any distinction between a vector of three forward prices set on June 30, 2012 and ultimate June 30 spot prices in 2013, 2014, and 2015?
   
    
3. Are your forward contract spot prices and forward prices synonymous in your forward contracts that have no future uncertain cash flow?
   If this is the case then you truly are not dealing in forward contracts since there is no vector of forward prices that can differ from eventual spot prices.
    

Please explain the difference between spot and forward prices in your conception of a forward contract that has no future cash flow uncertainty.

You still have not explained to me why a plain vanilla annuity of $900, $1,089 and $1,198 is different from a rent annuity of the same cash flow stream.

What makes a rent annuity a series of forward contracts vis-a-vis annual cash flows of a plain vanilla annuity that supposedly are not forward contracts?
 

Your definition is not at all clear to me and certainly is not teachable to my theory students (if I have any left on the AECM).

Respectfully,
Bob Jensen

Francine wishing that the courts would drive Deloitte out of business
"Big Four Auditors and Jury Trials: Not In The U.S.," by Francine McKenna, re:TheAuditors, June 19, 2012 ---
http://retheauditors.com/2012/06/19/big-four-auditors-and-jury-trials-not-in-the-u-s/

Deloitte has settled a shareholder case against the firm stemming from their role as auditor of Bear Stearns, one of the early financial services firms to fail, be force sold or nationalized during the financial crisis of 2008-2009. Deloitte was dangerously close to having to answer for its actions – or rather inactions – at a trial. For the Big 4 audit firms in the United States, trials over auditor liability are unheard of.

Rare birds in modern times.

Deloitte’s audits “were so deficient that the audit amounted to no audit at all,” the [Bear Stearns investors] plaintiffs argued in court papers.

That was Reuters describing the rationale behind the decision of US District Judge Robert Sweet back on January 23, 2011 to allow a case against executives of Bear Stearns and its outside auditor, Deloitte, to go forward. I wrote in Forbes:

In Ernst & Ernst v. Hochfelder, the Supreme Court held that actions under Section 10(b) of the Exchange Act and Rule 10b-5 require an allegation of “`scienter’—intent to deceive, manipulate, or defraud.” The “scienter” requirement, necessary to sustain allegations against the auditors in a securities claim under Section 10(b), is notoriously difficult to meet in an auditor liability case.

If there’s anything of substance in a claim against auditors the case usually settles before the facts are made public. New Century Trustee v. KPMG is an early crisis mortgage originator case, cited several times in the Bear Stearns decision. However, those facts will never be heard in open court. In spite of – or perhaps because of – very particular examples of reckless behavior by the auditor documented by the bankruptcy examiner, the case was settled...since Ernst, most courts have concluded that recklessness can satisfy the requirement of “scienter” in a securities fraud action against an accountant.

That standard requires more than a misapplication of accounting principles. Plaintiffs must prove that the accounting practices were so deficient that the audit amounted to no audit at all, or “an egregious refusal to see the obvious, or to investigate the doubtful,” or that the accounting judgments which were made were such that no reasonable accountant would have made the same decisions if confronted with the same facts.

The plaintiffs’ attorneys In Re: Bear Stearns Companies, Inc. Securities Litigation successfully pled recklessness equivalent to “scienter” and more. They knocked the requirements for recklessness to prove “scienter” out of the park. The Complaint identified as a red flag the fact that Deloitte knew or should have known, absent recklessness, the risk factors inherent in the industry, such as declining housing prices, relaxation of credit standards, excessive concentration of lending, and increasing default rates.

The Securities Complaint has alleged that JPMorgan discovered in the course of one weekend the overvaluation of assets and underestimation of risk exposure in Bear Stearns’ financial statements. JC Flowers & Co., a leverage-buyout company, had also reviewed Bear Stearns’ books the same weekend and made an unsuccessful proposal to buy 90% of the Company at a similar price between $2 and $2.60 per share. These allegations support an inference of Deloitte’s scienter.

 

They’re specific enough about who, what, why, and when to nail “particularity”. The misstatements with respect to valuation and risk were adequately alleged with sufficient specificity and established as material. They showed how Deloitte, like the Bear Stearns executives, caused losses.

But there will be no trial. Investors led by the State of Michigan Retirement Systems settled with Bear Stearns executives for $275 million – which will be covered by insurance –  and auditor Deloitte will pay, in cash, an additional $19.9 million.

To put Deloitte’s settlement in perspective, I looked at the firm’s audit fees for Bear Stearns from 2003-2006. (Fee information for 2007 is not available since the firm was bought, under duress, by JP Morgan in 2008 and the proxy focuses on that transaction, not the typical disclosures.) Deloitte earned $110 million dollars, more than 5X this settlement amount, in just the last four years at Bear.

. . .

Next chance for a trial for a Big Four firm in the US is again against Deloitte. Steven Thomas, the only lawyer who consistently tries and wins cases against the biggest auditors has a trial for the Taylor Bean & Whitaker mortgage originator fraud case starting in June 2013.

Continued in article

Jensen Question
Should we hope with Francine that this time Steven Tomas finally succeeds in destroying the fraudulent auditing firm of Deloitte and Touche?

Maybe another Enron is the only way of making the remaining Big Three firms get more serious about audit independence and professionalism.

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

"ReadWriteWeb DeathWatch: Hewlett Packard," by Fredric Paul, ReadWriteWeb, June 8, 2012 ---
http://www.readwriteweb.com/archives/readwriteweb-deathwatch-hewlett-packard.php

For the second installment of ReadWriteWeb’s new DeathWatch series, we cast a beady eye on Hewlett Packard. Let’s be clear: Unlike our first DeathWatch victim, HP is not about to go out of business anytime soon. But momentous market changes - not to mention an epic series of fumbles, miscalculations and missed opportunities - presents the iconic company with serious long-term challenges that could eventually put an end to HP as we know it.

Jim Martin's threads on Lean Enterprise accounting ---
http://maaw.info/LeanConceptsandTermsSummary.htm

June 19, 2012 message from Cheryl Dunn

REA Accounting Systems

Resources-Events-Agents: An ontology for designing, controlling, and using integrated enterprise systems

by Cheryl Dunn

Associate Professor

Grand Valley State University

Publisher:  McGraw-Hill Create, ISBN-13: 978-1-121-55585-3

ISBN-10: 1-121-55585-3

 

 

Earlier versions of this textbook were published by McGraw-Hill as Accounting, Information Technology, and Decision Making by Denna, Hollander, and Cherrington (2 editions)

and Enterprise Information Systems: A Pattern-Based Approach by Dunn, Cherrington, & Hollander.  McGraw-Hill also expects to publish future editions of this textbook.  In order to make this edition available as soon as possible, we decided to bypass the hardcover publication process and make it immediately available via Create.  To order this textbook you may contact your McGraw-Hill representative or visit www.create.mcgraw-hil.com. 

 

Table of Contents is as follows:

 

CONTENTS

 

Chapter 1

            Why REA? Accounting and Enterprise Systems as Economic Storytelling

                        Economic Storytelling: The Purpose of Enterprise Systems

Integration of Enterprise Systems

Re-inventing Enterprise Systems with REA

                       

Chapter 2

            Representation and Patterns: An Introduction to the REA Enterprise Ontology

                        Representation and Modeling

                        Patterns

                              Object Patterns

                              Script Patterns

                        The REA Enterprise Ontology

                              Value System

                              Value Chain

                              Business Processes

                              Tasks

An Example Enterprise

                              Value System Level Modeling

                              Value Chain Level Modeling

                        Concluding Comments

 

Chapter 3

            Task Level Modeling

                        System Flowcharting

                        File Types, Media, and Processing Methods

                        Acquisition Cycle: Workflow and Documents

                        Revenue Cycle: Workflow and Documents

                        Concluding Comments

 

Chapter 4

            Enterprise System Risks and Controls

                        The Relationships between Risks, Opportunities, and Controls

                        Regulations and Authoritative Guidance for Internal Control Systems

                        Using REA as a Framework for Risk Identification

                        Identification of Mitigating Controls

                        Concluding Comments

                       

Chapter 5

            Conceptual and Logical Relational Database Models

                        Conceptual Modeling with UML Class Diagrams

                                    Alternative Conceptual Modeling Notations

                        Converting Conceptual Models into Relational Logical Models    

                                    Association Attribute Placement

                        Summary

 

 

Chapter 6

            REA Core Business Process Modeling

                        REA Core Business Process Level Modeling Constructs

Core REA Classes

Core REA Associations

REA Attributes

REA Multiplicities: Some Heuristics

                        Step By Step – How to Create a Core REA Business Process Model

Core REA Modeling of the Acquisition Cycle

Acquisition Cycle Core Pattern - Example Enterprise

                        Core REA Modeling of the Revenue Cycle

                        Concluding Comments

 

Chapter 7

            Expanded REA Business Process Modeling and View Integration

                        Expansions to the REA Core Business Process Model

                        Expanded REA Acquisition Cycle Model

                        Expanded REA Revenue Cycle Model

                        View Integration

                        Concluding Comments

 

Chapter 8

            Database Design Implementation with Microsoft Access

                        Physical Implementation of Relational Model in Microsoft Access

                        Concluding Comments

 

Chapter 9

            Introduction to Querying

                        Querying Relational Databases

                                    Relational Algebra

                                    Structured Query Language

                                    Query by Example in Microsoft Access

                                                Parameter Queries

 

Chapter 10

            Acquisition and Revenue Cycle Information Retrieval

                        Information Needs and Measures in the Acquisition and Revenue Cycles                                    

Simple Class Queries

Simple Association Queries

            Accounts Receivable

            Accounts Payable

            Weighted Average Unit Cost

            Days to Fill Orders

                        Concluding Comments

 

 

Chapter 11

            Advanced Acquisition and Revenue Cycle Information Retrieval

                        Single Cycle-Multiple Association Queries

                                    Partially Filled Orders

                                    Accounts Payable by Supplier

                        Multiple Cycle-Multiple Association Queries

                                    Cash Balance

                                    Inventory Quantities on Hand

                                    Inventory Cost Balance

                                    Cost of Goods Sold

                        Concluding Comments

 

Chapter 12

            Advanced REA Modeling Concepts

Abstraction Mechanisms

Operational and Policy Infrastructures

Implementation Compromise

Concluding Comments

 

Chapter 13

            The Conversion Business Process

                        Conversion Process in an Enterprise Value System and Value Chain

                        Conversion Business Process Level Models

                                    Core Pattern

                                    Extended Pattern

                        Information Needs and Measures in the Conversion Process

                        Concluding Comments

 

Chapter 14

            The Human Resource Business Process

                        Human Resource Process in an Enterprise Value System

                        Human Resource Process in Enterprise Value Chains

                        Human Resource Business Process Level Models

                        Information Needs and Measures in the Human Resource Process

                        Concluding Comments

 

Chapter 15

            The Financing Business Process

                        Financing Process in an Enterprise Value System

                        Financing Process in Enterprise Value Chains

                        Financing Business Process Level Models

                        Information Needs and Measures in the Financing Process

                        Concluding Comments

 

Chapter 16

            Current Accounting and Enterprise Systems

                        Organizing Principles of Current Accounting and Enterprise Systems

                        Goals and Methods of ERP Software and the REA Enterprise Ontology

                        Intra-Enterprise Integration

                        Electronic Commerce, Inter-Enterprise System Design and REA

                        Concluding Comments

 

 

+++ AECM Home Page (View archives, unsubscribe, etc.): http://www.aecm.org +++

Question
What could possibly be wrong with mark-to-market accounting for financial instruments and derivative financial instruments?

Hint
It's called "asymmetric accounting" and the topic has been debated over an over again on the AECM (largely by Tom Selling versus Bob Jensen). This is also a topic that I recently recommended that Marc introduce to his "logic" analysis of fair value accounting for financial securities.

"GAAP IS CRAP: THE CASE OF JP MORGAN," by Anthony H. Catanach and J. Edward Ketz, Grumpy Old Accountants Blog, May 31, 2012 ---
http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/694

Abraham Briloff complained that sometimes the accounting standard setters do a pathetic job by creating rules that enhance the ability of managers to manage earnings.  At those times, he indicated that GAAP becomes cleverly rigged accounting ploys.  The CRAP acronym is tart, but precise.

David Reilly has written an excellent example of this proposition in his Wall Street Journal article, “Heard on the Street: J.P. Morgan, Hedges and ‘Asymmetric Accounting.’”  The issue pivots on the use of portfolio hedging and the “asymmetric accounting” that arises when the portfolio hedge is accounted for by mark-to-mark accounting, and at least some of the hedged items are treated as available for sale securities.  This situation creates a mismatch in the accounting for these items, thereby potentially subjecting an entity to large gains or losses in the derivative, while gains or losses of the hedged items bypass the income statement, and going directly into stockholders’ equity.

David Henry also has a nice essay about this chain of events, entitled “JPMorgan Chase Sells $25 Billion in Securities To Offset ‘London Whale’ Losses.”  He quotes former SEC Chief Accountant Lynn Turner who said JP Morgan made two stupid mistakes. They did not comprehend the risks they took with these complex derivatives and they covered half the losses with gains from high income assets that they no longer enjoy.

Jamie Dimon addressed these issues in a corporate conference call on May 10, 2012.  From an edited transcript of this conference call by Thomson Reuters StreetEvents, we read these comments by Mr. Dimon:

Continued in article

Jensen Comment
Below is a reply that I wrote years ago on the AECM ---
http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm

If a student asks why FAS 133 had to become so complicated tell them that it's because of the difference between economists and accountants. Economists allow hedging even when hedged items have not been booked by accountants. This causes all sorts of misleading accounting outcomes if hedge accounting relief is not provided for derivative contracts that are hedges rather than speculations.


Students may still ask why FAS 133 became the most complicated accounting standard in the history of the world.


Before FAS 133, companies were getting away with enormous off-balance-sheet-financing (OBSF) with newer types of derivative financial instruments. FAS 80 covered booking of options and futures contracts, but forward contracts and swaps were not booked when they were either speculations or hedges. After interest rate swaps were invented by Wall Street n the 1980s, for example, swap contracting took off like a rocket in worldwide finance. Trillions of dollars in swap debt were being transacted that were not even booked until FAS 133 went into effect in the 1990s.


Originally the FASB envisioned a relatively simple FAS 133. Most derivative financial instruments contracts (forwards, swaps, futures, and options) would be initially booked at fair value (with is zero in most instances except for options) and then reset to changed fair value at least every 90 days. All changes in value would then be booked as current earnings or current losses. Sounds simple except for some dark problems of trying to value some of these contracts.


But then, in the exposure draft period, companies made the FASB aware of an enormous problem that arose because of a difference between economists and accountants. Economists invented hedging contracts without caring at all whether a hedged items were booked or not booked by accountants. For example, the hedged item might be a forecasted transaction by Corp X to issue $100 million in bond debt at spot rates ten months from now. Economists showed Corp X how to hedge the cash flow risk of this unbooked forecasted transaction with a forward contract or swap contract.


Perfect hedges have zero effect on accounting earnings volatility when both the hedged item and its hedging derivative contract are booked by accountants --- such as when existing booked debt is changed from floating rate debt to fixed rate debt with an interest rate swap derivative contract.


Perfect hedges could have an enormous effect on earnings volatility when the hedged item is not booked and the hedging derivative contract is booked. For example, all changes up and down in the fair value of the booked derivative contracts would not be offset in the books by changes in value of the unbooked hedged items even though from an economics standpoint there is no change in economic earnings when changes in value of the booked derivative contract are perfectly offset by changes in value of the unbooked hedged item.


And most hedging circumstances are such that the hedging contract is booked under FAS 133 and the hedged item is not booked such as forecasted purchases of jet fuel by Southwest Airlines over the next two years.

 

Companies that hedged unbooked assets or liabilities would thereby punished with enormous accounting earnings volatility when they hedged economic earnings. The FASB ultimately agreed that this was misleading and thereby introduced hedge accounting relief in FAS 133 by keeping changes in the booked value of hedging contracts out of booked current earnings. For cash flow hedges and foreign currency hedges this is accomplished by using OCI. OCI is not used for fair value hedging, but hedge accounting relief is provided for fair value hedges in other ways. Look up fair value hedging under "Hedge" at
http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm#H-Terms 


Because there are thousands of  types of hedging contracts, FAS 133 became the most complicated standard ever issued by the FASB. It's the only standard that became so complicated that an implementation group (called the DIG) was organized by the FASB  to field implementation questions by auditors and their clients. DIG pronouncements, in turn, became so complicated that at times most accountants could not understand these pronouncements. DIG links are surrounded by red boxes at
http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm 



One of the most difficult aspects of FAS 133 is that hedge accounting relief is allowed only to the extent that hedges are effective. Hedges are seldom perfectly effective in terms of value changes at interim points in time even though they may be perfectly effective when hedges mature. Hedge effectiveness tests have become extremely complicated. FAS 133 still has some bright lines whereas the IASB in IFRS 9 is making hedge effectiveness testing principles based in IFRS 9. That's like giving an alcoholic a case of booze every week.


Thus if a student asks why FAS 133 had to become so complicated tell them that it's because of the difference between economists and accountants. Economists allow hedging even when hedged items have not been booked by accountants. This causes all sorts of misleading accounting outcomes if hedge accounting relief is not provided for derivative contracts that are hedges rather than speculations.


Respectfully,
Bob Jensen

 

"Rate swaps have an embedded option to sue the bank," Sober Look, May 28, 2012 ---
http://soberlook.com/2012/05/rate-swaps-have-embedded-option-to-sue.html?utm_source=BP_recent

This happened in the US and is now happening globally. Municipalities, corporations, and even sovereign states who put on "hedges" against rising interest rates are suing banks because their hedges lost money. Let's see, you put on a position that will make money if rates rise, what do you think happens if rates fall?

But that's OK because many organizations always have the option to sue the banks to recover these losses.
 

Bloomberg: - Unitech Ltd., an Indian property developer, accused Deutsche Bank AG of selling it an interest- rate swap that wasn’t suitable and wasn’t properly explained, according to a London lawsuit over a $150 million loan deal.

That's right, the hedge wasn't explained well. It's way too complicated. If interest rates rise, Unitech's property development funding costs go up and the swap makes them money to offset those incremental costs. If rates go down and funding costs decrease, the swap loses money and Unitech loses the savings from lower funding costs.

Or maybe they don't have to give up those savings after all - because they can just play dumb and default on the swap payments.
 

Unitech filed a counterclaim in May arguing Deutsche Bank was negligent to sell an unsuitable hedging agreement, and owed damages that canceled out its debt, according to court documents. Germany’s biggest bank had earlier sued Unitech saying a unit of the company owes $11 million under the swap contract and has missed payments.

Deutsche Bank “knew, or must have appreciated, that it was likely to make significant amounts of money” from the contract at Unitech’s expense, the Indian company said in its lawsuit. 

Of course Deutsche Bank knew that rates will go down. They always know which way rates are going.
 

Interest-rate swaps that turned out to be costly for customers and profitable for banks have led to hundreds of lawsuits and an investigation by the U.K. Financial Services Authority into how they were sold. Unitech’s suit is one of the largest to reach the U.K. courts. The issue has affected bank customers from British seaside cafes to municipal governments including Milan in Italy and Jefferson County, Alabama.

Banks make a spread on swaps they transact with clients. In general they offset the rate risk with futures, bonds, or swaps in the other direction (usually some combination of these). A typical swaps desk is indifferent to the detection of rates. That means if the client loses money, doesn't mean the bank makes that same amount of money, because the bank is rate neutral. Unless of course the client refuses to pay.

This option to sue really comes in handy. Here is some investment advice: if you have a stock portfolio, hedge it with some S&P500 futures. If these futures make you money when your portfolio tanks, you've limited your losses. But if the futures lose money when the portfolio rallies, just sue the Chicago Mercantile Exchange. Wait, that might be a bit tough to do. Instead of futures, just enter into an equity index swap with some bank, and then sue it in some "friendly" jurisdiction. Just claim it wasn't well explained to you.

Continued in article

Jensen Comment
The IASB in IFRS 9 is telling companies to bury their heads in the sand and no longer look for embedded derivatives. This is one of the worst decisions made by the IASB with respect to accounting for financial risk exposures, especially when the embedded derivatives have different risks than their host contracts.

The FASB still requires detection of embedded derivatives and bifurcation accounting when the embedded derivative risks are significantly different from host contract underlying risks. But this will probably go by the boards when the U.S. caves in to IFRS standards.

Bob Jensen's free tutorials on accounting for derivative financial instruments and hedging activities ---
http://www.trinity.edu/rjensen/caseans/000index.htm

Teaching Case on Revenue Recognition
From The Wall Street Journal Accounting Weekly Review on June 15, 2012

Dreamliner Hits a Milestone
by: Jon Ostrower
Jun 08, 2012
Click here to view the full article on WSJ.com
 

TOPICS: Financial Reporting, Long-Term Contracts, Managerial Accounting, Revenue Recognition

SUMMARY: "Boeing reported that first-quarter profit at its Commercial Airplanes division more than doubled to $1.08 billion from a year earlier. But the company acknowledges that accounting for the costs of each individual plane would have resulted in a first-quarter loss of $138 million... The losses don't show up on Boeing's bottom line, because accounting rules let the company spread the Dreamliner's costs over years-effectively booking earnings now from future Dreamliners that it expects to produce more profitably. With previous models, Boeing initially spread its costs over 400 planes, but with the Dreamliner it is distributing the costs over 1,100 planes-a number it says reflects unprecedented demand. Boeing already has 854 Dreamliner orders from 57 customers." The losses to date "...are 'larger than anything in the company's history,' said...an aerospace analyst for Barclay's Capital who believes demand for the jet will eventually make up for the losses..." though other analysts believe the company's estimates which lead to the profits currently being recorded may be too optimistic.

CLASSROOM APPLICATION: The article is useful to introduce revenue recognition for long term contracts in a financial accounting class and to discuss the effects of learning curves on costs in a managerial accounting course.

QUESTIONS: 
1. (Introductory) Based on the overall description in the article, what method of revenue recognition do you think Boeing is using for the income statement amounts generated by sales of aircraft? Support your answer.

2. (Advanced) Access the Boeing SEC filing on Form 10-Q of its most recent quarterly financial statements available at http://www.sec.gov/cgi-bin/viewer?action=view&cik=12927&accession_number=0001193125-12-181463&xbrl_type=v# Click on the link to Accounting Policies. Can you confirm your answer to question 1 above? Explain.

3. (Introductory) According to the article, what do analysts estimate as the profitability of the Dreamliners currently being sold? How do you think the analysts make these estimates? Cite the points in the article you use to make this assessment.

4. (Advanced) How do analysts judge the amount of investment in early Dreamliner production that Boeing is making, across time or across companies? Explain your answer with reference to the article.

5. (Advanced) What is a learning curve? How do estimated learning rates affect costs and profits at Boeing?
 

Reviewed By: Judy Beckman, University of Rhode Island

 

"Dreamliner Hits a Milestone," by: Jon Ostrower, The Wall Street Journal, June 8, 2012 ---
http://professional.wsj.com/article/SB10001424052702303296604577452812969126758.html?mod=djem_jiewr_AC_domainid&mg=reno64-wsj

Boeing Co. BA +1.10% rolled out the first 787 Dreamliner from its main factory that won't need major additional work before delivery, a long-delayed milestone that reflects streamlined manufacturing of the company's flagship passenger jet but also points up the program's enormous costs.

This week's achievement comes as the aerospace giant races to both increase output and cut costs on the Dreamliner program, which Boeing hopes will sustain the company in future decades. Analysts, however, estimate Boeing is now effectively losing more than $100 million for each plane sold. The Dreamliner's accumulated production losses—which analysts say are far larger than any previous Boeing plane—put increasing pressure on Boeing's other commercial jetliners to churn out hefty profits.

Assembling the 787—the first jetliner made from mostly carbon-fiber composites—involves tens of thousands of steps, from installing galleys and complex electrical systems to fusing the wings to the body. Boeing, which started making 787s in 2007, had been sending them out of its main factory in Everett, Wash., with many of those steps—sometimes thousands—unfinished, due to parts shortages and design changes on the advanced new jet. Those planes went to a separate facility in Boeing's giant campus to be completed.

The plane that rolled out this week—Boeing's 66th Dreamliner—skipped that costly step. Workers had only around 300 mostly small assembly tasks left to complete, about 100 more than the company's goal, but far fewer than the roughly 6,000 on the earliest Dreamliners, said a person familiar with the plane.

Boeing, in a statement, confirmed the plane "will be the first airplane to go straight into preflight operations" from the Everett plant. The minor tasks left for plane No. 66 can be handled outside of the factory before being prepared for delivery.

Boeing also makes Dreamliners in North Charleston, S.C., where the first 787 recently rolled out with just under 100 tasks remaining. But that aircraft spent nearly eight months in production, compared to the average of five weeks at the main plant in Everett, which pushes a 787 out of its football-field sized doors every six-to-eight days.

Analysts aren't sure exactly how much Boeing will save by producing finished planes, but they agree it is an important step to reduce costs.

Quickly cutting production costs is essential for Boeing, which spent an estimated $14 billion developing the Dreamliner, according to Barclays Capital, and has already suffered costly delays. UBS analysts estimated last month that Boeing spends about $242 million to build each plane, and sells them for an average of $113 million. They and other analysts estimate that Boeing's losses will sink to at least $20 billion by the time costs fall enough that each Dreamliner sells for a profit, likely in 2014 or later. Boeing doesn't say exactly what year it expects to hit that milestone.

The aggregate losses are "larger than anything in the company's history," said Carter Copeland, an aerospace analyst for Barclays Capital, who believes demand for the jet will eventually make up for the losses. The comparable hole for Boeing's last new twin-aisle jet, the 777, first delivered in 1995, was about $3.7 billion, adjusted for inflation, according to data provided by Boeing.

The losses don't show up on Boeing's bottom line, because accounting rules let the company spread the Dreamliner's costs over years—effectively booking earnings now from future Dreamliners that it expects to produce more profitably. With previous models, Boeing initially spread its costs over 400 planes, but with the Dreamliner it is distributing the costs over 1,100 planes—a number it says reflects unprecedented demand. Boeing already has 854 Dreamliner orders from 57 customers.

Boeing reported that first-quarter profit at its Commercial Airplanes division more than doubled to $1.08 billion from a year earlier. But the company acknowledges that accounting for the costs of each individual plane would have resulted in a first-quarter loss of $138 million—a drop UBS analyst David Strauss says is almost entirely attributable to the Dreamliner.

The Dreamliner's drain on cash is balanced by strong sales of the profitable single-aisle 737 and long-range 777 models. And analysts estimate Boeing is reducing the losses per Dreamliner by about $10 million each quarter. But maintaining the pace of cost reduction gets harder as the simplest problems are solved. Meanwhile, Boeing aims to increase production of Dreamliners to 10 per month at the end of 2013, up from 3.5 per month today—meaning the losses per plane will be magnified, but will also be tempered by the decreasing cost of each jet.

Some analysts believe Boeing's target for cost reduction on the Dreamliner could be too optimistic. Mr. Strauss of UBS says the company appears to be assuming it can reduce its cost 50% faster than it did with the 777. If instead the pace of cost reduction matches the 777, says one of UBS's models, the estimated $20 billion hole could double.

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

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

"Do Biologists Avoid Math-Heavy Papers?" Inside Higher Ed, June 27, 2012 ---
http://www.insidehighered.com/quicktakes/2012/06/27/do-biologists-avoid-math-heavy-papers

New research by professors at the University of Bristol suggests that biologists may be avoiding scientific papers that have extensive mathematical detail, Times Higher Education  reported. The Bristol researchers studied the number of citations to 600 evolutionary biology papers published in 1998. They found that the most "maths-heavy" papers were cited by others half as much as other papers. Each additional math equation appears to reduce the odds of a paper being cited. Tim Fawcett, a co-author of the paper, told Times Higher Education, "I think this is potentially something that could be a problem for all areas of science where there is a tight link between the theoretical mathematical models and experiment."

"Maths-heavy papers put biologists off," by Elizabeth Gibney, Times Higher Education, June 26, 2012 ---
http://www.timeshighereducation.co.uk/story.asp?sectioncode=26&storycode=420388&c=1

The study, published in the Proceedings of the National Academy of Sciences USA, suggests that scientists pay less attention to theories that are dense with mathematical detail.

Researchers in Bristol’s School of Biological Sciences compared citation data with the number of equations per page in more than 600 evolutionary biology papers in 1998.

They found that most maths-heavy articles were referenced 50 per cent less often than those with little or no maths. Each additional equation per page reduced a paper’s citation success by 28 per cent.

The size of the effect was striking, Tim Fawcett, research fellow and the paper’s co-author, told Times Higher Education.

“I think this is potentially something that could be a problem for all areas of science where there is a tight link between the theoretical mathematical models and experiment,” he said.

The research stemmed from a suspicion that papers full of equations and technical detail could be putting off researchers who do not necessarily have much mathematical training, said Dr Fawcett.

“Even Steven Hawking worried that each equation he added to A Brief History of Time would reduce sales. So this idea has been out there for a while, but no one’s really looked at it until we did this study,” he added.

Andrew Higginson, Dr Fawcett’s co-author and a research associate in the School of Biological Sciences, said that scientists need to think more carefully about how they present the mathematical details of their work.

“The ideal solution is not to hide the maths away, but to add more explanatory text to take the reader carefully through the assumptions and implications of the theory,” he said.

But the authors say they fear that this approach will be resisted by some journals that favour concise papers and where space is in short supply.

An alternative solution is to put much of the mathematical details in an appendix, which tends to be published online.

“Our analysis seems to show that for equations put in an appendix there isn’t such an effect,” said Dr Fawcett.

“But there’s a big risk that in doing that you are potentially hiding the maths away, so it's important to state clearly the assumptions and implications in the main text for everyone to see.”

Although the issue is likely to extend beyond evolutionary biology, it may not be such a problem in other branches of science where students and researchers tend to be trained in maths to a greater degree, he added.

Continued in article

Jensen Comment
The causes of this asserted avoidance are no doubt very complicated and vary in among individual instances. Some biologists might avoid biology quant papers because they themselves are not sufficiently quant to comprehend the mathematics. It would seem, however, that even quant biology papers have some non-mathematics summaries that might be of interest to the non-quant biologists.

I would be inclined to believer that biologists avoid quant papers for other reasons, especially some reasons that accounting teachers and practitioners most often avoid accountics research studies (that are quant by definition). I think the main reason for this avoidance is that biology and academic quants typically do their research in Plato's Cave with "convenient" assumptions that are too removed from the real and much more complicated world. For example, the real world is seldom in a state of equilibrium or a "steady state" needed to greatly simplify the mathematical derivations.

Bob Jensen's threads and illustrations of simplifying assumptions are at
Mathematical Analytics in Plato's Cave ---
http://www.trinity.edu/rjensen/TheoryTAR.htm#Analytics

Eugene Fama --- http://en.wikipedia.org/wiki/Eugene_Fama 

Efficient Market Hypothesis (EMH) --- http://en.wikipedia.org/wiki/Efficient_Market_Hypothesis

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

Eugene Fama's Still Begging for a Nobel Prize
"The Father of Efficient Markets: Is Warren Buffett Smart or Lucky?" By Dan Richards, Advisor Perspectives, June 5, 2012 ---
http://advisorperspectives.com/newsletters12/pdfs/The_Father_of_Efficient_Markets.pdf

Jensen Comment
One of the more distressing parts of this interview is the discussion of the holy grail of accountics research --- the CAPM that accountics scientists continue to plug into their models without challenge.

Stocks are still the best investment for the long run. But maybe not for your long run.
Justin Fox, "Are Stocks Still Good for the Long Run?" Time Magazine, June 15, 2009 --- http://www.time.com/time/magazine/article/0,9171,1902843-2,00.html
Also see Jim Mahar's June 10, 2009 summary at http://financeprofessorblog.blogspot.com/
In particular this references a study by Arnott that asserts that over the past 40 years the stock market underperformed the bond market. In my opinion, if you into bonds for the next 40 years they'd better be inflation-indexed bonds such as Treasury TIPs.

"AOL and the Case Against Efficient Market Theory," by Roben Farzad, Business Week, April 11, 2012 ---
http://www.businessweek.com/articles/2012-04-11/aol-and-the-case-against-efficient-market-theory 

The Strange Thinking of Our U.S. Supreme Court Justices:  Who says Justice Thomas cannot agree with Justices Kennedy, Ginsburg, Sotomayor, and Kagan?
"Taxation and Orwell's Animal Farm." The Faculty Lounge, June 5, 2012 ---
http://www.thefacultylounge.org/2012/06/taxation-and-orwells-animal-farm.html

Ernst & Young's annual outside audit of the HHS balance sheet last November was considered a triumph because several material weaknesses were downgraded merely to significant deficiencies. But on a "day-to-day or even monthly basis" HHS cannot accurately track its spending, according to the audit. The agency is in violation of numerous federal accounting rules written specifically for the bureaucracy, to say nothing of the financial reporting required of public companies.
"Fannie Med:  Health and Human Services gets into the venture capital game," The Wall Street Journal, June 4, 2012 ---
http://online.wsj.com/article/SB10001424052702303360504577408150150837834.html#mod=djemEditorialPage_t

Perhaps you thought that the Affordable Care Act is all about making insurance more affordable. Too bad no one told Americans that the law also turned the Health and Human Services Department into a giant venture capital investor for health care. This won't turn out well.

Awash in ObamaCare dollars, HHS has a growing investment portfolio that includes everything from new insurance companies to health-care start-ups to information technology. Secretary Kathleen Sebelius is rushing out loans and subsidies like nobody's business in case the Supreme Court overturns the law or Mitt Romney wins.

"We're moving forward with implementing this law, including moving forward with this very important commitment by the President, by the Administration, to community health centers and the people they serve," said senior White House aide Cecelia Munoz on a recent conference call with reporters. She was referring to $728 million in seed money for new clinics that HHS dispensed last month.

HHS already makes more grants than all other agencies combined, and it is the purchaser of health care for about one of three Americans via Medicare, Medicaid or both. The problem is that HHS spends its money—$788 billion for entitlements in 2012 and another $78 billion to run HHS's 300-odd programs—so badly.

Ernst & Young's annual outside audit of the HHS balance sheet last November was considered a triumph because several material weaknesses were downgraded merely to significant deficiencies. But on a "day-to-day or even monthly basis" HHS cannot accurately track its spending, according to the audit. The agency is in violation of numerous federal accounting rules written specifically for the bureaucracy, to say nothing of the financial reporting required of public companies.

The HHS inspector general revealed this year that his team can barely monitor HHS because its staff is too busy chasing the criminals exploiting HHS's incompetence. Experts disagree about how much is stolen from taxpayers through entitlement fraud—the Government Accountability Office puts it at $48 billion annually—but one sign of the problem is that Medicare allows doctors (or "doctors") to register for billing privileges as "other."

One particular ObamaCare boondoggle that needs fly-specking is the HHS decision to finance nonprofit insurance companies with up to $7.25 billion in ultra-low-cost loans. These co-ops were a consolation prize for liberals after Democratic opposition killed the government-run public option, and the co-ops are supposed to be managed by and for consumers. But it turns out that running an insurance company is hard for amateurs who can't attract private financing.

HHS officially estimates that the default rate on the loans will hit between 35% and 40%, which would be bad enough. But White House budget documents show that HHS expects to lose $3.1 billion of the $3.4 billion appropriated so far—which implies a default rate of 91%. The lack of accountability to shareholders or capital markets may help explain this propensity for failure.

Another problem is the way HHS chose to structure the co-op loans. To protect the insured, states require insurers to maintain reserves in the event they go bankrupt—and debts that are supposed to be repaid are viewed as liabilities. To end run these solvency requirements, HHS is issuing "surplus notes" that subordinate the taxpayer to everyone else for repayment if a co-op fails.

That seems likely, given the challenges of building a provider network and attracting members when expertise in such matters is legally prohibited under HHS rules. Any organization that wrote insurance policies prior to 2009—as it were, the pre-existing insurers of the Bush era—is barred from applying for loans or any significant role in the operations of a co-op. So the co-ops can't benefit from the business experience that might give them a chance to succeed.

Continued in article

Bob Jensen's threads on the sad state of governmental accounting ---
http://www.trinity.edu/rjensen/Theory02.htm#GovernmentalAccounting

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

"THE MOST-CITED LAW REVIEW ARTICLES OF ALL TIME," by Fred R. Shapiro and Michelle Pearse, Michigan Law Review, 2012 ---
http://www.michiganlawreview.org/assets/pdfs/110/8/Shapiro_and_Pearse.pdf
Thank you Paul Caron for the heads up.

This Essay updates two well-known earlier studies (dated 1985 and 1996) by the first coauthor, setting forth lists of the most-cited law review articles. New research tools from the HeinOnline and Web of Science databases now allow lists to be compiled that are more thorough and more accurate than anything previously possible. Tables printed here present the 100 most-cited legal articles of all time, the 100 most-cited articles of the last twenty years, and some additional rankings. Characteristics of the top-ranked publications, authors, and law schools are analyzed as are trends in schools of legal thought. Data from the all-time rankings shed light on contributions to legal scholarship made over a long historical span; the recent-article rankings speak more to the impact of scholarship produced in the current era. The authors discuss alternative tools and metrics for measuring the impact of legal scholarship, running selected articles from the rankings through these tools to serve as points of illustration.

The authors then contemplate how these alternative tools and metrics intersect with traditional citation studies and how they might impact legal scholarship in the future.

Table of Contents

I. Previous Studies and Rationale (Shapiro) .............        ..   .. . .. 1484

II. Current Methodology (Shapiro) ...........................     ......     ... 1486

III. Analysis (Shapiro) .............................................     ........     .. 1503

A. The Effect of the Social Sciences on Legal Citation Analysis      1504

B. Top Authors, Top Law Reviews, and Top Schools .....     .     .. 1504

C. Reflections ......................................................... ....     ....      . 1506

IV. Comparing Shapiro’s Lists with Modern Methods (Pearse) ..... 1508

 

Case on Professional Writing in the Work Place
From The Wall Street Journal Accounting Weekly Review on June 22, 2012

This Embarrasses You and I*
by: Sue Shellenbarger
Jun 19, 2012
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com 
 

TOPICS: Accounting

 

SUMMARY: The article highlights the need for correct grammar in the workplace, particularly in corporate interactions with customers and other outsiders. It describes many corporations providing grammar training at the workplace, including holding spelling bees and other grammar-oriented competitions to get employees' competitive juices flowing. The narrative describes many industries including accounting via a paragraph about the chief internal auditor at the New York City Health and Hospitals Corp.

 

CLASSROOM APPLICATION: The article is helpful for all instructors wanting to motivate students in their writing efforts for these WSJ Reviews. Good references to aid accounting instructors in leading this discussion are May, Claire B. and Gordon S. May, Effective Writing: A Handbook for Accountants, 9th Edition. Upper Saddle River, N.J.: Prentice Hall, 2011. ISBN #9780132567244 Strunk, W. Jr., and E.B. White, The Elements of Style, 5th Edition. Boston, MA: Allyn & Bacon, 2009. ISBN 978-0-205-31342-6.

 

QUESTIONS: 
1. (Introductory) Identify all professions or industries highlighted in the article.

 

2. (Advanced) How have firms in each of the industries listed above been affected by diminished use of proper grammar?

 

3. (Introductory) According to the author's discussion in the related video, what is the overall major concern with slippage in business use of appropriate English grammar?

 

4. (Advanced) Take the online quiz offered in the interactive graphic for the article available at http://online.wsj.com/article/SB10001424052702303410404577466662919275448.html?KEYWORDS=grammar+workplace#project%3DWORKFAM0619%26articleTabs%3Dinteractive How many questions did you answer correctly? List all questions you answered incorrectly for which you do not know the reason behind your error.
 

 

SMALL GROUP ASSIGNMENT: 
Assign the WSJ article in one class. Then, in the ensuing class, break students into groups to discuss the errors listed in answer to question 4. Have students help one another to determine the reasons for the errors, then report out: 1. The most common grammatical errors in the group. 2. The reasons for the errors. Conduct discussion to ensure that all students have correct reasons for solutions to the common errors.

Reviewed By: Judy Beckman, University of Rhode Island

 

"This Embarrasses You and I*,"  by Sue Shellenbarger, The Wall Street Journal, June 9, 2012 ---
http://professional.wsj.com/article/SB10001424052702303410404577466662919275448.html?mod=djem_jiewr_AC_domainid&mg=reno64-wsj

When Caren Berg told colleagues at a recent staff meeting, "There's new people you should meet," her boss Don Silver broke in, says Ms. Berg, a senior vice president at a Fort Lauderdale, Fla., marketing and crisis-communications company.

 

"I cringe every time I hear" people misuse "is" for "are," Mr. Silver says. The company's chief operations officer, Mr. Silver also hammers interns to stop peppering sentences with "like." For years, he imposed a 25-cent fine on new hires for each offense. "I am losing the battle," he says.

 

Managers are fighting an epidemic of grammar gaffes in the workplace. Many of them attribute slipping skills to the informality of email, texting and Twitter where slang and shortcuts are common. Such looseness with language can create bad impressions with clients, ruin marketing materials and cause communications errors, many managers say.

 

There's no easy fix. Some bosses and co-workers step in to correct mistakes, while others consult business-grammar guides for help. In a survey conducted earlier this year, about 45% of 430 employers said they were increasing employee-training programs to improve employees' grammar and other skills, according to the Society for Human Resource Management and AARP.

 

"I'm shocked at the rampant illiteracy" on Twitter, says Bryan A. Garner, author of "Garner's Modern American Usage" and president of LawProse, a Dallas training and consulting firm. He has compiled a list of 30 examples of "uneducated English," such as saying "I could care less," instead of "I couldn't care less," or, "He expected Helen and I to help him," instead of "Helen and me."

 

Leslie Ferrier says she was aghast at letters employees were sending to customers at a Jersey City, N.J., hair- and skin-product marketer when she joined the firm in 2009. The letters included grammar and style mistakes and were written "as if they were speaking to a friend," says Ms. Ferrier, a human-resources executive. She had employees use templates to eliminate mistakes and started training programs in business writing.

 

At Work

Readers weigh in on the grammar gaffes and malapropisms that make them fume. Share yours.

 

Most participants in the Society for Human Resource Management-AARP survey blame younger workers for the skills gap. Tamara Erickson, an author and consultant on generational issues, says the problem isn't a lack of skill among 20- and 30-somethings. Accustomed to texting and social networking, "they've developed a new norm," Ms. Erickson says.

 

At RescueTime, for example, grammar rules have never come up. At the Seattle-based maker of personal-productivity software, most employees are in their 30s. Sincerity and clarity expressed in "140 characters and sound bytes" are seen as hallmarks of good communication—not "the king's grammar," says Jason Grimes, 38, vice president of product marketing. "Those who can be sincere, and still text and Twitter and communicate on Facebook—those are the ones who are going to succeed."

 

Also, some grammar rules aren't clear, leaving plenty of room for disagreement. Tom Kamenick battled fellow attorneys at a Milwaukee, Wis., public-interest law firm over use of "the Oxford comma"—an additional comma placed before the "and" or "or" in a series of nouns. Leaving it out can change the meaning of a sentence, Mr. Kamenick says: The sentence, "The greatest influences in my life are my sisters, Oprah Winfrey and Madonna," means something different from the sentence, "The greatest influences in my life are my sisters, Oprah Winfrey, and Madonna," he says. (The first sentence implies the writer has two celebrity sisters; the second says the sisters and the stars are different individuals.) After Mr. Kamenick asserted in digital edits of briefs and papers that "I was willing to go to war on that one," he says, colleagues backed down, either because they were convinced, or "for the sake of their own sanity and workplace decorum."

 

Patricia T. O'Conner, author of a humorous guidebook for people who struggle with grammar, fields workplace disputes on a blog she cowrites, Grammarphobia. "These disagreements can get pretty contentious," Ms. O'Conner says. One employee complained that his boss ordered him to make a memo read, "for John and I," rather than the correct usage, "for John and me," Ms. O'Conner says.

 

In workplace-training programs run by Jack Appleman, a Monroe, N.Y., corporate writing instructor, "people are banging the table," yelling or high-fiving each other during grammar contests he stages, he says. "People get passionate about grammar," says Mr. Appleman, author of a book on business writing.

Continued in article

Bob Jensen's helpers for writers are at
http://www.trinity.edu/rjensen/Bookbob3.htm#Dictionaries

 

Professor Jensen,
 

As a lurker on AECM, I wanted to share with you an Accounting Review article from 1951 lamenting the writing skills of junior accountants along with Northwestern's innovative approach to addressing it.

 

Apparently we, as a profession, have struggled with this issue for generations.


 

Respectfully,

 

Phil Drake
 

Clinical Professor of Accounting
 

Arizona State University

 

Each Week ReadWriteWeb will feature a dying product or entire company --- This week it's RIM and the Blackberry
"ReadWriteWeb DeathWatch: Research In Motion," by Cormac Foster, ReadWriteWeb, June 1, 2012 ---
http://www.readwriteweb.com/mobile/2012/06/readwriteweb-deathwatch-research-in-motion.php

"The New GMAT: Thanks, But No Thanks," Business Week, May 31, 2012 ---
http://www.businessweek.com/articles/2012-05-31/the-new-gmat-thanks-but-no-thanks

The future can be scary, especially if you’re headed to B-school. And if you haven’t taken the GMAT yet, the future can be downright terrifying. On June 2 the old GMAT will be consigned to the dustbin of history and replaced on June 5 (after a two-day blackout period) with a new version of the B-school entrance test. The new and improved exam replaces one of the existing writing sections with a new integrated reasoning section that apparently is giving test takers the night sweats.

There’s been a mad rush on the part of students to register for the test before June 5. The Graduate Management Admission Council, which publishes the exam, isn’t saying exactly how mad, but if you charted test registrations it would look a lot like a bell curve. “We expected volumes to go up in April and May, and they have,” wrote GMAC spokesman Bob Ludwig in an e-mail. “Quite significantly.”

What that means for test takers is that, according to test-prep companies, registering for the GMAT just got a lot more difficult, especially if you’ve waited until the last minute. To take the test before the big changeover, some students are driving an hour or two out of their way to less popular testing centers and taking the test mid-week rather than on the weekend.

Andrew Mitchell, director of pre-business programs at Kaplan Test Prep, says a surge in test registrations before substantive changes is not unusual. In a recent survey, 38 percent of Kaplan GMAT students said they were trying to beat the June 2 deadline and take the old test. Many of them hadn’t even seen the new integrated reasoning questions yet—they were worried about the new section, sight unseen.

Test takers have now had several months to eyeball the new section using sample questions supplied by GMAC and test-prep materials. Mitchell says students equate the new integrated reasoning section’s level of difficulty with that of the GMAT’s data sufficiency questions—some of the test’s toughest—which ask test takers to determine if the information supplied is enough to answer the question.

“A business school student is generally going to want to take the easier path if there’s no disadvantage to doing so,” Mitchell says. “Integrated reasoning is all about working with data. Quant data is displayed graphically, and that’s intimidating to a lot of people. It makes sense that people would be apprehensive.”

But it’s not like prospective MBAs were without options. It’s worth noting that the usual prescription for apprehension when it comes to the GMAT—hitting the books—was and is available for anyone contemplating the new test. Kaplan test-prep books that went on sale in January have material related to integrated reasoning, and integrated reasoning sections have been added to five of Kaplan’s nine full-length practice tests.

At Veritas Prep, the number of website visitors using “integrated reasoning” as a search term has doubled every month since January. “We’re definitely seeing a lot of traffic,” says Brian Galvin, director of academic programs at Veritas. “It’s an exponential increase in interest.”

Continued in article

The New GMAT:  Part 1
"The New GMAT: Questions for a Data-Rich World,: by: Alison Damast, Business Week, May 14, 2012 ---
http://www.businessweek.com/articles/2012-05-14/the-new-gmat-questions-for-a-data-rich-world

Editor’s Note: This is the first in a three-part series on the new GMAT, which makes its official debut on June 5. In this article, we examine the conceptual building blocks for the test’s new Integrated Reasoning section.

On a blustery day in February 2009, a group of nine deans and faculty members from U.S. and European business schools huddled together in a conference room in McLean, Va., at the Graduate Management Admission Council’s headquarters. They were there to discuss what would be some of the most radical changes to the Graduate Management Admission Test (GMAT) in the exam’s nearly 60-year history.

Luis Palencia, then an associate dean at Spain’s IESE Business School, was eager to press his case for the skills he thought today’s MBAs needed to have at their fingertips. Business students must be able to nimbly interpret and play with data in graphs, spreadsheets, and charts, using the information to draw swift but informed conclusions, he told his colleagues.

“The GMAT was not becoming obsolete, but it was failing to identify the skills which might be important to warrant the success of our future candidates,” he said in a phone interview from Barcelona three years later.

By the time the faculty advisory group commenced two days later, they had come up with a set of recommendations that would serve as a framework for what would eventually become the new “Integrated Reasoning” section of the Next Generation GMAT, which has been in beta testing for two years and will be administered to applicants for the first time on June 5.

Until now, the B-school entrance exam, which was administered 258,192 times worldwide in 2011, was made up of verbal, quantitative, and two writing sections. The new section, which replaces one of the writing sections, is the biggest change to the GMAT since the shift to computer-adaptive testing 15 years ago, and one that has been in the works since 2006, when GMAC first decided to revisit the exam and the skills it was testing, says Dave Wilson, president and chief executive officer of GMAC.

“At that time, we got a pretty good handle that the GMAT was working, but we wanted to know if there was anything that we weren’t measuring that would provide real value to the schools,” Wilson says.

It turned out there was a whole slew of new skills business school faculty believed could be added to the exam. The recommendations put forth by Palencia and the rest of the committee that convened in 2009 served as the conceptual building blocks for what a new section might look like. Later that year, GMAC surveyed nearly 740 faculty members around the world, from business professors to admissions officers, who agreed with many of the committee’s findings and suggested that students needed certain proficiencies to succeed in today’s technologically advanced, data-driven workplaces.

For example, they gave “high importance” ratings to skills such as synthesizing data, evaluating data from different sources, and organizing and manipulating it to solve multiple, interrelated problems, according to the Next Generation GMAC Skills Survey report.

Those are all examples of skills that can now be found on the 30-minute Integrated Reasoning section, which GMAC has spent $12 million developing over the past few years, Wilson says. It will have 12 questions and include pie charts, graphs, diagrams, and data tables. The section employs four different types of questions that will allow students to flex their analytical muscles.

Continued in article

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

According to Hoyle:  The Number One Piece of Advice to Become a Better Teacher
"On the Other Side of the Desk," by Joe Hoyle, Teaching Blog, June 1, 2012 ---
http://joehoyle-teaching.blogspot.com/2012/05/on-other-side-of-desk.html

Jensen Comment
I'm not certain this can be done independently of circumstances, especially where circumstances dictate different needs and priorities. What works best in a Harvard Business School case course of 90 students is not what will work best in an online corporate tax course of 15 students or a basic accounting lecture hall of 860 young sophomore students.

"Global accounting rules – an unfeasible aim," by Stella Fearnley and Shyam Sunder, Financial Times, June 3, 2012 ---
http://www.ft.com/intl/cms/s/0/d467e660-a977-11e1-9772-00144feabdc0.html#axzz1wk6lvht0

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The introduction of the euro and the adoption of International Financial Reporting Standards (IFRS) in the EU and other countries were promoted by aspirational rhetoric about gains from uniformity. Applying uniform process or rule in diverse societies does not yield uniform outcomes. Effective oversight and control of the process and rule-making can become impossible and unbalanced with so many players involved. Failure to recognise and manage the risks associated with uniformity has driven the European Monetary Union to a critical precipice. Similar risks apply to the efforts of the International Accounting Standards Board (IASB), the accountancy profession and some international regulators to bring about adoption of IFRS for global use.

The IASB and US Financial Accounting Standards Board have committed significant resources since 2002 trying to agree on common accounting standards. Despite their efforts, IFRS have not been approved by the Securities and Exchange Commission for US adoption. The SEC may never risk the political backlash from ceding control of its accounting to a non-US body. We can learn from the euro debacle and assess not only if the vision of one set of global accounting standards is achievable but also if it is desirable.

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Accounting standards interact with law, commercial codes, and social norms in different countries in many ways. The IASB has pushed its agenda ahead taking no responsibility for recurrent unintended consequences. The disaster of some banks depleting their capital by paying bonuses and dividends out of false profits, generated under IFRS’s defective mark-to-market and loan-loss provision standards, is a good example.

Abandonment of judgmental true-and-fair standards in favour of written rules make accounting vulnerable to mis-statements through complexity beyond the grasp of users and directors.

China, Japan, and India have yet to be persuaded to adopt IFRS and watch from the sidelines. Within Europe, some countries view IFRS as an Anglo-American invention, and remain sceptical of its suitability for their own needs.

Complexity and interactivity of social systems and markets make it all but impossible for a group of experts to divine the “best” accounting solution that will serve divergent economies. Even if it were feasible, it can only be developed through bottom-up evolution of accounting and not through top-down imposition of a single method selected by a board of “experts” with limited accountability.

The IASB’s persistent denial that the procyclical and complex accounting model played a part in the banking crisis by inflating profits undermines trust in its competence and intent.

The euro debacle points to prudent wariness of Icarus-like overreaching ambition that is not underpinned in theory or experience. Common standards, such as common currency, may appear a good idea, particularly for international companies, regulators and audit firms. But what did we get? A Board that issues standards that can induce false profits in reports and drown users in complexity; that has not accepted responsibility for the dysfunctional consequences of its standards; and has no effective mechanisms for timely correction of defects.

Although the big players get economies of scale from applying IFRS across their international activities, shareholders and other stakeholders, particularly in the banking sector, have not been well served by the outcomes of IFRS standards.

Continued in article

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

"Online Classes See Cheating Go High-Tech," by Jeffrey R. Young, Chronicle of Higher Education, June 3, 2012 ---
http://chronicle.com/article/Online-Courses-Can-Offer-Easy/132093/?sid=wb&utm_source=wb&utm_medium=en

Easy A's may be even easier to score these days, with the growing popularity of online courses. Tech-savvy students are finding ways to cheat that let them ace online courses with minimal effort, in ways that are difficult to detect.

Take Bob Smith, a student at a public university in the United States. This past semester, he spent just 25 to 30 minutes each week on an online science course, the time it took him to take the weekly test. He never read the online materials for the course and never cracked open a textbook. He learned almost nothing. He got an A.

His secret was to cheat, and he's proud of the method he came up with—though he asked that his real name and college not be used, because he doesn't want to get caught. It involved four friends and a shared Google Doc, an online word-processing file that all five of them could read and add to at the same time during the test.

More on his method in a minute. You've probably already heard of plenty of clever ways students cheat, and this might simply add one more to the list. But the issue of online cheating may rise in prominence, as more and more institutions embrace online courses, and as reformers try new systems of educational badges, certifying skills and abilities learned online. The promise of such systems is that education can be delivered cheaply and conveniently online. Yet as access improves, so will the number of people gaming the system, unless courses are designed carefully.

This prediction has not escaped many of those leading new online efforts, or researchers who specialize in testing. As students find new ways to cheat, course designers are anticipating them and devising new ways to catch folks like Mr. Smith.

In the case of that student, the professor in the course had tried to prevent cheating by using a testing system that pulled questions at random from a bank of possibilities. The online tests could be taken anywhere and were open-book, but students had only a short window each week in which to take them, which was not long enough for most people to look up the answers on the fly. As the students proceeded, they were told whether each answer was right or wrong.

Mr. Smith figured out that the actual number of possible questions in the test bank was pretty small. If he and his friends got together to take the test jointly, they could paste the questions they saw into the shared Google Doc, along with the right or wrong answers. The schemers would go through the test quickly, one at a time, logging their work as they went. The first student often did poorly, since he had never seen the material before, though he would search an online version of the textbook on Google Books for relevant keywords to make informed guesses. The next student did significantly better, thanks to the cheat sheet, and subsequent test-takers upped their scores even further. They took turns going first. Students in the course were allowed to take each test twice, with the two results averaged into a final score.

"So the grades are bouncing back and forth, but we're all guaranteed an A in the end," Mr. Smith told me. "We're playing the system, and we're playing the system pretty well."

He is a first-generation college student who says he works hard, and honestly, in the rest of his courses, which are held in-person rather than online. But he is juggling a job and classes, and he wanted to find a way to add an easy A to his transcript each semester.

Although the syllabus clearly forbids academic dishonesty, Mr. Smith argues that the university has put so little into the security of the course that it can't be very serious about whether the online students are learning anything. Hundreds of students took the course with him, and he never communicated with the professor directly. It all felt sterile, impersonal, he told me. "If they didn't think students would do this, then they didn't think it through."

A professor familiar with the course, who also asked not to be named, said that it is not unique in this regard, and that other students probably cheat in online introductory courses as well. To them, the courses are just hoops to jump through to get a credential, and the students are happy to pay the tuition, learn little, and add an A.

"This is the gamification of education, and students are winning," the professor told me.

Of course, plenty of students cheat in introductory courses taught the old-fashioned way as well. John Sener, a consultant who has long worked in online learning, says the incident involving Mr. Smith sounds similar to students' sharing of old tests or bringing in cheat sheets. "There is no shortage of weak assessments," he says.

He cautions against dismissing online courses based on inevitable examples of poor class design: "If there are weaknesses in the system, students will find them and try to game it."

In some cases, the answer is simply designing tests that aren't multiple-choice. But even when professors assign papers, students can use the Internet to order custom-written assignments. Take the example of the Shadow Scholar, who described in a Chronicle article how he made more than $60,000 a year writing term papers for students around the country.

Part of the answer may be fighting technology with more technology, designing new ways to catch cheaters.

Countering the Cheaters

When John Fontaine first heard about the Shadow Scholar, who was helping students cheat on assignments, he grew angry. Mr. Fontaine works for Blackboard, and his job is to think up new services and products for the education-software company. His official title is senior director of technology evangelism.

"I was offended," he says. "I thought, I'm going to get that guy." So he started a research project to do just that.

Blackboard's learning-management software features a service that checks papers for signs of plagiarism, and thousands of professors around the country use it to scan papers when they are turned in.

Mr. Fontaine began to wonder whether authors write in unique ways that amount to a kind of fingerprint. If so, he might be able to spot which papers were written by the Shadow Scholar or other writers-for-hire, even if they didn't plagiarize other work directly.

"People tend to use the same words over and over again, and people have the same vocabulary," he says. "I've been working on classifiers that take documents and score them and build what I call a document fingerprint." The system could establish a document fingerprint for each student when they turn in their first assignments, and notice if future papers differ in style in suspicious ways.

Mr. Fontaine's work is simply research at this point, he emphasizes, and he has not used any actual student papers submitted to the company's system. He would have to get permission from professors and students before doing that kind of live test.

In fact, he's not sure whether the idea will ever work well enough to add it as a Blackboard feature.

Mr. Fontaine is not the only one doing such research. Scholars at the Massachusetts Institute of Technology say they are looking for new ways to verify the identity of students online as well.

Anant Agarwal is head of MIT's Open Learning Enterprise, which coordinates the university's MITx project to offer free courses online and give students a chance to earn certificates. It's a leading force in the movement to offer free courses online.

One challenge leaders face is verifying that online students are who they say they are.

A method under consideration at MIT would analyze each user's typing style to help verify identity, Mr. Agarwal told me in a recent interview. Such electronic fingerprinting could be combined with face-recognition software to ensure accuracy, he says. Since most laptops now have Webcams built in, future online students might have to smile for the camera to sign on.

Some colleges already require identity-verification techniques that seem out of a movie. They're using products such as the Securexam Remote Proctor, which scans fingerprints and captures a 360-degree view around students, and Kryterion's Webassessor, which lets human proctors watch students remotely on Web cameras and listen to their keystrokes.

Research Challenge

Researchers who study testing are also working on the problem of cheating. Last month more than 100 such researchers met at the University of Kansas at the Conference on Statistical Detection of Potential Test Fraud.

One message from the event's organizers was that groups that offer standardized tests, companies developing anticheating software, and researchers need to join forces and share their work. "Historically this kind of research has been a bit of a black box," says Neal Kingston, an associate professor of education at the university and director of its Center for Educational Testing Evaluation. "It's important that the research community improve perhaps as quickly as the cheating community is improving."

Continued in article

Bob Jensen's threads on cheating issues somewhat unique to distance education ---
http://www.trinity.edu/rjensen/Plagiarism.htm#OnlineCheating

Question
How would you treat the issue of plagiarism below?

I received this featured message below from one of those wearisome for-profit college promotion sites that tries to hide behind a link to an accounting history essay at
http://www.onlineaccountingdegree.net/resources/luca-pacioli-the-father-of-accounting/


Suppose that we pretend that one of your students (Jaime) submitted this essay to you as part of an assignment in your course.


Without taking the time and trouble to find the original source of this essay using plagiarism detection software, suppose that you performed a simple text stream check on Google --- as I often did when I was still teaching.


Further suppose that one of the text stream hits led to
http://www.robertnowlan.com/pdfs/Pacioli, Luca.pdf 


Firstly, are the essays similar enough to call Jaime to your office to discuss the possibility of plagiarism?



How likely is it that both essays were plagiarized?
Actually, when backing up the Robert Nowlan link it appears that the Robert Nowlan site is likely to be legitimate
http://www.robertnowlan.com/ 
http://www.robertnowlan.com/contents.html 



Would you pursue a charge of plagiarism against your student who submitted the essay at
http://www.onlineaccountingdegree.net/resources/luca-pacioli-the-father-of-accounting/
 

Note that these two essays are not duplicates. But there are terms that lead to suspicion in my devious mind --- terms and phrases like the following:

 

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

Respectfully,
Bob Jensen

 

 

---------- Forwarded message ----------
From: Jaime
Date: Mon, Jun 4, 2012 at 3:05 PM
Subject: Broken link on your page
To: Bob <rjensen@trinity.edu>

 

Hi Bob, I came across your website and wanted to notify you about a broken link on your page in case you weren't aware of it. The link on http://cs.trinity.edu/~rjensen/Calgary/CD/Theory/theory01.htm which links to http://acct.tamu.edu/smith/ethics/pacioli.htm is no longer working. I've included a link to a useful page on Luca Pacioli, the father of accounting that you could replace the broken link with if you're interested in updating your website. Thanks for providing a great resource! Link: http://www.onlineaccountingdegree.net/resources/luca-pacioli-the-father-of-accounting/ Best, Jaime

From The Wall Street Journal Accounting Weekly Review on June 8, 2012

Dire CBO Report Urges Fiscal Fixes
by: John D. McKinnon
Jun 06, 2012
Click here to view the full article on WSJ.com
 

TOPICS: Governmental Accounting

SUMMARY: "The Congressional Budget Office [CBO] released new projections of a worsening U.S. fiscal outlook...By the end of this year, the CBO said, cumulative federal debt will reach roughly 70% of gross domestic product...the highest level since just after World War II.[and] up from about 40% in 2008.

CLASSROOM APPLICATION: The article can be used in governmental accounting classes to differentiate between budget deficits and total U.S. debt.

QUESTIONS: 
1. (Introductory) Summarize the findings in the Congressional Budget Office report according to the description in this article.

2. (Advanced) What two numbers comprise the 70% ratio forecasted by the end of 2012? How does this ratio help to be able to compare our country's circumstances over time? How do you think each component has changed since the 2008 measure of 40% to result in this rise to 70%?

3. (Introductory) Define the term budget deficit. Does this 70% ratio have anything to do with the U.S. budget deficit?

4. (Advanced) Consider the graph labeled Components of Spending and Revenue. What two amounts result in the U.S. budget deficit? What are the major components of U.S. governmental spending?
 

Reviewed By: Judy Beckman, University of Rhode Island

 

"Dire CBO Report Urges Fiscal Fixes," by John D. McKinnon, The Wall Street Journal, June 6, 2012 ---
http://professional.wsj.com/article/SB10001424052702303918204577448343232424870.html?mod=djem_jiewr_AC_domainid&mg=reno64-wsj

The Congressional Budget Office released new projections of a worsening U.S. fiscal outlook, adding fuel to the election-year debate over the causes of rising government debt.

By the end of this year, the CBO said, cumulative federal debt will reach roughly 70% of gross domestic product—the value of all goods and services produced by the economy—the highest level since just after World War II. That's up from about 40% in 2008. Without changes in current policies, federal debt would reach about 200% of GDP in 25 years, the report said.

"The explosive path of federal debt…underscores the need for large and timely policy changes to put the federal government on a sustainable fiscal course," CBO director Doug Elmendorf wrote on his blog on Tuesday.

Budget watchdogs have long warned the U.S. was on an untenable fiscal path, due largely to the projected growth in spending on Medicare and other entitlement benefits as baby boomers age. Tax cuts enacted under former President George W. Bush also have contributed to the current fiscal plight.

Without changes in benefits or higher taxes—or both—the federal debt held by the public could reach 199% of GDP in 25 years, the CBO said, up from 187% in last year's projection.

The CBO said this course would likely have dire consequences for the economy, as well as forcing cuts in non-entitlement programs such as defense and social services. Without changes to stave off high debt and interest payments, U.S. GDP would be lower than otherwise over time.

The report showed that under current tax and spending policies, Social Security, Medicare and Medicaid—the three major programs that benefit older people—would amount to 16.6% of GDP in 2037, up from 10.4% now. That would tend to increase deficits dramatically and push interest costs to almost 10% of GDP in 2037, up from 1.4% now.

Republicans and Democrats blamed each other for the worsening budget outlook.

In a statement, Lanhee Chen, a top aide to Mitt Romney, the presumptive GOP presidential nominee, said the report showed President Barack Obama "has placed us on a path to fiscal ruin" by allowing debt to rise so quickly.

Obama campaign spokesman Ben LaBolt alluded to the policies of Mr. Obama's Republican predecessor, Mr. Bush, saying, "The president inherited a $1 trillion deficit as a result of two unfunded wars and tax cuts for the wealthiest." Mr. LaBolt added that Mr. Obama has "signed $2 trillion in deficit reduction into law and proposed a balanced plan to reduce the deficit by more than $4 trillion."

The political sniping also reflected the parties' sharp disagreement over several budget issues, including how to reduce the deficit, how to fuel stronger economic growth and how to handle the large tax increases and spending cuts scheduled to occur at the end of 2012.

Former President Bill Clinton, for example, appearing with Mr. Obama on Monday night, urged more short-term spending to boost the economy, and suggested Republicans were endangering growth with their zeal to cut spending.

"If you do not have economic growth, no amount of austerity will balance the budget, because you will always have revenues go down more than you can possibly cut spending," Mr. Clinton said of Republican budget plans.

Continued in article

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

"Suddenly, Audit Reports Get Sexy:  Dull, uninformative audit reports have been part of the European accounting landscape for decades. Now auditors will reveal a great deal more." by Andrew Sawers, CFO.com June 27, 2012 ---
http://www3.cfo.com/article/2012/6/auditing_auditors-report-iaasb-ifrs-financial-statements-goodwill-accounting

The auditor’s report is usually the most boring page in any company’s annual financial statements — and that’s saying something. But now, in what could be the most important development in global financial reporting since Europe decided in 2002 to adopt international financial reporting standards, the staid, boilerplate letter from the firm that signs off on the accounts could be the first page investors turn to.

For perhaps as long as anyone can remember, the report of the independent auditors has been a long, detailed, and uniquely uninformative letter that sheds no light on any control issues or valuation concerns arising between the audit firm and its client. In many jurisdictions, the wording has almost always been virtually identical from one company to the next.

Now, the International Auditing and Assurance Standards Board (IAASB), the authority that publishes the rules regulating the audit profession’s work for clients, is suggesting that audit reports should actually say something interesting about the company concerned. It has issued an “Invitation to Comment” on its proposals, Improving the Auditor’s Report. (The IAASB's standards have been adopted by 75 jurisdictions internationally, including for auditors of  private companies in the United States.)

This could mean that auditors will explicitly comment on the quality of financial controls, the valuation models used to calculate the worth of financial instruments, the assumptions driving the decision to make or avoid a goodwill impairment charge — in short, all the things that can make big trouble for companies in the weeks and months after their accounts have gotten the all-clear.

It looks like a development that will not only change corporate behavior but also improve auditor independence. Instead of an audit firm approving a set of accounts, signing off on them through gritted teeth after wrangling over some edge-of-the-envelope valuations pushed hard by its fee-paying client, the audit firm could have the ability — in fact, the requirement — to reveal that the assumptions underlying the financial statements are far from conservative, though they may just fall within what the auditor regards as an acceptable range of valuations.

That puts the auditor in a stronger position and perhaps even urges the corporate client to think again about the numbers it wants to publish. Instead of auditing being a “black box” that prevents anyone from knowing what’s really going on, a new environment of transparency will give everyone a clearer idea of the tussle between aggressive clients and cautious auditors.

Fifteen years ago, you could have asked the heads of audit at any of the Big Six audit firms (as they were then; Big Four now) what sorts of discussions they had had with institutional investors about what they, as the shareholders, wanted from the audit. And each one would have looked at you as though you were from Mars. Why would an auditor talk to an investor?

So it’s interesting to see in the IAASB’s document that “the call for change initially came primarily from institutional investors and financial analysts.” Why? Because as financial reporting got more and more complex, they wanted guidance from auditors as to “the areas on which the auditor’s work effort was focused — particularly on the most subjective matters within the financial statements.” Those financial instruments are one example; goodwill is another.

Continued in article

Jensen Comment
Yeah, maybe so but without the centerfold.

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

"IS A LEASE ACCOUNTING BREAKTHROUGH IN THE OFFING? WE ARE HOLDING OUR BREATH," by Anthony H. Catanach Jr. and J. Edward Ketz, Grumpy Old Accountants Blog, June 4, 2012 ---
http://blogs.smeal.psu.edu/grumpyoldaccountants/

The Grumps Think Rite Aid Should Get a Going Concern Report from Deloitte

"STILL SEARCHING FOR 'THE ‘RITE’ STUFF'," by Anthony H. Catanach Jr. and J. Edward, Ketz, Grumpy Old Accountants Blog, April 30, 2012 ---
http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/643

There are no academy awards in the offing for Rite Aid’s version of the 1983 test pilot film classic.  Recently, the Company released its 10-K, and things are still a mess.  No rocket science here.  Rite Aid cannot earn a profit and cash flows are dwindling even with an extra week of operations included (2011 was a 53 week fiscal year).  And the balance sheet is disgraceful. The Company just cannot seem to do anything “rite!”  Maybe management would have done better with a comedy like “Failure to Launch.”

Things have only worsened since we initially visited the Company in Rite Aid: Is Management Selling Drugs or Using Them?  It has not posted a positive earnings number since 2007.  Sure, the net loss is less than it was for the past few years, but a loss is still a loss, and remember, it had an extra week for this year’s performance reports.  It continues to bleed lease termination and impairment charges, as well as losses on debt modifications and retirements.  Yet, managers continue to perpetuate a turnaround façade via “improving” adjusted EBITDA numbers which suggest almost a $1 billion in “real” earnings.  Instead, the Company needs a dramatically new business model that emphasizes operating effectiveness and efficiency.  Only then will revenues rise, and cost of sales and other operating costs decline, both requirements for the Company’s delivering a profit.  We understand that the Company has implemented cost cutting initiatives, but when will see some believable and meaningful results?

The balance sheet remains in shambles.  Okay, there are enough current assets to cover current liabilities, but that’s the end of any good news in the balance sheet.  Total assets are $7,364 (all accounts are in millions of dollars), while total liabilities are $9,951, thereby yielding a shareholders’ deficit of $(2,587).  How this firm avoids corporate bankruptcy we just don’t know!

Actually, the balance sheet condition is much worse because the Company has humongous lease obligations that are carried “off-balance sheet.”  Using the data in financial statement note 10, we estimate the present value of the Company’s lease liabilities to be $5,939.  This adjustment increases total liabilities to $15,890, causing the stockholders’ deficit to worsen to $(8,526).

At least Rite Aid does not carry goodwill on its books any more, having written off the last vestiges of this intangible “asset” in 2009.  The only remaining reported intangibles are for favorable leases and for prescription files.  Oh please…favorable leases for a Company in this financial condition…we would be inclined to reduce the favorable lease asset, but the amounts are just not big enough to fret over given the “death watch” status of the Company.

However, to its credit, Rite Aid has not followed the example of Citicorp and some other banks that pumped earnings up by recognizing gains due to market value declines of debt due to problems in its own creditworthiness.  This practice is a sham even if condorsed (condoned and endorsed) by the FASB.

Even though the cash flow statement does provide some positive news, reported cash flows are a bit down (and again there was that extra week in the fiscal period).  Cash flows from operating activities were $(325), $395, and $266 for 2009-2011, while free cash flows were $(519), $209, and $16, respectively.  So, Rite Aid is reporting a positive free cash flow, albeit smaller than last year’s.

Ironically, if the Company would capitalize all of its operating leases, the cash flow picture improves considerably!  That’s because rental expenditures under operating lease accounting are displayed as operating activities; however, when leases are capitalized, the cash flows are divided between interest payments and payments against the lease obligation, the latter payments being properly categorized as financing cash flows.  Interest payments are still considered part of operating activities.  Thus, adjusted free cash flows paint a rosier picture for Rite Aid:  they are $(45), $691, and $545 for 2009-2011.

Given the Company’s precarious state, why doesn’t the auditor, Deloitte & Touche, issue a going concern report?  After all, Rite Aid’s troubles make it a bankruptcy candidate.  Clearly, profits are negative for five years, and there are significantly more liabilities than assets.  Perhaps the auditor also adjusts operating leases to obtain the healthier free cash flow numbers that we have estimated, and deduces that the firm can survive.  If so, then the auditor should persuade, if not require, Rite Aid to capitalize all of its leases.

Taking a long term perspective, most of the troubles endured by Rite Aid over the last several years seem a result of the failed Eckerd and Brooks business combination, which it bought from the Jean Coutu Group.  In short, Rite Aid paid too much for the business.  When the subsidiary did not generate enough cash flows, Rite Aid borrowed to the hilt, and has been operating under a heavy debt burden ever since.  (As a side note the Jean Coutu Group recently sold a substantial number of its Rite Aid shares, reducing its ownership to about 20 percent.)

Continued in article

The Grumps respond to their AECM critics on accounting for leasing at Rite Aid. I forwarded the AECM messaging concerning whether the Grumps made a mistake on their Rite Aid posting.

"A NOTE ON THE RITE AID ANALYSIS; AND A POX ON THE FASB," by Anthony H. Catanach and J. Edward Ketz, Grumpy Old Accountants Blog, May ,, 2012 ---
http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/652

Last time we discussed Rite Aid and claimed the balance sheet was in shambles.  Some fellow accounting professors objected to the analysis, so we need to respond to them.  We’ll answer the criticism and point out the big point that they all missed.

You will recall that Rite Aid’s most recent balance sheets has total assets of $7,364, total liabilities of $9,951, and shareholders’ equity of $(2,587).  As before, all amounts are in millions of U.S. dollars.  We then said our estimate of the present value of the operating leases was $5,939, thereby increasing total debts to $15,890 and causing shareholders’ equity to dip to $(8,526).

The criticism we received concerns the hit to equity.  They state that the entire amount should not go against equity but that a sizable amount should be in assets.

The criticism is well taken—up to a point.  Our analysis indicated that the assets were over half depreciated, so only a relatively small portion would be added to the left-hand side of the balance sheet.  Besides, as Rite Aid is a Pennsylvania corporation, we have been in several of the stores, and we think that the fair value of the leases needs to be written down.  At that point we took a short cut and assumed none of it would be there.  It made the work a lot shorter and helped us to make our point succinctly.

But, since our friends and associates want a full-blown adjustment instead of this raw short cut, here goes.  We adjust the income statement by taking out rental expense and by adding in depreciation, interest, and the differential income tax.  We adjust the assets in the balance sheet for the leased resources minus their accumulated depreciation.  We adjust the current debts for the present value of next year’s lease payment.  We adjust noncurrent debts for the present value of the remaining lease payments and for deferred income taxes.  Finally, we adjust the stockholders’ equity for the cumulative effect of past year differences in the firm’s net income.

What we find is the following:

		Reported	Adjusted
Revenues		26,121	26,121
Expense		26,490	26,472
Net income		(368)	(351)
Current assets		4,504	4,504
Plant		2,860	5,177
Total assets		7,364	9,681
Current debts		2,570	3,547
Long-term debts		7,381	12,438
Total debts		9,951	15,985
Equity		(2,586)	(6,304)
Total		7,364	9,681

 

Yes, the total assets are larger by $2.3 billion, but notice that the total debts are larger by $6 billion and the shareholders’ equity is lower by $3.7 billion.  (The liabilities are higher than the $5.9 we previously mentioned because now we are including the deferred income tax effect.)

So the criticism is correct inasmuch as the full $5.9 billion does not decrease equity, only $3.7 billion.  But given that we originally just wanted a rough approximation, we still don’t think it was off as badly as our colleagues thought.  As they obviously are watching carefully, we promise not to take this short cut again.

Having said that mea culpa, let’s observe that the thrust of our previous work is correct.  The balance sheet of Rite Aid is in shambles and the losses are habitual.  Operating cash flows are higher than reported, as we explained in the previous column, but that implies that financing cash outflows are correspondingly worse.  Rite Aid is in trouble.

Jensen Comment
I might note that to date the IASB and the FASB cannot agree on a new joint standard on leasing. The joint project is now entering a new Plan D under consideration. Until then, Rite Aid is subject to existing FASB rules on lease capitalization and expensing.

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

Question
Why are the FASB and IASB hung up on insurance contracts standard?

"Cross-Cutting Issues Impede Boards' Insurance Contracts Acquisition Costs Discussions," Bloomberg, June 6, 2012 ---
http://www.bna.com/crosscutting-issues-impede-b12884909858/

Cross-cutting issues involving other accounting rules appear to be impeding the Financial Accounting Standards Board and the International Accounting Standards Board from wrapping up discussions on how acquisition costs will be accounted for under an insurance contracts standard.

The accounting of acquisition costs is important to insurers because they incur costs in acquiring and originating insurance contracts and these costs can be very high at contract inception.

The boards May 24 redeliberated on the issue of how an insurer should account for the cash flows relating to the recovery of acquisition costs in the building block approach, including the presentation of information about those cash flows but did not conclude discussions on the topic which will continue in July. Suggestions included:

• Record it as an asset and amortize it over time;
• Include it as part of the margin but only then recognize that net margin in the income statements;
• Gross up the income statements; expense the amortized cost;
• Recognize it as one amount in the balance sheet (no differentiation) and recognize premium in the income statement for the amount of asset point in time when the costs are actually incurred; and
• Include it all as one balance sheet item but don't recognize it when the costs are incurred but rather recognize it in some other fashion.

Among issues that prevented the boards from moving forward in deliberations included current revenue recognition standard being developed, according to comments made by board members. Specifically, the implication that acquisition costs meet the criteria for an asset—one that raises issues of inconsistency within the insurance contracts discussions.

Some board members said that acquisition costs should be dealt with consistently among accounting standards—pointing out that it was on the table for review. "I don't think we can answer the expense of an asset until we talk about revenue recognition," said FABB member Russell Golden. "…..it seems like if we're going to go down the [asset] route we ought to decide if it's an asset for all or an expense [but we] cannot decide today. Today we can decide do you want these in the margin or do you want these out of the margin," he said.

Resolve Premiums.

There are other issues, including guidance under U.S. GAAP to be considered to ensure consistency—that are also cross-cutting. Within the insurance industry direct acquisition costs (DAC) were always accounted for as an asset (basically allowing certain costs to acquire the business to be accounted for an asset). In the U.S. however—effective this year—there was a change in what could be included in that asset and what would be required to be expensed.

The guidance, ASU No. 2010-26, Accounting for Costs Associated With Originating or Renewing Service Contracts, amends the guidance for insurance entities that apply the industry-specific guidance in ASC 944-30. It narrows the types of acquisition costs that can be deferred by insurers.

Another issue stems from the accounting guidance under FASB Statement No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases. This indicates that an entity's origination costs of a loan is the same as its acquisition cost (when it looks at what can be included in its origination cost).

Those issues aside, some IASB members said the boards' first need to resolve issues surrounding premiums within the insurance contracts discussions before deciding on acquisition costs.

The issue was all about presentation and is therefore linked very closely with premiums, said IASB member Stephen Cooper.

"We haven't taken a decision yet about premiums," said Cooper. "Strikes me that the answer depends upon that decision; how can we make a decision on this before we can make a decision about premiums. It seems to me the only other question we can answer is whether you want an asset or not—can't answer any of the other questions," he said.

Proposed Alternatives.

The staff paper included the following as potential approaches (as written in the board handout) for the boards to consider:

• Alternative A: an approach which recognizes the right to recover acquisition costs as an asset.
• Alternative B: an approach which includes acquisition costs in the cash flows used to determine the margin and which would require an insurer to recognize a reduction in the margin when the acquisition costs are incurred, with no effect in the statement of comprehensive income. The acquisition costs would be shown net against the residual/single margin and allocated to profit or loss in the same way as the single/residual margin. Changes in the insurance contract liability arising from acquisition costs would be shown with the release of margin and not as changes in the cash flows. This is a variant of FASB's view in developing the 2010 discussion paper.
• Alternative C: an approach which includes acquisition costs in the cash flows used to determine the margin and would require an insurer to expense the acquisition costs and recognize income equal to, and offsetting, those costs when the acquisition costs are incurred. Changes in the insurance contract liability arising from acquisition costs would be shown in the same way as change in the cash flows. This alternative is consistent with the IASB's view in developing its 2010 exposure draft.

The IASB completely ruled out ever voting for Alternative A and the FASB completely ruled out ever voting for Alternative C.

Potential Solution.

In fact, all three alternatives were potentially problematic. "If we have premiums written I think C is the only way to do it B doesn't make any sense, said Cooper. "If we're going to have premiums earned neither of them make any sense," he said.

He stated moreover that the problem with "C" is that "you have day revenue when you've done nothing—that doesn't make any sense…problem with B is your revenue is less than the premiums you actually receive—and you have no expense."

Continued in article

Insurance: A Scheme for Hiding Debt That Won't Go Away ---
http://www.trinity.edu/rjensen/Theory02.htm#Insurance

"Woman Who Couldn’t Be Intimidated by Citigroup Wins $31 Million," by Bob Ivry, Bloomberg News, May 31, 2012 ---
file:///C:/Documents and Settings/rjensen/My Documents/My Web Sites/images

Sherry Hunt never expected to be a senior manager at a Wall Street bank. She was a country girl, raised in rural Michigan by a dad who taught her to fish and a mom who showed her how to find wild mushrooms. She listened to Marty Robbins and Buck Owens on the radio and came to believe that God has a bigger plan, that everything happens for a reason.

She got married at 16 and didn’t go to college. After she had her first child at 17, she needed a job. A friend helped her find one in 1975, processing home loans at a small bank in Alaska. Over the next 30 years, Hunt moved up the ladder to mortgage-banking positions in Indiana, Minnesota and Missouri, Bloomberg Markets magazine reports in its July issue.

On her days off, when she wasn’t fishing with her husband, Jonathan, she rode her horse, Cody, in Wild West shows. She sometimes dressed up as the legendary cowgirl Annie Oakley, firing blanks from a vintage rifle to entertain an audience. She liked the mortgage business, liked that she was helping people buy houses.

In November 2004, Hunt, now 55, joined Citigroup (C) Inc. as a vice president in the mortgage unit. It looked like a great career move. The housing market was booming, and the New York- based bank, the sixth-largest lender in the U.S. at the time, was responsible for 3.5 percent of all home loans. Hunt supervised 65 mortgage underwriters at CitiMortgage Inc.’s sprawling headquarters in O’Fallon, Missouri, 45 minutes west of St. Louis.

Avoiding Fraud

Hunt’s team was responsible for protecting Citigroup from fraud and bad investments. She and her colleagues inspected loans Citi wanted to buy from outside brokers and lenders to see whether they met the bank’s standards. The mortgages had to have properly signed paperwork, verifiable borrower income and realistic appraisals.

Citi would vouch for the quality of these loans when it sold them to investors or approved them for government mortgage insurance.

Investor demand was so strong for mortgages packaged into securities that Citigroup couldn’t process them fast enough. The Citi stamp of approval told investors that the bank would stand behind the mortgages if borrowers quit paying.

At the mortgage-processing factory in O’Fallon, Hunt was working on an assembly line that helped inflate a housing bubble whose implosion would shake the world. The O’Fallon mortgage machinery was moving too fast to check every loan, Hunt says.

Phony Appraisals

By 2006, the bank was buying mortgages from outside lenders with doctored tax forms, phony appraisals and missing signatures, she says. It was Hunt’s job to identify these defects, and she did, in regular reports to her bosses.

Executives buried her findings, Hunt says, before, during and after the financial crisis, and even into 2012.

In March 2011, more than two years after Citigroup took $45 billion in bailouts from the U.S. government and billions more from the Federal Reserve -- more in total than any other U.S. bank -- Jeffery Polkinghorne, an O’Fallon executive in charge of loan quality, asked Hunt and a colleague to stay in a conference room after a meeting.

The encounter with Polkinghorne was brief and tense, Hunt says. The number of loans classified as defective would have to fall, he told them, or it would be “your asses on the line.”

Hunt says it was clear what Polkinghorne was asking -- and she wanted no part of it.

‘I Wouldn’t Play Along’

“All a dishonest person had to do was change the reports to make things look better than they were,” Hunt says. “I wouldn’t play along.”

Instead, she took her employer to court -- and won. In August 2011, five months after the meeting with Polkinghorne, Hunt sued Citigroup in Manhattan federal court, accusing its home-loan division of systematically violating U.S. mortgage regulations.

The U.S. Justice Department decided to join her suit in January. Citigroup didn’t dispute any of Hunt’s facts; it didn’t mount a defense in public or in court. On Feb. 15, 2012, the bank agreed to pay $158.3 million to the U.S. government to settle the case.

Citigroup admitted approving loans for government insurance that didn’t qualify under Federal Housing Administration rules. Prosecutors kept open the possibility of bringing criminal charges, without specifying targets.

‘Pure Myth’

Citigroup behaving badly as late as 2012 shows how a big bank hasn’t yet absorbed the lessons of the credit crisis despite billions of dollars in bailouts, says Neil Barofsky, former special inspector general of the Troubled Asset Relief Program.

“This case demonstrates that the notion that the bailed-out banks have somehow found God and have reformed their ways in the aftermath of the financial crisis is pure myth,” he says.

As a reward for blowing the whistle on her employer, Hunt, the country girl turned banker, got $31 million out of the settlement paid by Citigroup.

Hunt still remembers her first impressions of CitiMortgage’s O’Fallon headquarters, a complex of three concrete-and-glass buildings surrounded by manicured lawns and vast parking lots. Inside are endless rows of cubicles where 3,800 employees trade e-mails and conduct conference calls. Hunt says at first she felt like a mouse in a maze.

“You only see people’s faces when someone brings in doughnuts and the smell gets them peeking over the tops of their cubicles,” she says.

Jean Charities

Over time, she came to appreciate the camaraderie. Every month, workers conducted the so-called Jean Charities. Employees contributed $20 for the privilege of wearing jeans every day, with the money going to local nonprofit organizations. With so many workers, it added up to $25,000 a month.

“Citi is full of wonderful people, conscientious people,” Hunt says.

Those people worked on different teams to process mortgages, all of them focused on keeping home loans moving through the system. One team bought loans from brokers and other lenders. Another team, called underwriters, made sure loan paperwork was complete and the mortgages met the bank’s and the government’s guidelines.

Yet another group did spot-checks on loans already purchased. It was such a high-volume business that one group’s assignment was simply to keep loans moving on the assembly line.

Powerful Incentive

Still another unit sold loans to Fannie Mae, Freddie Mac and Ginnie Mae, the government-controlled companies that bundled them into securities for sale to investors. Those were the types of securities that blew up in 2007, igniting a global financial crisis.

Workers had a powerful incentive to push mortgages through the process even if flaws were found: compensation. The pay of CitiMortgage employees all the way up to the division’s chief executive officer depended on a high percentage of approved loans, the government’s complaint says.

By 2006, Hunt’s team was processing $50 billion in loans that Citi-Mortgage bought from hundreds of mortgage companies. Because her unit couldn’t possibly review them all, they checked a sample.

When a mortgage wasn’t up to federal standards -- which could be any error ranging from an unsigned document to a false income statement or a hyped-up appraisal -- her team labeled the loan as defective.

Missing Documentation

In late 2007, Hunt’s group estimated that about 60 percent of the mortgages Citigroup was buying and selling were missing some form of documentation. Hunt says she took her concerns to her boss, Richard Bowen III.

Bowen, 64, is a religious man, a former Air Force Reserve Officer Training Corps cadet at Texas Tech University in Lubbock with an attention to detail that befits his background as a certified public accountant. When he saw the magnitude of the mortgage defects, Bowen says he prayed for guidance.

In a Nov. 3, 2007, e-mail, he alerted Citigroup executives, including Robert Rubin, then chairman of Citigroup’s executive committee and a former Treasury secretary; Chief Financial Officer Gary Crittenden; the bank’s senior risk officer; and its chief auditor.

Bowen put the words “URGENT -- READ IMMEDIATELY -- FINANCIAL ISSUES” in the subject line.

“The reason for this urgent e-mail concerns breakdowns of internal controls and resulting significant but possibly unrecognized financial losses existing within our organization,” Bowen wrote. “We continue to be significantly out of compliance.”

No Change

There were no noticeable changes in the mortgage machinery as a result of Bowen’s warning, Hunt says.

Just a week after Bowen sent his e-mail, Sherry and Jonathan were driving their Toyota Camry about 55 miles (89 kilometers) per hour on four-lane Providence Road in Columbia, Missouri, when a driver in a Honda Civic hit them head-on. Sherry broke a foot and her sternum. Jonathan broke an arm and his sternum.

Doctors used four bones harvested from a cadaver and titanium screws to stabilize his neck.

“You come out of an experience like that with a commitment to making the most of the time you have and making the world a better place,” Sherry says.

Three months after the accident, attorneys from Paul, Weiss, Rifkind, Wharton & Garrison LLP, a New York law firm representing Citigroup, interviewed Hunt. She had no idea at the time that it was related to Bowen’s complaint, she says.

Home Computer

The lawyers’ questions made her search her memory for details of loans and conversations with colleagues, she says. She decided to take notes from that time forward on a spreadsheet she kept on her home computer.

Bowen’s e-mail is now part of the archive of the Financial Crisis Inquiry Commission, a panel created by Congress in 2009. Citigroup’s response to the commission, FCIC records show, came from Brad Karp, chairman of Paul Weiss.

He said Citigroup had reviewed Bowen’s issues, fired a supervisor and changed its underwriting system, without providing specifics.

Continued in article

A 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:

• Assess both the design and operating effectiveness of selected internal controls related to significant accounts and relevant assertions, in the context of material misstatement risks;
• Understand the flow of transactions, including IT aspects, in sufficient detail to identify points at which a misstatement could arise;
• Evaluate company-level (entity-level) controls, which correspond to the components of the COSO framework;
• Perform a fraud risk assessment;
• Evaluate controls designed to prevent or detect fraud, including management override of controls;
• Evaluate controls over the period-end financial reporting process;
• Scale the assessment based on the size and complexity of the company;
• Rely on management's work based on factors such as competency, objectivity, and risk;
• Conclude on the adequacy of internal control over financial reporting.

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

• What has to make the CitiBank revelations the most embarrassing revelations on the Sixty Minutes blockbuster emphasis that top CItiBank executives were not only informed by a Vice President in Charge of Fraud Investigation of huge internal control inadequacies, the outside U.S. government top accountant, the U.S. Comptroller General, sent an official letter to CitiBank executives notifying them of their Section 404 internal control failures.
   
• Eight days after receiving the official warning from the government, the CEO of CitiBank flipped his middle finger at the U.S. Comptroller General and signed off on Section 404 provisions that he'd also been informed by his Vice President of Fraud and his Internal Auditing Department were being violated.
  http://www.bloomberg.com/news/2011-02-24/what-vikram-pandit-knew-and-when-he-knew-it-commentary-by-jonathan-weil.html
   
• What the Sixty Minutes show failed to mention is that the external auditing firm of KPMG also flipped a bird at the U.S. Comptroller General and signed off on the adequacy of its client's internal controls.
   
• A few months thereafter CitiBank begged for and got hundreds of billions in bailout money from the U.S. Government to say afloat.
   
• The implication is that CitiBank and the other Wall Street corporations are just to0 big to prosecute by the Justice Department. The Justice Department official interviewed on the Sixty Minutes show sounded like hollow brass wimpy taking hands off orders from higher authorities in the Justice Department.
   
• The SEC worked out a settlement with CitiBank, but the fine is such a joke that the judge in the case has to date refused to accept the settlement. This is so typical of SEC hand slapping settlements --- and the hand slaps are with a feather.

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

• Countrywide Financial before 2007 was the largest issuer of mortgages on Main Streets throughout the nation and by estimates of one of its own whistle blowing executives in charge of internal fraud investigations over 60% of those mortgages were fraudulent.
   
• After Bank of America purchased the bankrupt Countrywide, BofA top executives tried to buy off the Countrywide executive in charge of fraud investigations to keep him from testifying. When he refused BofA fired him.
   
• Whereas the Justice Department has not even attempted to indict Countrywide executives and the Countrywide auditing firm of Grant Thornton  (later replaced by KPMG) to bring indictments for Section 404 violations, the FTC did work out an absurdly low settlement of $108 million for 450,000 borrowers paying "excessive fees" and the attorneys for those borrowers ---
  http://www.nytimes.com/2011/07/21/business/countrywide-to-pay-borrowers-108-million-in-settlement.html
  This had nothing to do with the massive mortgage frauds committed by Countrywide.
   
• Former Countrywide CEO Angelo Mozilo settled the SEC’s Largest-Ever Financial Penalty ($22.5 million) Against a Public Company's Senior Executive
  http://sec.gov/news/press/2010/2010-197.htm
  The CBS Sixty Minutes show estimated that this is less than 20% of what he stole and leaves us with the impression that Mozilo deserves jail time but will probably never be charged by the Justice Department.

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.

"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
 

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

"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!

A Mutation in the Evolution of Accountics Science Toward Real Science:  A Commentary Published in The Accounting Review in May 2012

The publication of the Moser and Martin commentary in the May 2012 edition of TAR is a mutation of progress in accountics science evolution. We owe a big thank you to both TAR Senior Editors Steve Kachelmeier and Harry Evans.

Accountics is the mathematical science of values.
Charles Sprague [1887] as quoted by McMillan [1998, p. 1]
http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm#_msocom_1

A small step for accountics science, A giant step for accounting

Accountics science made a giant step in its evolution toward becoming a real science when it published a commentary in The Accounting Review (TAR) in the May 2012 edition.

""A Broader Perspective on Corporate Social Responsibility Research in Accounting," by Donald V. Moser and Patrick R. Martin, The Accounting Review, Vol. 87, May 2012, pp. 797-806 ---
http://aaajournals.org/doi/full/10.2308/accr-10257

We appreciate the helpful comments of Ramji Balakrishnan, Harry Evans, Lynn Hannan, Steve Kachelmeier, Geoff Sprinkle, Greg Waymire, Michael Williamson, and the authors of the two Forum papers on earlier versions of this commentary. Although we have benefited significantly from such comments, the views expressed are our own and do not necessarily represent the views of others who have kindly shared their insights with us.

. . .

In this commentary we suggest that CSR research in accounting could benefit significantly if accounting researchers were more open to (1) the possibility that CSR activities and related disclosures are driven by both shareholders and non-shareholder constituents, and (2) the use of experiments to answer important CSR questions that are difficult to answer with currently available archival data. We believe that adopting these suggestions will help accounting researchers obtain a more complete understanding of the motivations for corporate investments in CSR and the increasing prevalence of related disclosures.

Our two suggestions are closely related. Viewing CSR more broadly as being motivated by both shareholders and a broader group of stakeholders raises new and important questions that are unlikely to be studied by accounting researchers who maintain the traditional perspective that firms only engage in CSR activities that maximize shareholder value. As discussed in this commentary, one example is that if CSR activities actually respond to the needs or demands of a broader set of stakeholders, it is more likely that some CSR investments are made at the expense of shareholders. Data limitations make it very difficult to address this and related issues in archival studies. In contrast, such issues can be addressed directly and effectively in experiments. Consequently, we believe that CSR research is an area in which integrating the findings from archival and experimental studies can be especially fruitful. The combination of findings from such studies is likely to provide a more complete understanding of the drivers and consequences of CSR activities and related disclosures. Providing such insights will help accounting researchers become more prominent players in CSR research. Our hope is that the current growing interest in CSR issues, as reflected in the two papers included in this Forum, represents a renewed effort to substantially advance CSR research in accounting.

 

Jensen Comment
There are still two disappointments for me in the evolution of accountics science into real science.

• This Moser and Martin commentary is not a critical commentary. It's probably too soon to have accountics scientists criticizing each others' research in TAR ---
  http://www.trinity.edu/rjensen/TheoryTAR.htm#Replication
  
   
• This is not a commentary in the AAA Commons. It's probably too soon to expect accountics scientists to communicate with the riff raff of accounting teachers and practitioners on the Commons ---
  
  How Accountics Scientists Should Change: 
  "Frankly, Scarlett, after I get a hit for my resume in The Accounting Review I just don't give a damn"
  http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm
  One more mission in what's left of my life will be to try to change this
  http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm 

It's somewhat revealing to track how this Moser and Martin commentary found its way into TAR. You might begin by noting the reason former Senior Editor Steve Kachelmeier gave to the absence of commentaries in TAR (since 1998). In fairness, I was wrong to have asserted that Steve will not send a "commentary" out to TAR referees. His reply to me was as follows ---
http://www.trinity.edu/rjensen/TheoryTAR.htm

No, no, no! Once again, your characterization makes me out to be the dictator who decides the standards of when a comment gets in and when it doesn’t. The last sentence is especially bothersome regarding what “Steve tells me is a requisite for his allowing TAR to publish a comment.” I never said that, so please don’t put words in my mouth.

If I were to receive a comment of the “discussant” variety, as you describe, I would send it out for review to two reviewers in a manner 100% consistent with our stated policy on p. 388 of the January 2010 issue (have you read that policy?). If both reviewers or even the one independent reviewer returned favorable assessments, I would then strongly consider publishing it and would most likely do so. My observation, however, which you keep wanting to personalize as “my policy,” is that most peer reviewers, in my experience, want to see a meaningful incremental contribution. (Sorry for all the comma delimited clauses, but I need this to be precise.) Bottom line: Please don’t make it out to be the editor’s “policy” if it is a broader phenomenon of what the peer community wants to see. And the “peer community,” by the way, are regular professors from all varieties of backgrounds. I name 574 of them in the November 2009 issue.

Thus the reason given by Steve that a commentary was not published by TAR since 1998 is that the TAR referees rejected each and every submitted commentary  since 1998. In the back of my mind, however, I always thought the Senior and Associate Editors of TAR could do more to encourage the publication of commentaries in TAR.

Thus it's interesting to track the evolution of the May 2012 Moser and Martin commentary published in TAR.

"A FORUM ON CORPORATE SOCIAL RESPONSIBILITY RESEARCH IN ACCOUNTING  Introduction," by John Harry Evans III (incoming Senior Editor of TAR),  The Accounting Review, Vol. 87, May 2012, pp. 721-722 ---
http://aaajournals.org/doi/full/10.2308/accr-10279

In July 2011, shortly after I began my term as Senior Editor of The Accounting Review, outgoing editor Steve Kachelmeier alerted me to an excellent opportunity. He and his co-editors (in particular, Jim Hunton) had conditionally accepted two manuscripts on the topic of corporate social responsibility (CSR), and the articles were scheduled to appear in the May 2012 issue of TAR. Steve suggested that I consider bundling the two articles as a “forum on corporate social responsibility research in accounting,” potentially with an introductory editorial or commentary.

Although I had never worked in the area of CSR research, I was aware of a long history of interest in CSR research among accounting scholars. In discussions with my colleague, Don Moser, who was conducting experiments on CSR topics with his doctoral student, Patrick Martin, I was struck by the potential for synergy in a forum that combined the two archival articles with a commentary by experimentalists (Don and Patrick). Because archival and experimental researchers face different constraints in terms of what they can observe and control, they tend to address different, but related, questions. The distinctive questions and answers in each approach can then provide useful challenges to researchers in the other, complementary camp. A commentary by Moser and Martin also offered the very practical advantage that, with Don and Patrick down the hall from me, it might be feasible to satisfy a very tight schedule calling for completing the commentary and coordinating it with the authors of the archival articles within two to three months.

The Moser and Martin (2012) commentary offers potential insight concerning how experiments can complement archival research such as the two fine studies in the forum by Dhaliwal et al. (2012) and by Kim et al. (2012). The two forum archival studies document that shareholders have reason to care about CSR disclosure because of its association with lower analyst forecast errors and reduced earnings management. These are important findings about what drives firms' CSR activities and disclosures, and these results have natural ties to traditional financial accounting archival research issues.

Like the two archival studies, the Moser and Martin (2012) commentary focuses on the positive question of what drives CSR activities and disclosures in practice as opposed to normative or legal questions about what should drive these decisions. However, the Moser and Martin approach to addressing the positive question begins by taking a broader perspective that allows for the possibility that firms may potentially consider the demands of stakeholders other than shareholders in making decisions about CSR activities and disclosures. They then argue that experiments have certain advantages in understanding CSR phenomena given this broader environment. For example, in a tightly controlled environment in which future economic returns are known for certain and individual reputation can play no role, would managers engage in CSR activities that do not maximize profits and what information would they disclose about such activities? Also, how would investors respond to such disclosures?

 

Jensen Comment
And thus we have a mutation in the evolution of "positive" commentaries in TAR with the Senior TAR editor being a driving force in that mutation. However, in accountics science we have a long way to go in terms of publishing critical commentaries and performing replications of accountics science research ---
http://www.trinity.edu/rjensen/TheoryTAR.htm#Replication
As Joni Young stated, there's still "an absence of dissent" in accountics science.

We also have a long way to go in the evolution of accountics science in that accountics scientists do very little to communicate with accounting teachers and practitioners ---
http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm 

But the publication of the Moser and Martin commentary in the May 2012 edition of TAR is a mutation of progress in accountics science evolution. We owe a big thank you to both TAR Senior Editors Steve Kachelmeier and Harry Evans.

Bob Jensen's threads on Corporate Social Responsibility research and Triple-Bottom (Social, Environmental, Human Resource) Reporting ---
---
http://www.trinity.edu/rjensen/Theory02.htm#TripleBottom

"Why don’t people like markets?" by Pascal Boyer, Cognition and Culture, June 18, 2012 ---
http://www.cognitionandculture.net/home/blog/35-pascals-blog/2423-why-dont-people-like-markets-the-largely-missing-cognition-and-culture-perspective

People do not love markets – there is a lot of evidence for that. Is it relevant that, well, to put it bluntly, people do not seem to understand much about market economics?

That is a common enough message from professional economists. It is put into sharper focus by Bryan Caplan in his book The myth of the rational voter. Caplan (among other important and interesting things) reports on systematic studies of voters’ knowledge of policies and their effects on economic processes. The take-home message is that people just don’t get it, and that their voting preferences are largely irrational.

Now, voter ignorance or irrationality would not be very bad, if it was completely random. If most voters chose policies randomly, the net result would be no strong aggregate preference for any policy. But Caplan shows that people’s irrationality about economic issues is not random at all. There is method in their madness. It consists in a series of “biases”, like the anti-foreign and anti-trade bias (i.e., “when foreign countries prosper we suffer”). If this is true, many “rational voter” models in political science are in serious trouble.

As usual when people describe folk-understandings as “irrational” or “biased”, we cognition and culture and evolution folks get a trifle impatient.

Too often, such descriptions boil down to the observation that human minds do not follow some arbitrarily chosen normative model (see Tversky and Kahneman passim and Gerd Gigerenzer on the alternative perspective). Surely we should not stop at saying that people “don’t attend to base rates” or “have a bias against foreign trade”. The real questions is, why? What psychological processes lead to such biases?

The truth is, no-one knows because no-one bothered to study that. I am surprized, nay flabbergasted that there is no study of folk-economics in the social science literature. No-one (except Caplan and a few others) seems to study what makes people’s economic modules tick. In psychology we have had decades of study of folk-physics, folk-biology, intuitive psychology and the like. Intuitive economics anyone?

Robert Nozick observed that intellectuals dislike markets, probably because intellectuals are used to and thrive in knowledge-rewarding meritocracies, while markets do not really care for your effort, intelligence or just desert, as long as you provide what others want. This may be true. But it is not sufficient, for most people, not just intellectuals, are leery of markets.

Market process are unloved for many reasons.

One of them, obviously, is that market processes are not visible. Going through our everyday tasks, we fail to notice how millions of voluntary transactions resulted in precisely these goods and services being available to us when and where we want them at a price that makes them affordable. That is of course a point that Adam Smith and others made long ago, but could be made more forcefully if we understood the limits and susceptibilities of human imagination. In a powerful essay, 19th century free-trader Frédéric Bastiat noted that the economic process comprises ‘what is seen’ and ‘what is unseen’. For instance, when a government taxes its citizens and offers a subsidy to some producers, what is seen is the money taken and the money received. What is unseen is the amount of production that would occur in the absence of such transfers

Another plausible factor is that markets are intrinsically probabilistic and therefore marked with uncertainty. Even though it is likely that whoever makes something that others want will earn income, it is not clear who these others will be, how much they will need what you make or when you will run into them. Like other living organisms, we are loss-averse and try to minimise uncertainty. (Note, however, that market uncertainty creates a niche for market-uncertainty insurance, which itself is all the more efficient as it is driven by demand).

Continued in article

Why do they hate us (professors)? --- http://www.trinity.edu/rjensen/HigherEdControversies.htm#Hate

Jensen Comment
Professors (and other intellectuals) hate markets, and non-intellectuals hate professors. So we must learn to live with hate. We don't live very well without some things we hate. Students cannot imagine learning without the help of professors, both research professors who discover new knowledge and teachers who provide materials and other aids for learning existing knowledge.

Nationwide experiments with resource allocation based up government planning boards are now mostly rotting hulls on the shores of failed experimental utopias. Where governments stepped in to distribute goods and services with coupon books or highly controlled prices, black markets moved in to make up for the failures of those controlled economies. The biggest failures came with mismatches of supply and demand creating surpluses of things consumers did not much want in great quantities and shortages of things that they desperately wanted. Countries that brutally control the black markets often end up with mass starvation like what has happened in North Korea for decades.

This of course does not mean that government should not regulate prices and resource allocations where there are resources that are externalities incapable of being effectively and efficiently priced on the market such as clean air, pure water, national security, public safety, universal education. I think universal health care (at least at basic levels) should also be considered externalities needing government regulation. There are huge risks of overgrazing the commons without some government regulations and price controls.

One major problem is where subsets, often very small subsets, of people desperately need some essentials that cannot be produced at prices they can afford to pay. For example, we're currently having this problem with certain life-saving cancer drugs that are enormously expensive to produce in the often small quantities desperately needed by the few patients who will die without them. On occasion very tough choices must be made regarding subsidized pricing. Should we raise taxes by a billion dollars per year to provide 25,000 children with a life saving drug? Should we raise taxes by a billion dollars per year to provide 10 children with a life saving drug? There are obviously tough decisions to be made for some externalities.

The American Dream ---
http://www.cs.trinity.edu/~rjensen/temp/SunsetHillHouse/SunsetHillHouse.htm

June 26, 2012 reply from Richard Sansing

Folk Economics ---
http://www.jstor.org/discover/10.2307/1061637?uid=3739712&uid=2&uid=4&uid=3739256&sid=56278089403

Definition of New Hampshire --- A state where residents from Canada, Vermontax, taxachusetts, and Maine come to shop
Canadians come for lower prices on liquor, cigarettes, beer, and some big ticket items like air a new set of tires. I think there are limits to how much Canadians are allowed to bring back to Canada, and their cars are subject to searches at the border. However, unless narcotics are suspected, I doubt that inspectors look under seats and at all five tires.

U.S. residents can cross back from New Hampshire with virtually zero risk of car inspections. Hotels commonly locates near a Wal-Mart for shoppers that want to spend the night and shop for two or more days.

From The Wall Street Journal Accounting Weekly Review on June 18m 2012

Canadians Crowd U.S. Airports. Why? Taxes
by: Jack Nicas
Jun 08, 2012
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com 
 

TOPICS: Foreign Currency Exchange Rates, sales tax, Tax Policy, Taxation

SUMMARY: 'Canadians have discovered a cheaper way to fly to the United States: drive there first." The taxes imposed on airline tickets and the fees charged by Canadian airports to fund major overhauls and expansions-items funded by the federal government in the U.S.-lead to much higher prices in Canada than in the U.S. The result has been a surge in border airline traffic that is mostly due to Canadian passenger travel to and from other U.S. locations "while overall air traffic in the U.S. has fluctuated over the past decade."

CLASSROOM APPLICATION: The article can be used to describe the economic and behavioral effects of tax policy. It also mentions the impact of foreign exchange rates between the U.S. and Canadian dollars.

QUESTIONS: 
1. (Introductory) Summarize the conclusions in the recent Canadian Senate Committee report on the economic effects of Canadians migrating to U.S. airports to then fly elsewhere in the U.S.

2. (Introductory) What are the different governmental policies affecting the difference in taxation of U.S. and Canadian airport operations?

3. (Advanced) According to the online video and the table entitled "Stacking Up", which shows one airfare example, what two factors increase the price of Canadian airline tickets relative to U.S. ticket prices?

4. (Introductory) How have smaller airlines in smaller airports along the U.S. border taken advantage of business opportunities from these pricing differences?

5. (Advanced) Why does the author note that "the Canadian dollar has also remained largely on par with the U.S. dollar over the past two years..." What effect does that exchange rate have on the issues in the article?
 

Reviewed By: Judy Beckman, University of Rhode Island

"Canadians Crowd U.S. Airports. Why? Taxes," by: Jack Nicas, The Wall Street Journal, June 8, 2012 ---
http://professional.wsj.com/article/SB10001424052702303506404577448523616941712.html?mod=djem_jiewr_AC_domainid&mg=reno64-wsj

Canadians have discovered a cheaper way to fly to the United States: Drive there first.

Rising flight taxes and a strengthening Canadian dollar are pushing Canadians to begin their U.S.-bound trips on U.S. soil. Now airlines are rushing to meet the demand, adding service at small outposts along the border.

Discount carrier Allegiant Travel Co. ALGT +1.54% first stumbled onto the strategy in 2004 when it began service from Bellingham, Wash., a city of 81,000 an hour south of Vancouver. The carrier quickly found that more than half of its passengers were driving there from Canada.

Since then, Allegiant has unlocked a new customer base by filling planes with Canadians at a dozen lower-cost airports strung along the Canadian border.

For the border airports, the Canadian passengers have meant new life. At the three where Canadians make up more than 60% of the passengers—Bellingham, Niagara Falls, N.Y., and Plattsburgh, N.Y.—departing passengers have more than tripled to a total of 750,000 since 2007, and major expansions are planned or under way.

In Plattsburgh, just 60 miles south of Montreal, city officials in 2007 turned the former local Air Force base into an airport and nicknamed it "l'aéroport américain de Montréal." The airport's website and all of its signs are bilingual, and employees are offered French classes.

"We knew it was going to be successful," said Michele Powers of the area chamber of commerce, "but we had no idea it was going to grow this quickly." Passenger traffic has tripled since 2008, and officials are now planning to double the size of the terminal just five years after its opening.

Taxes and fees on a flight from Canada to U.S. cities can be four times higher, or nearly $100 more each way, than on flights to the same destinations from U.S. airports located just miles across the border. Canadian airlines say that gap has made it nearly impossible to compete.

The tax-and-fee gap between the two countries is the result of differing governing philosophies.

Canada views air travel as best paid for by fliers themselves, requiring them to fund airports' capital projects, said Daniel-Robert Gooch, president of the Canadian Airports Council.

That strategy has made Canada home to some of the best aviation infrastructure in the world without burdening Canadian taxpayers as a whole, he said.

The U.S., however, subsidizes many airports, especially in rural areas, betting they can drive economic activity.

Canadian airports and airlines, meanwhile, are trying to plug the passenger leak. They recently commissioned studies on the exodus to lobby the Canadian government to lower taxes on flying.

They found that U.S. airports near the border handled roughly 4.8 million Canadians departing or arriving last year—15% more than 2010, when it was first tracked. That is enough passengers to fill 64 Boeing Co. 747s per day, or more traffic than Ottawa International Airport, Canada's sixth-largest airport.

"Everyone in Quebec is talking about how airline tickets are (less expensive) here" in the U.S., said Caroline Gallant. The Canadian woman made the 2½ hour drive to the airport in Burlington, Vt. because the $400 round-trip flight to Chicago was half the fare from Montreal, which is 20 minutes from her home.

Friends told her about the Burlington, Vt. airport a year ago, and she has flown from it three times since. "I know it isn't good for our airports, but they should decrease the tax, what can I say?"

On Tuesday, a Canadian Senate committee released a study on the migration, urging the government to stop charging local airport-operating authorities rent for airport land, and to lower taxes on flying, such as a fee to use the country's navigation system that can run as high as 20 Canadian dollars (US$19.50).

"Our position is blown out of the water by all the taxes and fees," said Gregg Saretsky, chief executive of WestJet Airlines Ltd., WJA +1.78% Canada's largest discount carrier. If every Canadian who drove to the U.S. for a flight last year instead flew from Canada, Mr. Saretsky said WestJet's $149 million net profit would have increased by roughly half.

"But this isn't just a question for the airlines; it is a question for the whole Canadian economy."

Canadian airport officials estimate the preflight migration costs the country nearly 9,000 jobs and $1.1 billion in gross domestic product a year. They also say there are also countless Americans who fly to U.S. border airports and then drive to Canada to save on fares.

On Wednesday, instead of flying directly to Montreal to visit his parents, Jean-Francois Brossoit and his family flew from their home in Indianapolis to Burlington, and then rented a car and drove to Canada, saving them hundreds of dollars.

In the past two years, Canada and the U.S. have raised taxes by about $10 on flights south across the border.

But more increases have come from individual Canadian airports which, unlike those in the U.S., rarely receive government funding and must rely on passenger fees for capital projects. In Calgary, for example, one fee on fliers is increasing to $30 from $20 to pay for a new $1 billion runway.

In the U.S., however, the federal government is paying for a new runway at the airport in Niagara Falls, N.Y., where workers say they count, on average, eight Canadian license plates out of every 10 cars in the parking lot.

Continued in article

The PCAOB is Not Going to Give Up Until Audit Firm Rotation ---
Resistance is Beginning to Look Futile in Spite of Overwhelming Opposition

"PCAOB invites additional comments on audit firm rotation," by Ken Tysiac, Journal of Accountancy, June 26, 2012 ---
http://journalofaccountancy.com/News/20125956.htm

The PCAOB is soliciting further public comment on its concept release on auditor independence and mandatory audit firm rotation in anticipation of a public meeting on the issue Thursday in San Francisco.

The comment period for the concept release was reopened Monday and will be extended through July 28. The release sought comment on how to enhance auditor independence, objectivity, and professional skepticism, and on mandatory audit firm rotation. Comments can be mailed to the PCAOB or emailed to comments@pcaobus.org.

The PCAOB has already received more than 650 comment letters on the concept release, which was originally issued on Aug. 16, 2011. The AICPA sent a letter that supported the PCAOB’s overall goal of enhancing auditor independence, objectivity, and professional skepticism, but it urged the PCAOB to refrain from pursuing mandatory firm rotation because it “carries significant costs and possible unintended consequences that have the potential to hinder audit quality.”

Panelists at the public meeting in San Francisco will include academics, investor advocates, audit committee chairmen, audit firm executives, and former regulators who are primarily based on the West Coast or in Asia. Former SEC Chairman Harold Williams and former SEC Chief Accountant Conrad Hewitt are among the former regulators on the panel. The meeting will be available via webcast at the PCAOB website.

The PCAOB held a similar meeting March 21–22 in Washington, where some panelists offered alternatives to audit firm rotation that could improve auditor independence and objectivity.

 

Jensen Comment
Auditors for large CPA firms should think about ordering motor homes and customized buses for their families to live in after they manage to sell their homes.
It might be better for auditors to look into divorces from spouses.

Teaching Case on PCAOB Proposal to Rotate Auditing Firms

From The Wall Street Journal Accounting Weekly Review on August 19, 2011

Curbs on Auditor Terms Explored
by: Michael Rapoport
Aug 17, 2011
Click here to view the full article on WSJ.com
 

TOPICS: Audit Committee, Audit Firms, Audit Quality, Auditing, Auditing Services, Auditor Changes, Auditor Independence, Public Accounting, Public Accounting Firms

SUMMARY: "The [Public Company Accounting Oversight Board (PCAOB)] voted Tuesday to explore whether companies should have to change their outside auditors every several years, with the aim of improving audit quality and auditors' independence from their clients."

CLASSROOM APPLICATION: The article is useful in an auditing class to introduce the process of engaging auditors, auditor rotation, professional skepticism, and the PCAOB.

QUESTIONS: 
1. (Introductory) What is the Public Company Accounting Oversight Board (PCAOB)? What is this entity proposing with regard to the engagement of CPAs performing audits of financial statements?

2. (Advanced) Who engages a certified public accountant to provide an audit opinion on annual financial statements?

3. (Advanced) Define the term "professional skepticism" in performing an audit. According to the article, what evidence exists that auditors may have difficulty maintaining professional skepticism on audit engagements?

4. (Advanced) What are the negative points related to the PCAOB proposal? How could those problems lead to difficulty in accomplishing the goals of an audit just as a lack of professional skepticism might do?
 

Reviewed By: Judy Beckman, University of Rhode Island
 

"Curbs on Auditor Terms Explored," by: Michael Rapoport, The Wall Street Journal, August 17, 2011 ---
http://professional.wsj.com/article/SB10001424053111903480904576512351445912480.html?mod=djem_jiewr_AC_domainid

The U.S. government's auditing regulator voted Tuesday to explore whether companies should have to change their outside auditors every several years, with the aim of improving audit quality and auditors' independence from their clients.

The move by the Public Company Accounting Oversight Board is the first step toward requiring auditor "term limits" that could break up client-auditor relationships that have lasted decades or even more than a century in some cases.

Supporters say the move would help alleviate coziness between audit firms and clients that could lead an auditor to be not as skeptical as it should be in questioning a company's books. Critics say it would increase costs to companies as a new auditor gets up to speed and would deprive companies of a longstanding auditor's institutional knowledge.

Investors "would be better positioned and the capital markets would be better served if we could increase the skepticism of auditors," said Joseph Carcello, a University of Tennessee professor who serves on two advisory boards that counsel the auditing watchdog. "This is one proposal that may get us there."

The consideration of mandatory audit-firm rotation is still in its early stages. The board is accepting public comments on rotation, and soliciting input on other audit-independence ideas, until Dec. 14. It plans to hold a public discussion next March on the possibility of rotation. Any move to require rotation would be subject to approval by the Securities and Exchange Commission.

Board Chairman James Doty said it is important to explore audit-firm rotation as a move that might help counter the pressures, incentives and mindset that might lead a longstanding auditor to go easy on a client.

"For example, when we see auditors marketing themselves to potential clients as 'a partner in supporting and helping' the client 'achieve its goals,' it's hard not to question whether their mindset might have contributed to some of these audit failures," Mr. Doty said at the board's meeting Tuesday.

Michael Gallagher, a managing partner at PricewaterhouseCoopers LLP, said in a statement that PwC wants to discuss how to improve audit quality, but "we are not supportive of mandatory audit-firm rotation." The firm believes the move could have "negative consequences"—for example, he said, it limits the discretion of a company's audit committee in choosing the auditor it believes is best suited to that company's needs.

Mandatory rotation or any other new requirements should "meet the objective of improving audit quality," and making sure any benefits of new rules are worth the costs "should be central to the project," said Cindy Fornelli, executive director of the Center for Audit Quality, an accounting-industry group.

Audit-firm rotation has been proposed before, notably in the discussions after the Enron Corp. and WorldCom Inc. accounting scandals that led to passage of the Sarbanes-Oxley corporate-overhaul law in 2002. In that case, Congress ultimately said the General Accounting Office—as the Government Accountability Office was known at the time—should study the issue, and the GAO, amid opposition from accounting firms and their clients, said rotation "may not be the most efficient way" to improve audit quality and auditor independence.

But the GAO also said regulators could consider further auditor-independence steps after they had had time to evaluate the effectiveness of Sarbanes-Oxley's overhauls. Members of the auditing oversight board said the timing is appropriate now, since the board has inspected accounting firms for several years and uncovered hundreds of audit failures, indicating auditor independence may still be a problem.

Continued in article

Jensen Comment
How some AECM actives vote, to date, on proposals to have mandatory rotation of audit firms of public company clients as long as the rotations are not too often (nothing less than 5-7 years between required rotations). Note that this is rotation between firms and not just the present rules for rotating auditors within one auditing firm assigned to a particular client.

Tom Selling (Yes)


Bob Jensen (No)

Doty's initiative probably has epsilon chance of eventually happening in the near future. It ain't going to happen until more Andersen type audits happen that once again threaten the very foundation of securities markets --- when investors commence abandoning the securities markets in droves because of distrust of audited financial statements.


Personally, I think there are better ways around the auditor independence issue than rotating audits between Big Four firms. Firstly, there are many huge international clients such that fixed costs of taking on a new huge client are enormous. Deloitte found this out when it had to bring over 600 new auditors to Washington DC when KPMG was fired from the audit of Fannie Mae and Deloitte took on the responsibility.


Secondly the cost of dismantling after the loss of a huge client are enormous, especially in a local office that's responsible for most of the audit of a large client. Did KPMG have to ship over 600 auditors out of Washington DC when it was fired from the Fannie Mae audit?


Thirdly, if there are only four firms that can really take on the largest clients in the world, the advantages of rotation are minimal, and "random rotation" is a bad joke. In this case I like Jim's carousel metaphor.
 

Jim Peterson (No) ---
http://www.jamesrpeterson.com/home/2011/08/mandatory-auditor-rotation-the-pcaob-sails-off-th-charts.html


Francine Mckenna (No) ---
http://retheauditors.com/2011/08/15/dear-pcaob-my-response-to-your-request-for-comments/

Bob,
You make excellent points about firm specialization (Jim P. did too from a country perspective) and the lack of true geographic mobility of staff even within the United States. There's the licensing issues and local taxes to deal with too. If an auditor works in another state they have to be licensed and pay local income taxes and head taxes like in NYC, Ohio, some cities, etc. It's a nightmare. They'd rather layoff staff if they lose a big client in NYC as Deloitte did during crisis (lost Bear Stearns and Merrill Lynch) and hire new cheaper grads in midwest or west for those new clients. Practices are run locally, rewards are dished out on local office results primarily, and partners protect their teams and won't pay another partner for their staff especially if they are higher paid and require travel.

Francine

Francine has a recent summary of her reactions to various PCAOB proposals and to some recent court decisions involving audit firms as defendants ---
http://retheauditors.com/2011/08/15/dear-pcaob-my-response-to-your-request-for-comments/

As I recall virtually all commentators on the AECM have been opposed to having the public sector (read that government) takeover private sector auditing. One exception has been David Albrecht who said that he favors government auditing but he did not elaborate on why the government would do a better job in the best interests of investors.
 

Bob Jensen's threads on audit firm rotation are at
http://www.trinity.edu/rjensen/Fraud001c.htm#Rotation

The Saga of Auditor Professionalism and Independence ---
http://www.trinity.edu/rjensen/Fraud001c.htm

Forwarded by Gene and Joan

Who Knew??????

1. To remove a bandage painlessly, saturate the bandage with vodka. The stuff dissolves adhesive. 

2. To clean the caulking around bathtubs and showers, fill a trigger-spray bottle with vodka, spray the caulking, let set five minutes and wash clean. The alcohol in the vodka kills mold and mildew. 

3. To clean your eyeglasses, simply wipe the lenses with a soft, clean cloth dampened with vodka. The alcohol in the vodka cleans the glass and kills germs. 

4. Prolong the life of razors by filling a cup with vodka and letting your safety razor blade soak in the alcohol after shaving. The vodka disinfects the blade and prevents rusting. 

5. Spray vodka on wine stains, scrub with a brush, and then blot dry. 

6. Using a cotton ball, apply vodka to your face as an astringent to cleanse the skin and tighten pores. 

7. Add a jigger of vodka to a 12-ounce bottle of shampoo. The alcohol cleanses the scalp, removes toxins from hair, and stimulates the growth of healthy hair.Straight vodka gets rid of nits too. 

8. Fill a sixteen-ounce trigger-spray bottle with vodka and spray bees or wasps to kill them. Description: Description: Description: Image removed by sender..

9 Pour one-half cup vodka and one-half cup water into a Ziploc freezer bag and freeze for a slushy, refreshing ice pack for aches, pain or black eyes. 

10 .. Fill a clean, used mayonnaise jar with freshly packed lavender flowers, fill the jar with vodka, seal the lid tightly and set in the sun for three days. Strain liquid through a coffee filter, then apply the tincture to aches and pains. 

11 .. To relieve a fever, use a washcloth to rub vodka on your chest and back as a liniment. 

12 .. To cure foot odour, wash your feet with vodka. 

13 Vodka will disinfect and alleviate a jellyfish sting. 

14 .. Pour vodka over an area affected with poison ivy to remove the urushiol oil from your skin. 

15. Swish a shot of vodka over an aching tooth. Allow your gums to absorb some of the alcohol to numb the pain. 

And silly me! I used to drink the stuff!!

Jensen Comment
Except for drinking, the above uses don't require expensive vodka.
In emergency situations, substitute gin, rum, or bourbon. Never waste the scotch.

Humor June 30, 2012

Bill Murray’s Baseball Hall of Fame Speech (and Hideous Sports Coat) --- Click Here
http://www.openculture.com/2012/06/bill_murrays_baseball_hall_of_fame_speech_and_hideous_sports_coat.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+OpenCulture+%28Open+Culture%29

Don't Push the Red Button --- http://youtube.googleapis.com/v/316AzLYfAzw%26autoplay=1%26rel=0

Still Chasing Birds
Video: Dead cat turned into remote-controlled helicopter ---
http://www.sacbee.com/2012/06/05/4539709/video-dead-cat-turned-into-remote.html#storylink=cpy

Forwarded by Dan Gheorghe Somnea

YES, I'M A SENIOR CITIZEN!

I'm the life of the party..... Even if it lasts until 8 p.m.

I'm very good at opening childproof caps..... With a hammer.

I'm awake many hours before my body allows me to get up.

I'm smiling all the time because I can't hear a thing you're saying.

I'm sure everything I can't find is in a safe secure place, somewhere.

I'm wrinkled, saggy, lumpy, and that's just my left leg.

I'm beginning to realize that aging is not for wimps.

Yes, I'm a SENIOR CITIZEN and I think I am having the time of my life!

Forwarded by Dan Gheorghe Somnea

A Minister decided that a visual demonstration would add emphasis to his Sunday sermon.

Four worms were placed into four separate jars.

The first worm was put into a container of alcohol.

The second worm was put into a container of cigarette smoke.

The third worm was put into a container of chocolate syrup.

The fourth worm was put into a container of good, clean soil.

At the conclusion of the sermon, the Minister reported the following results:

The first worm in alcohol ... Dead.

Description: 48AD8E3665C74675AB435D23C8611614@tcrockettPC The second worm in cigarette smoke .... Dead.

Description: 5F1396A16DDE43588DDA8B69893104AD@tcrockettPC

The third worm in chocolate syrup ... Dead.

Description: 3FA01E62914641ABB1492F03972A42C1@tcrockettPC

The fourth worm in good, clean soil ... Alive .

So the Minister asked the congregation, "What did you learn from this demonstration?"

Maxine was sitting in the back and quickly raised her hand and said,

Description: D8E7258463BE46F4858511443219E2AC@tcrockettPC

"As long as you drink, smoke, and eat chocolate, you won't have worms!"

Forwarded by Dan Gheorghe Somnea

Jewish taxi driver A clearly inebriated woman, stark naked, jumped into a taxi in New York City.

The cab driver, an old Jewish gentleman, opened his eyes wide and stared at the woman. He made no attempt to start the cab. The woman glared back at him and said, "What's wrong with you, honey? Haven't you ever seen a naked woman before?"

The old Jewish driver answered, "Let me tell you sumsing, lady - I vasn't staring at you like you tink; det vould not be proper vair I come from."

The drunk woman giggled and responded, "Well, if you're not staring at my boobs, sweetie, what are you doing then?"

He paused a moment, then told her... "Vell, M'am, I am looking and I am looking, and I am tinking to myself, 'Vair in da hell is dis lady keeping de money to pay for dis ride?!'"

Forwarded by Maureen

How the world works lately...

If a man cuts his finger off while Slicing salami at work, He blames the restaurant.

If you smoke three packs a day For 40 years and die of lung cancer, Your family blames the Tobacco company.

If your neighbor crashes Into a tree while driving home drunk, He blames the bartender.

If your grandchildren are

Brats without manners, You blame television.

If your friend is shot by a Deranged madman, You blame the gun manufacturer..

And if a crazed person breaks Into the cockpit and Tries to kill the pilot at 35,000 feet, And the passengers Kill him instead, The mother of the crazed deceased Blames the airline.

I must have lived too long to Understand the world As it is anymore.

So, if I die while my OLD WRINKLED ASS is parked in front of this computer, I want all of you to Blame Bill Gates

Forwarded by Maureen

THE ITALIAN POKER CLUB

Six retired Italian fellows were playing poker in the condo clubhouse when Guido loses $500 on a single hand, clutches his chest, and drops dead at the table.

Showing respect for their fallen comrade, the other five continue playing, but standing up.

At the end of the game, Giovanni looks around and asks, "So, who's gonna' tell his wife?"

They cut the cards. Pasquale picks the low card and has to carry the news.

They tell him to be discreet, be gentle, don't make a bad situation any worse.

"Discreet? I'm the most discreet person you'll ever meet. Discretion is my middle name. Leave it to me!"

So, Pasquale goes over to the Guido's condo and knocks on the door.

The wife answers through the door and asks what he wants?

Pasquale declares: "Your husband just lost $500 in a poker game and is afraid to come home."

"Tell him to drop dead!" yells the wife.

"I'll go tell him." says Pasquale.

BILL ENGVALL - Here's Your Sign Live (Part.1) --- Click Here
http://www.youtube.com/watch?v=B7eYnDddsic&oref=http%3A%2F%2Fwww.youtube.com%2Fresults%3Fsearch_query%3Dbill%2Bengvall%2Bhere%2527s%2Byour%2Bsign%2Bjokes%26oq%3Dbill%2Bengvall%2Bhere%2527s%2Byour%2Bsign%26aq%3D4%26aqi%3Dg10%26aql%3D%26gs_l%3Dyoutube.1.4.0l10.10229.17057.0.20260.15.14.0.0.0.2.161.1193.9j5.14.0...0.0.2UzxqDN4fPU&has_verified=1

Forwarded by Auntie Bev

Puns by Ted Carmody

Forwarded by Auntie Bev

Two Vermonters are drinking in a bar. One says, "Did you know that elks have sex 10 to 15 times a day?"

"Aw shit..," says his friend, "and I just joined the Knights of Columbus!"

Forwarded by Paula

Forwarded by Eileen

There was a bit of confusion at the store this morning. When I was ready to pay for my groceries, the cashier said, "Strip down, facing me.."

Making a mental note to complain to my congressman about Homeland Security running amok, I did just as she had instructed.

When the hysterical shrieking and alarms finally subsided, I found out that she was referring to my credit card.

I have been asked to shop elsewhere in the future.

They need to make their instructions to us seniors a little clearer!

Forwarded by Auntie Bev

Sometimes, When I Look At My Children, I say To myself, "Lillian, You Should Have Remained A Virgin." -
Lillian Carter (mother of Jimmy Carter)

I had a rose named after me and
I was very flattered. But I was not
pleased to read the description in the Catalogue:
|"No good in a Bed, but fine against a Wall." -
Eleanor Roosevelt

Last week, I stated this woman was the ugliest woman I had ever seen. I have since been visited by her sister and now wish to withdraw that statement.. -
Mark Twain

The secret of a Good Sermon is to have a good beginning and a good ending; and to have the two as close together as possible -
George Burns

Santa Claus has the Right Idea. Visit people only once a year. -
Victor Borge

Be Careful About Reading Health Books. You May Die Of A Misprint. -
Mark Twain

By all means, Marry. If you get a Good Wife, you'll become Happy; if you get a Bad One, you'll become a Philosopher.
Socrates

I was Married by a Judge. I should have asked for a Jury. -
Groucho Marx

My Wife has a slight impediment in her Speech. Every now and then she stops to Breathe. -
Jimmy Durante

I have never hated a man enough to give his Diamonds back. -
Zsa Zsa Gabor

Only Irish Coffee Provides In A Single Glass All Four Essential Food Groups: Alcohol, Caffeine, Sugar And Fat. -
Alex Levine

My Luck is so bad that if I bought a Cemetery, people would stop Dying. -
Rodney Dangerfield

Money can't buy you Happiness .... But it does bring you a More Pleasant Form Of Misery. -
Spike Milligan

Until I was Thirteen, I thought my Name was SHUT UP. -
Joe Namath

I don't Feel Old. I don't feel anything until Noon. Then it's time for my Nap. -
Bob Hope

I never drink Water because of the disgusting things that Fish do in it.. -
W. C. Fields

We could certainly slow the Aging Process Down if it had to work its way through Congress. -
Will Rogers

Don't worry about avoiding Temptation. As you Grow Older, it will Avoid You. -
Winston Churchill

Maybe it's TRUE that Life Begins At Fifty... But everything else starts to WEAR OUT, FALL OUT, or SPREAD OUT. -
Phyllis Diller

By The Time A Man Is Wise Enough To Watch His Step, He's TOO OLD To Go Anywhere. -
Billy Crystal

And The Cardiologist's Diet: If It Tastes Good Spit It Out.

Forwarded by Maureen

Being Green

Checking out at the store, the young cashier suggested to the older woman, that she should bring her own grocery bags because plastic bags weren't good for the environment.

The woman apologized and explained, "We didn't have this green thing back in my earlier days."

The young clerk responded, "That's our problem today. Your generation did not care enough to save our environment for future generations."

She was right -- our generation didn't have the green thing in its day.

Back then, we returned milk bottles, soda bottles and beer bottles to the store. The store sent them back to the plant to be washed and sterilized and refilled, so it could use the same bottles over and over. So they really were recycled.

But we didn't have the green thing back in our day.

Grocery stores bagged our groceries in brown paper bags, that we reused for numerous things, most memorable besides household garbage bags, was the use of brown paper bags as book covers for our schoolbooks. This was to ensure that public property, (the books provided for our use by the school) was not defaced by our scribblings. Then we were able to personalize our books on the brown paper bags.

But too bad we didn't do the green thing back then.

We walked up stairs, because we didn't have an escalator in every store and office building. We walked to the grocery store and didn't climb into a 300-horsepower machine every time we had to go two blocks.

But she was right. We didn't have the green thing in our day.

Back then, we washed the baby's diapers because we didn't have the throwaway kind. We dried clothes on a line, not in an energy-gobbling machine burning up 220 volts -- wind and solar power really did dry our clothes back in our early days. Kids got hand-me-down clothes from their brothers or sisters, not always brand-new clothing.

But that young lady is right; we didn't have the green thing back in our day.

Back then, we had one TV, or radio, in the house -- not a TV in every room. And the TV had a small screen the size of a handkerchief (remember them?), not a screen the size of the state of Montana . In the kitchen, we blended and stirred by hand because we didn't have electric machines to do everything for us. When we packaged a fragile item to send in the mail, we used wadded up old newspapers to cushion it, not Styrofoam or plastic bubble wrap. Back then, we didn't fire up an engine and burn gasoline just to cut the lawn. We used a push mower that ran on human power. We exercised by working so we didn't need to go to a health club to run on treadmills that operate on electricity.

But she's right; we didn't have the green thing back then.

We drank from a fountain when we were thirsty instead of using a cup or a plastic bottle every time we had a drink of water. We refilled writing pens with ink instead of buying a new pen, and we replaced the razor blades in a razor instead of throwing away the whole razor just because the blade got dull.

But we didn't have the green thing back then.

Back then, people took the streetcar or a bus and kids rode their bikes to school or walked instead of turning their moms into a 24-hour taxi service. We had one electrical outlet in a room, not an entire bank of sockets to power a dozen appliances. And we didn't need a computerized gadget to receive a signal beamed from satellites 23,000 miles out in space in order to find the nearest burger joint.

But isn't it sad the current generation laments how wasteful we old folks were just because we didn't have the green thing back then?

Forwarded by Maureen

THE OLDER CROWD
A distraught senior citizen Phoned her doctor's office. 'Is it true,' she wanted to know, 'that the medication You prescribed has to be taken For the rest of my life?' 'Yes, I'm afraid so,' the doctor told her. There was a moment of silence Before the senior lady replied, I'm wondering, then, Just how serious is my condition Because this prescription is marked 'NO REFILLS'.'

***********************
An older gentleman was On the operating table Awaiting surgery And he insisted that his son, A renowned surgeon, Perform the operation. As he was about to get the anesthesia, He asked to speak to his son 'Yes, Dad, what is it? ' 'Don't be nervous, son; Do your best And just remember, If it doesn't go well, If something happens to me, Your mother Is going to come and Live with you and your wife....'
~~~~~~~~~~~~~~~~~

Aging: Eventually you will reach a point When you stop lying about your age And start bragging about it. This is so true. I love to hear them say "you don't look that old."

---------------------------------

The older we get, The fewer things Seem worth waiting in line for.

---------------------------------

Some people Try to turn back their odometers. Not me! I want people to know 'why' I look this way. I've traveled a long way And some of the roads weren't paved. ********************

When you are dissatisfied And would like to go back to youth, Think of Algebra.

~~~~~~~~~~~~~~~~~

You know you are getting old when Everything either dries up or leaks.

-------------------------------

One of the many things No one tells you about aging Is that it is such a nice change From being young.

Ah, being young is beautiful, But being old is comfortable.

First you forget names, Then you forget faces. Then you forget to pull up your zipper. It's worse when You forget to pull it down.

---------------------------------

Two guys one old one young Are pushing their carts around Wal-Mart When they collide. The old guy says to the young guy, 'Sorry about that. I'm looking for my wife, And I guess I wasn't paying attention To where I was going.

The young guy says, 'That's OK, it's a coincidence. I'm looking for my wife, too...' I can't find her and I'm getting a little desperate'

The old guy says, 'Well, Maybe I can help you find her.. What does she look like?' '

The young guy says, 'Well, she is 27 yrs old, tall, With red hair, Blue eyes, is buxom wearing no bra, Long legs, And is wearing short shorts. What does your wife look like?' To which the first old guy says,

'Doesn't matter, --- let's look for yours.'

Forwarded by Paula

A Scotsman and his wife walked past a swanky new restaurant last night...

"Did you smell that food?" she asked... "Incredible!"

Being the 'Kind Hearted Scotsman', he thought,

"What the heck, I'll treat her!"

.... So they walked past it again ...before going to a fish & chips dump.

Forwarded by Paula

It's 2012 and it's the Olympics in London .

A Scotsman, an Englishman and an Irishman want to get in, but they haven't got tickets.

The Scotsman picks up a manhole cover, tucks it under his arm and walks to the gate." McTavish , Scotland ," he says,

"Discus" and in he walks.

The Englishman picks up a length of scaffolding and slings it over his shoulder." Waddington-Smythe , England " he says, "Pole vault" and in he walks.

The Irishman looks around and picks up a roll of barbed wire and tucks it under his arm. “O'Malley, Ireland," he says, "Fencing."

Forwarded by Gene and Joan

Punography I changed my i Pod name to Titanic. It's syncing now.

I tried to catch some Fog. I mist.

When chemists die, they barium.

Jokes about German sausage are the wurst.

A soldier who survived mustard gas and pepper spray is now a seasoned veteran.

I know a guy who's addicted to brake fluid. He says he can stop any time.

How does Moses make his tea? Hebrews it.

I stayed up all night to see where the sun went. Than it dawned on me.

This girl said she recognized me from the vegetarian club, but I'd never met herbivore.

I'm reading a book about anti-gravity. I can't put it down.

I did a theatrical performance about puns. It was a play on words .

They told me I had type A blood, but it was a Type-O.

A dyslexic man walks into a bra.

PMS jokes aren't funny, period.

Why were the Indians here first? They had reservations.

Class trip to the Coca-Cola factory. I hope there's no pop quiz.

Energizer bunny arrested. Charged with battery.

I didn't like my beard at first. Then it grew on me.

How do you make holy water? Boil the hell out of it!

Did you hear about the cross eyed teacher who lost her job because she couldn't control her pupils?

When you get a bladder infection, urine trouble.

What does a clock do when it's hungry? It goes back four seconds.

I wondered why the baseball was getting bigger. Then it hit me!

Broken pencils are pointless.

What do you call a dinosaur with a extensive vocabulary? A thesaurus.

England has no kidney bank, but it does have a Liverpool.

I used to be a banker, but then I lost interest.

I dropped out of communism class because of lousy Marx.

All the toilets in New York's police stations have been stolen. Police have nothing to go on.

I got a job at a bakery because I kneaded dough.

Haunted French pancakes give me the crepes.

Velcro - what a rip off!

Cartoonist found dead in home. Details are sketchy.

Venison for dinner? Oh deer!

Earthquake in Washington obviously government's fault.

I used to think I was indecisive, but now I'm not so sure.

Be kind to your dentist. He has fillings, too.

Forwarded by Auntie Bev

ADULT: 
A person who has stopped growing at both ends and is now growing in the middle. 

BEAUTY PARLOR: 
A place where women curl up and dye. 
 

CHICKENS: 
The only animals you eat before they are born and after they are dead. 

COMMITTEE: 
A body that keeps minutes and wastes hours. 

DUST: 
Mud with the juice squeezed out. 

EGOTIST: 
Someone who is usually me-deep in conversation. 

HANDKERCHIEF: 
Cold Storage. 

INFLATION: 
Cutting money in half without damaging the paper. 

MOSQUITO: 
An insect that makes you like flies better. 

RAISIN: 
A grape with a sunburn. 

SECRET: 
Something you tell to one person at a time. 

SKELETON: 
A bunch of bones with the person scraped off. 

TOOTHACHE: 
The pain that drives you to extraction. 

TOMORROW: 
One of the greatest labor saving devices of today. 

YAWN: 
An honest opinion openly expressed. 


WRINKLES: 
Something other people have, 
Similar to my character lines.

June 22, 2012 email message from the Queen of England

To the citizens of the United States of America from Her Sovereign Majesty Queen Elizabeth II

 
In light of your immediate failure to financially manage yourselves and also in recent years your tendency to elect incompetent Presidents of the USA and therefore not able to govern yourselves, we hereby give notice of the revocation of your independence, effective immediately. (You should look up 'revocation' in the Oxford English Dictionary.)

 
Her Sovereign Majesty Queen Elizabeth II will resume monarchical duties over all states, commonwealths, and territories (except Kansas, which she does not fancy).

 
Your new Prime Minister, David Cameron, will appoint a Governor for America without the need for further elections.

 
Congress and the Senate will be disbanded.  A questionnaire may be circulated sometime next year to determine whether any of you noticed.

 
To aid in the transition to a British Crown dependency, the following rules are introduced with immediate effect:

 
1. The letter 'U' will be reinstated in words such as 'colour,' 'favour,' 'labour' and 'neighbour.'  Likewise, you will learn to spell 'doughnut' without skipping half the letters,  and the suffix '-ize' will be replaced by the suffix '-ise.'  Generally, you will be expected to raise your vocabulary to acceptable levels.  (look up 'vocabulary'). And you will spell "Center" as "Centre".
------------------------
2. Using the same twenty-seven words interspersed with filler noises such as ''like' and 'you know' is an unacceptable and inefficient form of communication. There is no such thing as U.S. English. We will let Microsoft know on your behalf.  The Microsoft spell-checker will be adjusted to take into account the reinstated letter 'u'' and the elimination of  '-ize.'
-------------------
3. July 4th will no longer be celebrated as a holiday.
-----------------
4. You will learn to resolve personal issues without using guns, lawyers, or therapists.  The fact that you need so many lawyers and therapists shows that you're not quite ready to be independent.  Guns should only be used for shooting grouse.  If you can't sort things out without suing someone or speaking to a therapist, then you're not ready to shoot grouse.
----------------------
5. Therefore, you will no longer be allowed to own or carry anything more dangerous than a vegetable peeler although a permit will be required if you wish to carry a vegetable peeler in public.
----------------------
6. All intersections will be replaced with roundabouts, and you will start driving on the left side with immediate effect.  At the same time, you will go metric with immediate effect and without the benefit of conversion tables.   Both roundabouts and metrication will help you understand the British sense of humour.
--------------------
7. The former USA will adopt UK prices on petrol (which you have been calling gasoline) of roughly $10/US gallon.  Get used to it.
-------------------
8. You will learn to make real chips.  Those things you call French fries are not real chips, and those things you insist on calling potato chips are properly called crisps.  Real chips are thick cut, fried in animal fat, and dressed, not with ketchup, but with vinegar.
-------------------
9. The cold, tasteless stuff you insist on calling beer is not actually beer at all.  Henceforth, only proper British Bitter will be referred to as beer, and European brews of  known and accepted provenance will be referred to as Lager.  New Zealand beer is also acceptable, as New Zealand is pound for pound the greatest sporting nation on earth and it can only be due to the beer.  They are also part of the British Commonwealth - see what it did for them.  American brands will be referred to as Near-Frozen Gnat's Urine, so that all can be sold without risk of further confusion.
---------------------
10. Hollywood will be required occasionally to cast English actors as good guys.  Hollywood will also be required to cast English actors to play English characters.  Watching Andie Macdowell attempt English dialogue in Four Weddings and a Funeral was an experience akin to having one's ears removed with a cheese grater.
---------------------
11. You will cease playing American football.  There are only two kinds of proper football; one you call soccer, and rugby (dominated by the New Zealanders).  Those of you brave enough will, in time, be allowed to play rugby (which has some similarities to American football, but does not involve stopping for a rest every twenty seconds or wearing full kevlar body armour like a bunch of nancies).
---------------------
12. Further, you will stop playing baseball.  It is not reasonable to host an event called the World Series for a game which is not played outside of America.  Since only 2.1% of you are aware there is a world beyond your borders, your error is understandable.  You will learn cricket, and we will let you face the Australians (World dominators) first to take the sting out of their deliveries.
--------------------
13. You must tell us who killed JFK.  It's been driving us mad.
-----------------
14. An internal revenue agent (i.e. tax collector) from Her Majesty's Government will be with you shortly to ensure the acquisition of all monies due (backdated to 1776).
---------------
15. Daily Tea Time begins promptly at 4 p.m. with proper cups, with saucers, and never mugs, with high quality biscuits (cookies) and cakes; plus strawberries (with cream)  when in season.

 
God Save the Queen!

And that's the way it was on June 30, 2012 with a little help from my friends.

Bob Jensen's gateway to millions of other blogs and social/professional networks ---
http://www.trinity.edu/rjensen/ListservRoles.htm

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

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

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

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

Bob Jensen's Homepage --- http://www.trinity.edu/rjensen/

Concerns That Academic Accounting Research is Out of Touch With Reality

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/

May 31, 2012

Bob Jensen's New Bookmarks May 31, 2012
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/

Blast from the Past With Hal and Rosie Wyman ---
http://www.cs.trinity.edu/~rjensen/temp/Wyman2011.htm

Bob Jensen's threads on business, finance, and accounting glossaries ---
http://www.trinity.edu/rjensen/Bookbus.htm 
 

Upload Some of Your Best Photographs to for the Walls of the American Accounting Association's Building ---
http://commons.aaahq.org/hives/06a813aecb/summary

The AAA headquarters office recently underwent a complete renovation and now it’s time to decorate the walls. We invite you, our members, to participate in this project by submitting your favorite photos. From all of the submissions, the AAA Staff will select those to be displayed as art on our office walls. We look forward to seeing your entries and are eager to pick our favorites! We encourage you to tap into your creative side and get started by clicking on the "Enter a Photograph" button below. In our view, there is no better way to enhance our surroundings than with a meaningful connection to our members and their unique experiences captured through photos.

A few items to consider:

·         only submit photos taken by you, your family, friends, or students (no professional photographers please)

·         by submitting your photo, you grant permission to the AAA to reproduce, enlarge, crop or publicly display your entry as wall art or other promotional material

·         include a relevant description of the photo such as location, names, year or circumstance so photos can be identified

·         use at least a 3.5 mega pixel digital camera

·         minimum photo size should be 6" x 9" at 300 dpi resolution and uploaded as a JPG, PNG, TIF or BMP file

·         all photos submitted will also be used as part of a display at the 2012 AAA Annual Meeting in Washington, D.C. 

·         submissions will close on June 30, 2012

Jensen Comment
I've uploaded a few of my own photographs to serve as illustrations of what I think the AAA is seeking. I'm looking forward to some of your best photographs under the above criteria.

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

I submitted some pictures to the American Accounting Association's Picture Contest.
Now it's your turn to submit some of the favorite photographs that you've taken in life.
Help Us Decorate Our Office! --- http://commons.aaahq.org/hives/06a813aecb/summary

The AAA headquarters office recently underwent a complete renovation and now it’s time to decorate the walls. We invite you, our members, to participate in this project by submitting your favorite photos. From all of the submissions, the AAA Staff will select those to be displayed as art on our office walls. We look forward to seeing your entries and are eager to pick our favorites! We encourage you to tap into your creative side and get started by clicking on the "Enter a Photograph" button below. In our view, there is no better way to enhance our surroundings than with a meaningful connection to our members and their unique experiences captured through photos.

A few items to consider:

·         only submit photos taken by you, your family, friends, or students (no professional photographers please)

·         by submitting your photo, you grant permission to the AAA to reproduce, enlarge, crop or publicly display your entry as wall art or other promotional material

·         include a relevant description of the photo such as location, names, year or circumstance so photos can be identified using a small placard similar to those used in art galleries

·         use at least a 3.5 mega pixel digital camera

·         minimum photo size should be 6" x 9" at 300 dpi resolution and uploaded as a JPG, PNG, TIF or BMP file

·         all photos submitted will also be used as part of a display at the 2012 AAA Annual Meeting in Washington, D.C. 

·         submissions will close on June 30, 2012

Note that I initially had text on my submission pictures. Judy later asked me to submit the pictures once again without text.

Put your favorite pictures on your computer and then click on the "Enter a Photograph" button at
http://commons.aaahq.org/hives/06a813aecb/summary

You can view all of Bob Jensen's submissions here ---
 http://www.cs.trinity.edu/~rjensen/temp/00AAAPhotos/

The Cult of Statistical Significance: How Standard Error Costs Us Jobs, Justice, and Lives ---
http://www.cs.trinity.edu/~rjensen/temp/DeirdreMcCloskey/StatisticalSignificance01.htm

How Accountics Scientists Should Change: 
"Frankly, Scarlett, after I get a hit for my resume in The Accounting Review I just don't give a damn"
http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm
One more mission in what's left of my life will be to try to change this
http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm 

Accountics is the mathematical science of values.
Charles Sprague [1887] as quoted by McMillan [1998, p. 1]
http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm#_msocom_1

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

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

 "Frankly, Scarlett, after I get a hit for my resume in The Accounting Review I just don't give a damn"
http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm

I yust learnt to say yam and dey started calling it yelly
Ole

The SEC's Revamped Website --- http://sec.gov/

The Closing Paragraph of Joel Demski's 1973 TAR Paper

"The General Impossibility of Normative Accounting Standards,"
by Joel Demski,
The Accounting Review, Vol. 48, No. 4, Oct., 1973, pp. 718-723

Jensen Comment
The closing paragraph of Joel's paper remains a mystery to me over nearly four decades. This landmark paper in general is opposed to using normative research and reasoning in the setting of accounting standards. Yet the final paragraph is among the strongest paragraphs I've ever read in favor of using normativism in judging whether standards work or do not work..

Knowing Joel the way I've known him over nearly five decades, I'm not certain to this day whether the last paragraph is deadly serious or intended as a joke. Joel could by cynical in a very humorous way. I suspect that in this particular instance he was being serious and uncharacteristically realistic.

On the premise that there is no such thing a perfect constitution, a perfect set of statutes, a perfect set of commandments, or a perfect set of accounting standards, the last paragraph in Joel's paper applies to all of these imperfect proclamations that inevitably need reworking over time and changing circumstances.

We know these imperfect proclamations don't always work and do not produce the desired result in every instance. For example, in the case of an accounting standard, the standard cannot be expected to work for countless future variations in contracting, including those many variations that lawyers and accountants cleverly devise to circumvent the standard.

Maybe it's my own inadequate reasoning, but it seems to me that more often than not the test of when these proclamations "work" versus when they "do not work" is a normative test. The test outcome should be judged in much the same way as we judge right from wrong in a court of law. For example, the Bankruptcy Examiner for Lehman Bros. found that FAS 140 "did not work" in preventing sales contracts to be booked as sales even though it was 100% certain that each and every sold item would be returned in a few weeks after the books were closed. Lehman Bros. and its auditors discovered a way in which FAS 140 "did not work" for the public good ---
http://www.trinity.edu/rjensen/ecommerce/eitf01.htm#Repo

Joel's mathematical model in this paper is so overly simplified and detached from the real world that it languished in Plato's Cave since it was published and cannot be used to judge what works and what does not work in the much, much more complicated real world.

You can read those last paragraph of Joel Demski's brilliant paper at
http://www.cs.trinity.edu/~rjensen/temp/Demski197301.jpg

Vive La Normativism (as the test of a proclamation over time and changing circumstances)!

The Cult of Statistical Significance:  How Standard Error Costs Us Jobs, Justice, and Lives, by Stephen T. Ziliak and Deirdre N. McCloskey (Ann Arbor:  University of Michigan Press, ISBN-13: 978-472-05007-9, 2007)
http://www.cs.trinity.edu/~rjensen/temp/DeirdreMcCloskey/StatisticalSignificance01.htm

Page 206
Like scientists today in medical and economic and other sizeless sciences, Pearson mistook a large sample size for the definite, substantive significance---evidence s Hayek put it, of "wholes." But it was as Hayek said "just an illusion." Pearson's columns of sparkling asterisks, though quantitative in appearance and as appealing a is the simple truth of the sky, signified nothing.

In Accountics Science R² = 0.0004 = (-.02)(-.02) Can Be Deemed a Statistically Significant Linear Relationship ---
http://www.cs.trinity.edu/~rjensen/temp/DeirdreMcCloskey/StatisticalSignificance01.htm

When Research Gets it Wrong
"Something Does Not Add Up,"  by Joan O'Connell Hamilton, Stanford Magazine, May/June 2012 ---
http://alumni.stanford.edu/get/page/magazine/article/?article_id=53345 

Too much medicine relies on fatally flawed research. Epidemiologist John P.A. Ioannidis leads the charge to ensure health care you can count on.

Last June, Stanford orthopedic surgeon Eugene Carragee and his editorial team at the Spine Journal announced they had examined data that Medtronic Inc. presented a decade ago to get approval for the spinal bone graft product sold as Infuse.

Not only did the team find that evidence for Infuse's benefits over existing alternatives for most patients was questionable; they also discovered in a broad array of published research that risks of complications (including cancer, male sterility and other serious side effects) appeared to be 10 to 50 times higher than 13 industry-sponsored studies had shown. And they learned that authors of the early studies that found no complications had been paid between $1 million and $23 million annually by the company for consulting, royalties and other compensation. Carragee, MD '82, estimates Medtronic has sold several billion dollars' worth of Infuse for uses both approved and "off label." Medtronic issued a statement saying it believed the product was safe for approved use and gave a $2.5 million grant to Yale University researchers to review the data. Their analysis is expected this year.

Continued in article

Question
In a 2010 AAA Plenary Session, what did Harvard's Bob Kaplan accuse accountics scientists of getting wrong?

Answer
What accountics scientists got wrong, according to Bob, is limiting the scope of their research to accountics epidemiology and not enough focus on the clinical side of accountancy.

Members of the AAA who have access to the AAA Commons can watch Bob's video at
Note that to watch the entire Kaplan video ---
http://commons.aaahq.org/hives/531d5280c3/posts?postTypeName=session+video
I think the video is only available to AAA members.

"Accounting Scholarship that Advances Professional Knowledge and Practice," AAA Presidential Scholar Address by Robert S. Kaplan, The Accounting Review, March 2011, pp. 372-373 (emphasis added)

I am less pessimistic than Schön about whether rigorous research can inform professional practice (witness the important practical significance of the Ohlson accounting-based valuation model and the Black-Merton-Scholes options pricing model), but I concur with the general point that academic scholars spend too much time at the top of Roethlisberger’s knowledge tree and too little time performing systematic observation, description, and classification, which are at the foundation of knowledge creation. Henderson
1970, 67–68 echoes the benefits from a more balanced approach based on the experience of medical professionals:

both theory and practice are necessary conditions of understanding, and the method of Hippocrates is the only method that has ever succeeded widely and generally. The first element of that method is hard, persistent, intelligent, responsible, unremitting labor in the sick room, not in the library … The second element of that method is accurate observation of things and events, selection, guided by judgment born of familiarity and experience, of the salient and the recurrent phenomena, and their classification and methodical exploitation. The third element of that method is the judicious construction of a theory … and the use thereof … [T]he physician must have, first, intimate, habitual, intuitive familiarity with things, secondly, systematic knowledge of things, and thirdly an effective way of thinking about things.

 More recently, other observers of business school research have expressed concerns about the gap that has opened up in the past four decades between academic scholarship and professional practice.

Examples include: Historical role of business schools and their faculty is as evaluators of, but not creators or originators of, business practice. (Pfeffer 2007, 1335) Our journals are replete with an examination of issues that no manager would or should ever care about, while concerns that are important to practitioners are being ignored. (Miller et al. 2009, 273)

In summary, while much has been accomplished during the past four decades through the application of rigorous social science research methods to accounting issues, much has also been overlooked. As I will illustrate later in these remarks, we have missed big opportunities to both learn from innovative practice and to apply innovations from other disciplines to important accounting issues. By focusing on these opportunities, you will have the biggest potential for a highly successful and rewarding career.

Integrating Practice and Theory: The Experience of Other Professional Schools
Other professional schools, particularly medicine, do not disconnect scholarly activity from practice. Many scholars in medical and public health schools do perform large-scale statistical studies similar to those done by accounting scholars. They estimate reduced-form statistical models on cross-sectional and longitudinal data sets to discover correlations between behavior, nutrition, and health or sickness. Consider, for example, statistical research on the effects of smoking or obesity on health, and of the correlations between automobile accidents and drivers who have consumed significant quantities of alcoholic beverages. Such large-scale statistical studies are at the heart of the discipline of epidemiology.

Some scholars in public health schools also intervene in practice by conducting large-scale field experiments on real people in their natural habitats to assess the efficacy of new health and safety practices, such as the use of designated drivers to reduce alcohol-influenced accidents. Few academic accounting scholars, in contrast, conduct field experiments on real professionals working in their actual jobs (Hunton and Gold [2010] is an exception). The large-scale statistical studies and field experiments about health and sickness are invaluable, but, unlike in accounting scholarship, they represent only one component in the research repertoire of faculty employed in professional schools of medicine and health sciences.

Many faculty in medical schools (and also in schools of engineering and science) continually innovate. They develop new treatments, new surgeries, new drugs, new instruments, and new radiological procedures. Consider, for example, the angiogenesis innovation, now commercially represented by Genentech’s Avastin drug, done by Professor Judah Folkman at his laboratories in Boston Children’s Hospital (West et al. 2005). Consider also the dozens of commercial innovations and new companies that flowed from the laboratories of Robert Langer at MIT (Bowen et al. 2005) and George Whiteside at Harvard University (Bowen and Gino 2006). These academic scientists were intimately aware of gaps in practice that they could address and solve by applying contemporary engineering and science. They produced innovations that delivered better solutions in actual clinical practices. Beyond contributing through innovation, medical school faculty often become practice thought-leaders in their field of expertise. If you suffer from a serious, complex illness or injury, you will likely be referred to a physician with an appointment at a leading academic medical school. How often, other than for expert testimony, do leading accounting professors get asked for advice on difficult measurement and valuation issues arising in practice?

One study (Zucker and Darby 1996) found that life-science academics who partner with industry have higher academic productivity than scientists who work only in their laboratories in medical schools and universities. Those engaged in practice innovations work on more important problems and get more rapid feedback on where their ideas work or do not work.

These examples illustrate that some of the best academic faculty in schools of medicine, engineering, and science, attempt to improve practice, enabling their professionals to be more effective and valuable to society. Implications for Accounting Scholarship To my letter writer, just embarking on a career as an academic accounting professor, I hope you can contribute by attempting to become the accounting equivalent of an innovative, worldclass accounting surgeon, inventor, and thought-leader; someone capable of advancing professional practice, not just evaluating it. I do not want you to become a “JAE”
Just Another Epidemiologist . My vision for the potential in your 40
year academic career at a professional school is to develop the knowledge, skills, and capabilities to be at the leading edge of practice. You, as an academic, can be more innovative than a consultant or a skilled practitioner. Unlike them, you can draw upon fundamental advances in your own and related disciplines and can integrate theory and generalizable conceptual frameworks with skilled practice. You can become the accounting practice leader, the “go-to” person, to whom others make referrals for answering a difficult accounting or measurement question arising in practice.

But enough preaching! My teaching is most effective when I illustrate ideas with actual cases, so let us explore several opportunities for academic scholarship that have the potential to make important and innovative contributions to professional practice.

Continued in article

Added Jensen Comment
Of course I'm not the first one to suggest that accountics science referees are inbred. This has been the theme of other AAA presidential scholars (especially Anthony Hopwood), Paul Williams, Steve Zeff, Joni Young, and many, many others that accountics scientists have refused to listen to over past decades.

"The Absence of Dissent," by Joni J. Young, Accounting and the Public Interest 9 (1), 2009 --- Click Here

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

We could try to revitalize accountics scientists by expanding the gene pools of inbred referees.

The Cult of Statistical Significance: How Standard Error Costs Us Jobs, Justice, and Lives ---
http://www.cs.trinity.edu/~rjensen/temp/DeirdreMcCloskey/StatisticalSignificance01.htm

“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.

Bob Jensen's threads on what went wrong with accountics research are at
http://www.trinity.edu/rjensen/theory01.htm#WhatWentWrong

Boston University Libraries: Research Guide --- http://www.bu.edu/library/guides/index.html

Ask a Librarian
Cited References: How Do I Find Who Cited an Article or Book?
Citing Your Sources
Classes and Tutorials
Dissertations (Guide for Writers of Theses and Dissertations)
Information Literacy
Locate Full-Text Articles
Open Access
Primary Sources
Reference Services
RefWorks [About]
Research Process

 

Jensen Comment
There are 50 research guides in this resource, from accounting to zoology.
The Accounting and Auditing Link is at --- http://www.bu.edu/library/guides/pml/accounting.html

Business/Economics Research- Pardee Library Research Guides Databases E-Journals Library Catalog Pardee Home

 

General Research- BU Libraries Research Guides Databases E-Journals Library Catalog BU Libraries

Accounting researchers should not forget Jim Martin's great MAAW site ---
http://maaw.info/

The London School of Economics and Political Science: Video and Audio (Invited Speaker Collection) ---
http://www2.lse.ac.uk/newsAndMedia/videoAndAudio/Home.aspx

"The endangered public company:  The rise and fall of a great invention, and why it matters," The Economist, May 19, 2012 ---
http://www.economist.com/node/21555562

AS THIS newspaper went to press, Facebook was about to become a public company. It will be one of the biggest stockmarket flotations ever: the social-networking giant expects investors to value it at $100 billion or so. The news raises several questions, from “Is it worth that much?” to “What will it do next?” But the most intriguing question is what Facebook’s flotation tells us about the state of the public company itself.

At first glance, all is well. The public company was invented in the mid-19th century to provide the giants of the industrial age with capital. That Facebook is joining Microsoft and Google on the stockmarket suggests that public listings are performing the same miracle for the internet age. Not every 19th-century invention has weathered so well.

But look closer and the picture changes (see article). Mark Zuckerberg, Facebook’s young founder, resisted going public for as long as he could, not least because so many heads of listed companies advised him to. He is taking the plunge only because American law requires any firm with more than a certain number of shareholders to publish quarterly accounts just as if it were listed. Like Google before it, Facebook has structured itself more like a private firm than a public one: Mr Zuckerberg will keep most of the voting rights, for example.

The number of public companies has fallen dramatically over the past decade—by 38% in America since 1997 and 48% in Britain. The number of initial public offerings (IPOs) in America has declined from an average of 311 a year in 1980-2000 to 99 a year in 2001-11. Small companies, those with annual sales of less than $50m before their IPOs—have been hardest hit. In 1980-2000 an average of 165 small companies undertook IPOs in America each year. In 2001-09 that number fell to 30. Facebook will probably give the IPO market a temporary boost—several other companies are queuing up to follow its lead—but they will do little to offset the long-term decline.

Companies are like jets; the elite go private

Mr Zuckerberg will be joining a troubled club. The burden of regulation has grown heavier for public companies since the collapse of Enron in 2001. Corporate chiefs complain that the combination of fussy regulators and demanding money managers makes it impossible to focus on long-term growth. Shareholders are also angry. Their interests seldom seem to be properly aligned at public companies with those of the managers, who often waste squillions on empire-building and sumptuous perks. Shareholders are typically too dispersed to monitor the men on the spot. Attempts to solve the problem by giving managers shares have largely failed.

At the same time, alternative corporate forms are flourishing. Once “going public” was every CEO’s dream; now it is perfectly respectable to “go private”, like Burger King, Boots and countless other famous names. State-run enterprises have recovered from the wreck of communism and now include the world’s biggest mobile-phone company (China Mobile), its most successful port operator (Dubai World), its fastest-growing big airline (Emirates) and its 13 biggest oil companies.

No doubt the sluggish public equity markets have played a role in this. But these alternative corporate forms have addressed some of the structural weaknesses that once held them back. Access to capital? Private-equity firms, helped by tax breaks, and venture capitalists both have cash to spare, and there are private markets such as SecondMarket (where $1 billion-worth of shares has changed hands since 2008). Limited liability? Partners need no longer be fully liable, and firms can have as many partners as they want. Professional managers? Family firms employ them by the HBS-load and state-owned ones are no longer just sinecures for the well-connected.

Make capitalism popular again

Does all this matter? The increase in the number of corporate forms is a good thing: a varied ecosystem is more robust. But there are reasons to worry about the decline of an organisation that has spread prosperity for 150 years.

First, public companies have been central to innovation and job creation. One reason why entrepreneurs work so hard, and why venture capitalists place so many risky bets, is because they hope to make a fortune by going public. IPOs provide young firms with cash to hire new hands and disrupt established markets. The alternative is to sell themselves to established firms—hardly a recipe for creative destruction. Imagine if the fledgling Apple and Google had been bought by IBM.

Second, public companies let in daylight. They have to publish quarterly reports, hold shareholder meetings (which have grown acrimonious of late), deal with analysts and generally conduct themselves in an open manner. By contrast, private companies and family firms operate in a fog of secrecy.

Third, public companies give ordinary people a chance to invest directly in capitalism’s most important wealth-creating machines. The 20th century saw shareholding broadened, as state firms were privatised and mutual funds proliferated. But today popular capitalism is in retreat. Fewer IPOs mean fewer chances for ordinary people to put their money into a future Google. The rise of private equity and the spread of private markets are returning power to a club of privileged investors.

All this argues for a change in thinking—especially among the politicians who have heaped regulations onto Western public companies, blithely assuming that businessfolk have no choice but to go public in the long run. Many firms now go (or stay) private to avoid red tape. The result is that ever more business is conducted in the dark, with rich insiders playing a more powerful role.

Public companies built the railroads of the 19th century. They filled the world with cars and televisions and computers. They brought transparency to business life and opportunities to small investors. Because public companies sell shares to the unsophisticated, policymakers are right to regulate them more tightly than other forms of corporate organisation. But not so tightly that entrepreneurs start to dread the prospect of a public listing. The public company has long been the locomotive of capitalism. Governments should not derail it.

 

The Problem in a Nutshell is the Age-Old Problem of Accounting Itself --- Inability to Value Intangibles (including the enormous Facebook audience)
"The Facebook IPO: What Went Wrong?" Knowledge@Wharton, May 23, 2012 ---
http://knowledge.wharton.upenn.edu/article.cfm?articleid=3007

"DOES FACEBOOK STILL DESERVE AN (Our) “A” FOR ITS FINANCIAL REPORTING?" by Anthony H. Catanach and J. Edward Ketz, Grumpy Old Accountants, May 23, 2012 ---
http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/681

"Crony Capitalism for Intellectuals," by Luigi Zingales, Chronicle of Higher Education, May 20, 2012 ---
http://chronicle.com/article/Crony-Capitalism-for/131894/?sid=cr&utm_source=cr&utm_medium=en

Bob Jensen's threads on valuation of intangibles and contingencies ---
http://www.trinity.edu/rjensen/theory01.htm#TheoryDisputes

May 18, 2012 message from Roger Debreceny

Eric Cohen recently posted some interesting items on XBRL GL to the XBRL GL mailing list. 

 

Roger D
 

---------- Forwarded message ----------
From: Eric Cohen <eric.e.cohen@us.pwc.com>
Date: Mon, May 14, 2012 at 1:50 AM
Subject: [INT-GL] XBRL GL in print and in use
To: INT-GL@xbrl.org


I wanted to make sure you were aware of two things:

1. Journal of Accountancy  has XBRL coverage, including XBRL GL, in its June 2012  issue

2. Revenue Administration of the Turkish Republic chooses XBRL GL as its data archival format for e-bookkeeping


1. Journal of Accountancy  has XBRL coverage, including XBRL GL

The Journal of Accountancy is highlighting XBRL in its June 2012 edition (1) and XBRL's Global Ledger Taxonomy Framework (XBRL GL) has played a major role in those highlights.

In the article "The future is now: XBRL emerges as career niche", both the work of the Maryland Association of CPAs (MACPA) and the efforts of Salisbury University in its collaboration with XBRL GL WG Chair Gianluca Garbellotto are described. (2)

The article "MACPA project serves as XBRL case study for private companies, nonprofits" (3)  then drills more deeply into the XBRL GL implementation at the MACPA.

You can read the issue at the links provided, or watch for your traditional hard copy in the mail.

= = =

2. Revenue Administration of the Turkish Republic chooses XBRL GL as its data archival format for e-bookkeeping

I hope to have more news for you soon, but I wanted to point you to the use of XBRL GL as a tax archival format in the country of Turkey (4). We understand that the catalyst was the need for telecommunications companies to maintain their audit trails for a decade - and ten years of paper records is a burden to maintain. In response, an electronic archival format - XBRL GL - has been chosen as the mandatory format for those choosing to go with electronic records. In conjunction with electronic signatures on the part of both the Filer and the Revenue Administration of the Turkish Republic, XBRL GL provides a standard format for the complete audit trail across the audit reporting supply chain across all ERP applications from first transaction to end report.

Representatives of the organization presented on XBRL GL and their plans at the 24th World Continuous Auditing Conference, held at İnönü University  in Malatya, Turkey. (5)

= = =

More about XBRL GL, of course, is available online ... (6)

<eccn />

References:

(1) http://www.journalofaccountancy.com/Issues/2012/Jun/?WBCMODE=PresentationUnpublished

(2) http://www.journalofaccountancy.com/Issues/2012/Jun/20124962.htm?WBCMODE=PresentationUnpublished

(3) http://www.journalofaccountancy.com/Issues/2012/Jun/MACPA-XBRL-project.htm?WBCMODE=PresentationUnpublished

(4) http://www.edefter.gov.tr/web/guest/2

(5) http://24wcars.inonu.edu.tr/en-index.html

(6)
http://www.xbrl.org/GLTaxonomy
http://wwww.xbrl.org/LFiles
http://gl.iphix.net
http://www.palgrave-journals.com/jdg/journal/v6/n3/full/jdg20095a.html

 

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

"The Impact of Academic Accounting Research on Professional Practice: An Analysis by the AAA Research Impact Task Force," by Stephen R. Moehrle, Kirsten L. Anderson, Frances L. Ayres, Cynthia E. Bolt-Lee, Roger S. Debreceny, Michael T. Dugan, Chris E. Hogan, Michael W. Maher, and Elizabeth Plummer, Accounting Horizons, December 2009, pp. 411- 456.

SYNOPSIS:
The accounting academy has been long recognized as the premier developer of entry-level talent for the accounting profession and the major provider of executive education via master’s-level curricula and customized executive education courses. However, the impact that the academy’s collective ideas have had on the efficiency and effectiveness of practice has been less recognized. In this paper, we summarize key contributions of academic accounting research to practice in financial accounting, auditing, tax, regulation, managerial accounting, and information systems. Our goal is to increase awareness of the effects of academic accounting research. We believe that if this impact is more fully recognized, the practitioner community will be even more willing to invest in academe and help universities address the escalating costs of training and retaining doctoral-trained research faculty. Furthermore, we believe that this knowledge will attract talented scholars into the profession. To this end, we encourage our colleagues to refer liberally to research successes such as those cited in this paper in their classes, in their textbooks, and in their presentations to nonacademic audiences.

Jensen Comment
This paper received the AAA's 2010 Accounting Horizon's best paper award. However, I don't find a whole lot of recognition of work in practitioner journals. My general impression is one of disappointment. Some of my comments are as follows:

Unsubstantiated Claims About the Importance of Accountics Event Studies on Practitioners
The many citations of accounting event studies are more like a listing of "should-have-been important to practitioners" rather than demonstrations that these citations were "actually of great importance to practitioners." For example, most practitioners for over 100 years have known that earnings numbers and derived ratios like P/E ratios impact investment portfolio decisions and acquisition-merger decisions. The findings of accountics researchers in these areas simply proved the obvious to practitioners if they took the time and trouble to understand the complicated mathematics of these event studies. My guess is that most practitioners did not delve deeply into these academic studies and perhaps do not pay any attention to complicated studies that prove the obvious in their eyes. In any case, the authors of the above studies did not contact practitioners to test out assumed importance of accountics research in these events studies. In other words, this AAA Task Force did not really show, at least to me, that these events studies had a great impact on practice beyond what might've been used by standard setters to justify positions that they probably would've taken with or without the accountics research findings.

Mention is made about how the FASB and government agencies included accounting professors in some deliberations. This is well and good but the study does not do a whole lot to document if and how these collaborations found accountics research of great practical value.

Practitioner Journal Citations of Accountics Research
The AAA Task Force study above did not examine practitioner journal citations of accountics research journals like TAR, JAR, and JAE. The mentions of practitioner journals refer mostly to accounting professors who published in practitioner journals such as when Kenney and Felix published a descriptive piece in the 1980 Journal of Accountancy or Altman/McGough and Hicks published 1974 pieces in the Journal of Accountancy. Some mentions of practitioner journal citations have to go way back in time such as the mention of the Mautz and Sharaf. piece in the 1961 Journal of Accountancy.

Accountics professors did have some impact of auditing practice, especially in the areas of statistical sampling. The types of sampling used such as stratified sampling were not invented by accounting academics, but auditing professors did make some very practical suggestions on how to use these models in both audit sampling and bad debt estimation.

Communication with Users
There is a very brief and disappointing section in the AAA Task Force report. This section does not report any Task Force direct communications with practitioners. Rather it cites two behavioral studies using real-world subjects (rather than students) and vague mention studies related to SAS No. 58.

Unsubstantiated Claims About the Importance of Mathematical Models on Management Accounting Practice
To the extent that mathematical models may or may not have had a significant impact on managerial accounting is not traced back to accounting literature per se. For example, accounting researchers did not make noteworthy advances of linear programming shadow pricing or inventory decision models originating in the literature of operations research and management science. Accounting researcher advances in these applications are hardly noteworthy in the literature of operations research and management science or in accounting practitioner journal citations.

No mention is made by the AAA Task Force of how the AICPA funded the mathematical information economics study Cost Determination: A Conceptual Approach, and then the AICPA  refused to publish and distanced itself from this study that was eventually picked up by the Iowa State University Press in1976. I've seen no evidence that this research had an impact on practice even though it is widely cited in the accountics literature. The AICPA apparently did not think it would be of interest to practitioners.

The same can be said of regression models used in forecasting. Business firms do make extensive applications of regression and time series models in forecasting, but this usage can be traced back to the economics, finance, and statistics professors who developed these forecasting models. Impacts of accounting professors on forecasting are not very noteworthy in terms of accounting practice.

Non-Accountics Research
The most valid claims of impact of accounting academic research on practice were not accountics research studies. For example, the balanced score card research of Kaplan and colleagues is probably the best cited example of accounting professor research impacting practice, but Bob Kaplan himself is a long-time critic of resistance to publishing his research in TAR, JAR, and JAE.

There are many areas where AIS professors interact closely with practitioners who make use of their AIS professor software and systems contributions, especially in the areas of internal control and systems security. But most of this research is of the non-accountics and even non-mathematical sort.

One disappointment for me in the AIS area is the academic research on XBRL. It seems that most of the noteworthy creative advances in XBRL theory and practice have come from practitioners rather than academics.

Impact of Academic Accountants on Tax Practice
Probably the best section of the AAA Task Force report cites links between academic tax research and tax practice. Much of this was not accountics research, but credit must be given its due when the studies having an impact were accountics studies.

Although many sections of the AAA Task force report disappointed me, the tax sections were not at all disappointing. I only wish the other sections were of the same quality.

For me the AAA Task Force report is a disappointment except where noted above. If we had conducted field research over the past three years that focused on the A,B,C,D, or F grades practitioners would've given to academic accounting research, my guess is that most practitioners would not even know enough about most of this research to even assign a grade. Some of them may have learned about some of this research when they were still taking courses in college, but their interest in this research, in my opinion, headed south immediately after they received their diplomas (unless they returned to college for further academic studies).

One exception might be limited exposure to academic accounting research given by professors who also teach CEP courses such as CEP courses in audit sampling, tax, audit scorecard, ABC costing, and AIS.  I did extensive CEP teaching on the complicated topics of FAS 133 on accounting for derivative financial instruments and hedging activities. However, most of my academic research citations were in the areas of finance and economics since there never has been much noteworthy research on FAS 133 in the accountics literature.

Is there much demand for CEP courses on econometric modeling and capital markets research?

Most practitioners who are really into valuation of business firms are critical of the lack of relevance of Residual Income models and Free Cash Flow models worshipped ad nauseum in the academic accounting research literature.

During the past several decades, many leading B schools have quietly adopted an inappropriate --- and ultimately self-defeating --- model of academic excellence.  Instead of measuring themselves in terms of the competence of their graduates, or by how well their faculties understand important drivers of business performance, they measure themselves almost solely by the rigor of their scientific research. They have adopted a model of science that uses abstract financial and economic analysis, statistical regressions, and laboratory psychology.  Some of the research produced is excellent, but because so little of it is grounded in actual business practices. the focus of graduate business education has become increasingly circumscribed --- and less and less relevant to practitioners ...We are not advocating a return to the days when business schools were glorified trade schools.  In every business, decision making requires amassing and analyzing objective facts, so B schools must continue to teach quantitative skills.  The challenge is to restore balance to the curriculum and the faculty:  We need rigor and relevance.  The dirty little secret at most of today's best business schools is that they chiefly serve the faculty's research interests and career goals, with too little regard for the needs of other stakehollders.
Warren G. Bennis and James O'Toole, "How Business Schools Lost Their Way," Harvard Business Review, May 2005.

Civil War IEDs
Forwarded by Joe Davis

I have been reading some Civil War memoirs and found the quotations below interesting

“On the 8th , as I rode along [from Atlanta to Savannah December 1864], I found the column turned out of the main road, marching through the fields. Close by, in the corner of a fence, was a group of men standing around a handsome young officer, whose foot had been blown to pieces by a torpedo planted in the road. He was waiting for a surgeon to amputate his leg, and told me that he was riding along with the rest of his brigade...when a torpedo trodden on by his horse had exploded, killing the horse and literally blowing off all the flesh from one of his legs. I saw the terrible wound, and made full inquiry into the facts. There had been no resistance at that point, nothing to give warning of danger, and the rebels had planted eight-inch shells in the road, with friction-matches to explode them by being trodden on. This was not war, but murder, and it made me very angry. I immediately ordered a lot of rebel prisoners to be brought from the provost-guard, armed with picks and spades, and made them march in close order along the road, so as to explode their own torpedoes, or to discover and dig them up. They begged hard, but I reiterated the order, and could hardly help laughing at their stepping so gingerly along the road, where it was supposed sunken torpedoes might explode at each step, but they found no other torpedoes till near Fort McAllister.”
William Tecumseh Sherman, Memoirs, vol. 2. pt. 4. Location 320, Kindle edition.

“The enemy, anticipating that I would march by this route [near Richmond] had planted torpedoes along it, and many of these exploded as the column passed over them, killing several horses and wounding a few men....The torpedoes were loaded shells planted on each side of the road, and connected by wires attached to friction-tubes in the shells, that when a horses hoof struck a wire the shell was exploded by the jerk on the improvised lanyard. After the loss of several horses and the wounding of some of the men by these torpedoes, I gave directions to have them removed, if practicable, so about twenty-five of the prisoners were brought up and made to get down of their knees, feel for the wires in the darkness, follow them up and unearth the shells. The prisoners reported the owner of one of the neighboring houses to be the principal person who had engaged in planting these shells, and I therefore directed that some of them be carried and placed in the cellar of his house, arranged to explode if the enemy’s column came that way, while he and his family were brought off as prisoners and held till after daylight.”
Phillip H. Sheridan, Memoirs, vol. 1. Location 3084, Kindle edition.

The New GMAT:  Part 1
"The New GMAT: Questions for a Data-Rich World,: by: Alison Damast, Business Week, May 14, 2012 ---
http://www.businessweek.com/articles/2012-05-14/the-new-gmat-questions-for-a-data-rich-world

Editor’s Note: This is the first in a three-part series on the new GMAT, which makes its official debut on June 5. In this article, we examine the conceptual building blocks for the test’s new Integrated Reasoning section.

On a blustery day in February 2009, a group of nine deans and faculty members from U.S. and European business schools huddled together in a conference room in McLean, Va., at the Graduate Management Admission Council’s headquarters. They were there to discuss what would be some of the most radical changes to the Graduate Management Admission Test (GMAT) in the exam’s nearly 60-year history.

Luis Palencia, then an associate dean at Spain’s IESE Business School, was eager to press his case for the skills he thought today’s MBAs needed to have at their fingertips. Business students must be able to nimbly interpret and play with data in graphs, spreadsheets, and charts, using the information to draw swift but informed conclusions, he told his colleagues.

“The GMAT was not becoming obsolete, but it was failing to identify the skills which might be important to warrant the success of our future candidates,” he said in a phone interview from Barcelona three years later.

By the time the faculty advisory group commenced two days later, they had come up with a set of recommendations that would serve as a framework for what would eventually become the new “Integrated Reasoning” section of the Next Generation GMAT, which has been in beta testing for two years and will be administered to applicants for the first time on June 5.

Until now, the B-school entrance exam, which was administered 258,192 times worldwide in 2011, was made up of verbal, quantitative, and two writing sections. The new section, which replaces one of the writing sections, is the biggest change to the GMAT since the shift to computer-adaptive testing 15 years ago, and one that has been in the works since 2006, when GMAC first decided to revisit the exam and the skills it was testing, says Dave Wilson, president and chief executive officer of GMAC.

“At that time, we got a pretty good handle that the GMAT was working, but we wanted to know if there was anything that we weren’t measuring that would provide real value to the schools,” Wilson says.

It turned out there was a whole slew of new skills business school faculty believed could be added to the exam. The recommendations put forth by Palencia and the rest of the committee that convened in 2009 served as the conceptual building blocks for what a new section might look like. Later that year, GMAC surveyed nearly 740 faculty members around the world, from business professors to admissions officers, who agreed with many of the committee’s findings and suggested that students needed certain proficiencies to succeed in today’s technologically advanced, data-driven workplaces.

For example, they gave “high importance” ratings to skills such as synthesizing data, evaluating data from different sources, and organizing and manipulating it to solve multiple, interrelated problems, according to the Next Generation GMAC Skills Survey report.

Those are all examples of skills that can now be found on the 30-minute Integrated Reasoning section, which GMAC has spent $12 million developing over the past few years, Wilson says. It will have 12 questions and include pie charts, graphs, diagrams, and data tables. The section employs four different types of questions that will allow students to flex their analytical muscles.

Continued in article

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

"B-School Research Briefs," by: Francesca Di Meglio, Business Week, May 11, 2012 ---
http://www.businessweek.com/articles/2012-05-11/b-school-research-briefs

"B-School Culture: A Plea for Change," by Philip Delves, Business Week, May 14, 2012 ---
http://www.businessweek.com/articles/2012-05-14/b-school-culture-a-plea-for-change

A guest post from Philip Delves Broughton, a former Paris bureau chief for Britain’s Daily Telegraph. Broughton graduated from Harvard Business School in 2006 and is the author of The Art of the Sale: Learning From the Masters About the Business of Life (Penguin Press, 2012).

In 2007, Rakesh Khurana, a professor at Harvard Business School, published a sharp critique of American B-schools called From Higher Aims to Hired Hands: The Social Transformation of American Business Schools and the Unfulfilled Promise of Management as a Profession.

He argued that MBA programs were flogging a product to students which did nothing to help them improve the business world once they graduated. They were given tools and equipped with skills but left with a gaping hole in the middle of their education where their morality was supposed to be.

The ruling class of American business, with its obsession with shareholder returns over any broader social good, was a direct reflection of the intellectual and spiritual poverty of business schools. Much of Khurana’s work at HBS is devoted to trying to fix this.

And now we have one of the intellectual lions of Harvard, Clay Christensen, publishing How Will You Measure Your Life?, a gripping personal story with lessons from business mixed in. Christensen’s decision to venture from innovation, the subject that made him famous, into the personal advice genre was provoked in part by seeing what happened to his peer group from Oxford University and Harvard Business School. (He was recently profiled in Bloomberg Businessweek and the New Yorker.)

“Something had gone wrong for some of them along the way: Their personal relationships had begun to deteriorate, even as their professional prospects blossomed,” he writes in the prologue of his new book. When his friends stopped even attending reunions, he sensed that they “felt embarrassed to explain to their friends the contrast in the trajectories of their personal and professional lives.”

Continued in article

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

"Texas A&M Gathers Accountability Data on New Web Site," Chronicle of Higher Education, May 18, 2012 ---
http://chronicle.com/blogs/ticker/texas-am-launches-new-web-site-in-response-to-demand-for-accountability/43387?sid=wc&utm_source=wc&utm_medium=en

Amid calls for more accountability, Texas A&M University has unveiled a website that makes data such as graduation rates, faculty workloads, demographics and student debt easily accessible.

The site — accountability.tamu.edu — is composed of data that already was publicly available, but administrators say the effort is an unprecedented step toward ensuring public trust.

“It is unfortunate that higher education faces new questions about its impact,” said Texas A&M President R. Bowen Loftin in a news release. “We want to do everything in our power to ensure the public trust in all we do.”

Accountability was the subject of a public fight last year between the state’s two public research universities, A&M and UT-Austin, and the Gov. Rick Perry-backed conservative think tank, the Texas Public Policy Foundation.

The group’s “seven breakthrough solutions” were a series of ideas with which the group aimed to address perceived accountability issues. The universities’ regents, all of whom are appointed by Perry, embraced some of the ideas and flirted with others until the schools pushed back following media attention.

One of the most criticized of the ideas was one that reduced a faculty member’s value to a “bottom line” financial figure, represented by a number in either red or black, by subtracting his or her salary and benefits from money brought in through teaching and research.

The document was taken down amid numerous complaints of inaccuracies in the data.

“I’m not opposed to accountability,” said Peter Hugill, a Texas A&M faculty member and state conference president of the American Association of University Professors. “I was opposed to that crazy red and black report.”

The new accountability website has no such measure.

The site provides large amounts of information in a compact format with real-time changes, said Joe Pettibon, associate vice president for academic services, in the news release.

“This is a bold step in transparency that holds the university to the highest standards regarding how we use our resources,” Pettibon said. “However, the site will always be a work in progress as information is added, updated, and improved to address what is happening in higher education and the university.”

 

The accountability site is at
https://accountability.tamu.edu/

Texas A&M University is committed to accountability in its pursuit of excellence. The university expects to be held to the highest standards in its use of resources and in the quality of the educational experience. In fact, this commitment is a part of the fabric of the institution from its founding and is a key component of its mission statement (as approved by the Board of Regents and the Texas Higher Education Coordinating Board), its aspirations found in Vision 2020 (approved by the Board of Regents in 1999), and its current strategic plan, Action 2015: Education First (approved by the Chancellor in December 2010).

An Innovative Reference for a Cost/Managerial Accounting Course
Some wonderful symphony orchestras have suspended operations because of the inability to manage costs

Every symphony in the world incurs an operating deficit
"Financial Leadership Required to Fight Symphony Orchestra ‘Cost Disease’," by Stanford University's Robert J Flanagan, Stanford Graduate School of Business, February 8, 2012 ---
http://www.gsb.stanford.edu/news/headlines/symphony-financial-leadership.html

 What if you sat down in the concert hall one evening to hear Haydn’s Symphony No. 44 in E Minor and found 5 robots scattered among the human musicians? To get multiple audiences in and out of the concert hall faster, the human musicians and robots are playing the composition in double time.

Today’s orchestras have yet to go down this road. However, their traditional ways of doing business, as economist Robert J. Flanagan explains in his new book on symphony orchestra finances, locks them into limited opportunities for productivity growth and ensures that costs keep rising.

 The symphonies’ financial problems are rooted in what has come to be known as the “cost disease,” a term coined in 1966 by two then-Princeton economics professors, William Baumol and William Bowen, in a study of the economics of the performing arts. “The labor requirements for the music are set by the composer. For the most part, you don’t toy around with that,” Flanagan says. Furthermore, it takes 25 minutes to perform a Haydn symphony. Speeding up the playing or substituting a robot or digital device for one of the players doesn’t appear on any music director’s solution list, at least not yet.

U.S. manufacturing companies offset higher labor and materials costs through gains in productivity. They work to ensure that output rises for each person employed. Automakers, for example, have added hundreds of robots to their assembly lines. Productivity gains based on computer technology have also occurred in many white- collar fields, but performing arts groups haven’t found a way to do the same.

Flanagan, the Konosuke Matsushita Professor of International Labor Economics and Policy Analysis, Emeritus, at the Graduate School of Business, has firsthand experience with the economics of playing music. He has played a clarinet and saxophone weekly for years in a 17-piece amateur jazz orchestra. He began investigating the finances of American symphony orchestras in 2006 and published a paper in 2008 that irritated more than a few symphony board members, managers, and musicians’ union officials, because it illuminated the fragile finances of orchestras, and questioned some management practices. In the last 20 years more than a dozen U.S. symphony orchestras declared bankruptcy.

With assistance from data collected by others, Flanagan has analyzed the finances of orchestras in the United States, continental Europe, and Australia, and reported his findings in his book, The Perilous Life of Symphony Orchestras: Artistic Triumphs and Economic Challenges, published by Yale University Press in January 2012.

The financial health of symphony orchestras in the United States continues down a perilous path of an ever-widening gap between operating revenues and expenses, he says, after studying the financial experience of the 63 largest domestic symphony orchestras between the 1987 and 2005 concert seasons. “Even the most artistically accomplished orchestras in the United States relentlessly have trouble balancing their books,” he says.

Flanagan explores changes in operating revenues and expenses, searching for ways to narrow operating deficits. The book covers ticket pricing strategies, marketing activities, the rapid growth of artistic pay, and competition with other performing arts organizations for the time of potential patrons. He examines how tax policies, the economic capacity of a community, and orchestra policies influence the trends and determinants of nonperformance income, such as grants and donations from private and public sources. Because there is no guarantee that nonperformance income will exactly match operating deficits, the result is an uncertain financial future.

Orchestras outside the United States face similar economic challenges even though they benefit from millions of dollars in direct government subsidies. “Every symphony in the world incurs an operating deficit,” Flanagan says, and, if the cost disease cannot be offset, “symphony orchestras will face increasing overall deficits.” For example, performance revenues of U.S. orchestras have declined from 60% of budgets in 1940 to 41% in the 2005-06 season.

Classical music lovers in the United States often complain that U.S. governments should treat symphony orchestras as cultural necessities and support them with larger grants. In other countries grants often cover 50% and more of operating budgets. While direct federal government grants in the U.S. have fallen to what he describes as “a negligible level,” the value of federal government tax expenditures has soared. Those tax expenditures, defined as foregone government tax revenues, because individuals and corporations can deduct their donations from taxable income, now account for 96% of all federal government support to U.S. orchestras. Such tax expenditures are much less common abroad.

Continued in article

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

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

There were 123 Big Four audit deficiencies related to asset impairments and fair-value estimates identified in a sampling by the PCAOB in 2010
"Asset Valuations Trip Up Audits," by Emily Chason, The Wall Street Journal, May 22, 2012 ---
http://blogs.wsj.com/cfo/2012/05/22/asset-valuations-trip-up-audits/?mod=wsjpro_hps_cforeport

That’s the number of audit deficiencies related to asset-valuation problems found among clients of the Big Four accounting firms in 2010.

Market volatility has made it hard for companies and their auditors to value assets based on market prices. They often have had to turn to outside advisers for an estimate. But overreliance on such advice has led to a sharp rise in the number of audit deficiencies cited by regulators, according to a study by business-valuation firm Acuitas Inc.

The Public Company Accounting Oversight Board found 123 audit deficiencies related to fair-value estimates and asset impairments in 2010, making asset valuation the most common audit problem, Acuitas says. The firm studied the audit watchdog’s most recent inspection reports on 250 audits and other assignments of the Big Four audit firms. They are PricewaterhouseCoopers LLP, Deloitte LLP, Ernst & Young LLP and KPMG LLP.

The PCAOB conducts annual inspections of the Big Four and reviews the audits it considers likely to be the most problematic. It flags the work as significantly deficient if it thinks the firm doesn’t have enough evidence to justify the audit; usually the firms are able to correct any problems.

Out of the 234 audit deficiencies cited in the agency’s 2010 inspection reports on the Big Four, it found 92 fair-value deficiencies and 31 deficiencies related to asset impairments.

That compares with 21 fair-value deficiencies and 17 impairment-related deficiencies out of a total of 72 deficiencies in 2009.

“The PCAOB is saying that the auditors in certain situations didn’t provide enough scrutiny in terms of management’s forecasts, or didn’t look closely enough at the assumptions and methodologies that went into some of the modeling used by corporate pricing services,” said Mark Zyla, a managing director at Acuitas.

Bob Jensen's threads on fair value accounting are at
http://www.trinity.edu/rjensen/theory02.htm#FairValue

Market Taking Versus Market Making

Paul Williams wrote:
 "Anyone who has ever executed an estate knows the law is much more coherent on the matter of what is an asset -- what does the deceased possess that can be converted into cash to settle the "legal" (i.e., enforceable in law) claims against the estate."


Jensen Comment
The "estate valuation" analogy over simplifies the real problem of asset identification and valuation. For example, the estate of Steve Jobs most likely was a piece of cake compared to preparing a 10-K for Apple Corporation plus identifying and valuing Apple's intangible assets --- patents, copyrights, reputation, and human resources.


When valuing Apple Corporation shares owned by estate of Steve Jobs as of a given date we need only look up a table in the pages of the WSJ.


When providing accounting information to investors who make the daily market for Apple Corporation shares, the task is much more daunting.


Estate valuation is a "market taking" task. Corporate accounting is a "market making" task. This is where Baruch Lev stumbled when trying to value intangibles. He relied upon share prices to value intangibles when in fact the purpose of financial accounting is to help investors set those transaction prices. Baruch put the cart full of intangibles in front of the horse ---
http://www.trinity.edu/rjensen/theory01.htm#TheoryDisputes
 

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

An Excellent Presentation on the Flaws of Finance, Particularly the Flaws of Financial Theorists

A recent topic on the AECM listserv concerns the limitations of accounting standard setters and researchers when it comes to understanding investors. One point that was not raised in the thread to date is that a lot can be learned about investors from the top financial analysts of the world --- their writings and their conferences.

A Plenary Session Speech at a Chartered Financial Analysts Conference
Video: James Montier’s 2012 Chicago CFA Speech The Flaws of Finance ---
http://cfapodcast.smartpros.com/web/live_events/Annual/Montier/index.html
Note that it takes over 15 minutes before James Montier begins

Major Themes

1. The difference between physics versus finance models is that physicists know the limitations of their models.
    
2. Another difference is that components (e.g., atoms) of a physics model are not trying to game the system.
    
3. The more complicated the model in finance the more the analyst is trying to substitute theory for experience.
    
4. There's a lot wrong with Value at Risk (VaR) models that regulators ignored.
    
5. The assumption of market efficiency among regulators (such as Alan Greenspan) was a huge mistake that led to excessively low interest rates and bad behavior by banks and credit rating agencies.
    
6. Auditors succumbed to self-serving biases of favoring their clients over public investors.
    
7. Banks were making huge gambles on other peoples' money.
    
8. Investors themselves ignored risk such as poisoned CDO risks when they should've known better. I love his analogy of black swans on a turkey farm.
    
9. Why don't we see surprises coming (five excellent reasons given here)?
    
10. The only group of people who view the world realistically are the clinically depressed.
     
11. Model builders should stop substituting elegance for reality.
     
12. All financial theorists should be forced to interact with practitioners.
     
13. Practitioners need to abandon the myth of optimality before the fact.
    Jensen Note
    This also applies to abandoning the myth that we can set optimal accounting standards.
     
14. In the long term fundamentals matter.
     
15. Don't get too bogged down in details at the expense of the big picture.
     
16. Max Plank said science advances one funeral at a time.
     
17. The speaker then entertains questions from the audience (some are very good).

James Montier is a very good speaker from England!

Mr. Montier is a member of GMO’s asset allocation team. Prior to joining GMO in 2009, he was co-head of Global Strategy at Société Générale. Mr. Montier is the author of several books including Behavioural Investing: A Practitioner’s Guide to Applying Behavioural Finance; Value Investing: Tools and Techniques for Intelligent Investment; and The Little Book of Behavioural Investing. Mr. Montier is a visiting fellow at the University of Durham and a fellow of the Royal Society of Arts. He holds a B.A. in Economics from Portsmouth University and an M.Sc. in Economics from Warwick University
http://www.gmo.com/america/about/people/_departments/assetallocation.htm

There's a lot of useful information in this talk for accountics scientists.

"The Radical New Humanities Ph.D.," by Kaustuv Basu, Inside Higher Ed, May 16, 2012 ---
http://www.insidehighered.com/news/2012/05/16/rethinking-humanities-phd

The warning last year from Russell Berman, who at the time was president of the Modern Language Association, was apocalyptic: If doctoral programs in the humanities do not reduce the time taken to graduate, they will become unaffordable and face extinction.

Now, Berman has taken his ideas home. At Stanford University, where he is a professor of comparative literature and directs the German studies program, he and five other professors at the university have produced a paper that calls for a major rethinking at Stanford -- a reduction in the time taken to graduate by Ph.D. candidates in the humanities, and preparing them for careers within and beyond the academy. The professors at Stanford aren't just talking about shaving a year or so off doctoral education, but cutting it down to four or five years -- roughly half the current time for many humanities students.

The Stanford professors aren’t alone in pushing this kind of thinking. The Department of Comparative Literature at Harvard University, for example, is already testing some ideas, and so is the University of Minnesota. The initiatives at all three places, whether proposed or in its infancy, involve changing academic culture and university policies to refashion the humanities Ph.D. The University of Colorado at Boulder recently announced a four-year Ph.D. in German studies, consistent with the principles being discussed at Stanford, although the Colorado effort applies to one small program while the Stanford and Minnesota initiatives are much broader.

The Stanford document proposes a scenario where students decide on a career plan -- academic or nonacademic -- they want to embark on by the end of their second-year of graduate study, file the plan with their department, and then prepare projects and dissertation work that would support that career. Similarly, departments have to help students make realistic career choices at the end of the second year of graduate study, and advise students regularly. “…[T]hey should aim to balance academic training in a particular discipline and field with the provision of broader professional perspectives that may extend beyond the traditional academic setting,” the document said.

This would represent a dramatic shift from the current norm, whereby many humanities grad students say that their entire program is designed for an academic career, and that they only start to consider other options when they are going on the job market -- a bit late to shape their preparation for nonacademic options.

According to the document, one way to speed up time to degree would be to include “four-quarter” support for students instead of unfunded summers, currently the standard for many humanities Ph.D. programs. Gabriella Safran, a professor of Slavic languages and literature at Stanford, who also worked with Berman to create the proposal, said the key might be to anticipate when Ph.D. candidates are getting bogged down and respond to the issue earlier. “A better use of time might be to use the summers more effectively. Right now, I think there are too many unfunded summers when students don’t make progress,” she said.

Berman, who said that the recent document was mostly an effort directed at administrators to “reform degree trajectories," believes that time to degree can be reduced to four or five years. “The study of the humanities need to be accessible and cheap. And we have to become more transparent about our placement records,” he said.

The document said that departments should have suitable plans in terms of curriculum, examination schedule, and dissertation that will help speed up time to degree. “Scholarly fields have widened, and added a lot of expectations,” Berman said.

He emphasized the need to amplify success stories of students who have ventured beyond the academic world. “We should be telling all their stories,” said Berman, who is also chairing a MLA task-force on the future of the doctorate in the languages and literature.

David Damrosch, a professor of comparative literature at Harvard University, said that Ph.D. students and professors in his department have been thinking more carefully about coursework. “Very often, students drift for extended periods,” he said. Frequent meetings with dissertation committee members are helpful, he said. “All this result in fewer incompletes in coursework … and more consistent progress in the dissertations,” said Damrosch.

“In anthropological terms, academia is more of a shame culture than a guilt culture: you may feel some private guilt at letting a chapter go unread for two or three months, but a much stronger force would be the public shame you'd feel at coming unprepared to a meeting with two of your colleagues,” he said. “It’s also ultimately a labor-saving device for the faculty as well as the student, as the dissertation can proceed sooner to completion and with less wasted effort for all concerned….” With frequent meetings, the students doesn’t lose time on “unproductive lines of inquiry” or “tangential suggestions tossed out by a single adviser,” Damrosch said.

A two-hour oral exam, meetings each semester with “dissertation-stage” students and their committee members, and clearer feedback for students are part of the graduate program in the comparative literature department now. “We also introduced a monthly forum for students to share and discuss their own work; and an ambitious series of professional development talks, on everything from article submission to dissertation planning to alternative careers,” Damrosch said.

The University of Minnesota is also taking a fresh look at its Ph.D. programs. Henning Schroeder, vice provost and dean of the graduate school at the university, said that professors and administrators have been discussing how to give the Ph.D. a narrower focus. “How much coursework do students need before they engage in scholarly research?” he asked.

Getting students into a “research mode” earlier helps save time, Schroeder said. “The question is also, what can we do at the administrative level?” he said. The university has promoted discussion on best practices on advising, and also how the “prelim-oral” -- a test students take before writing their dissertations – can delay research. The university now lets students get credit for research work before the oral examination, in an effort to allow for more flexibility in curriculums and to reduce time to degree.

Debra Satz, senior associate dean for the humanities at Stanford and a professor of philosophy, said that too many students end up spending six to eight years in the Ph.D. program. “There is no correlation between taking a longer time to degree and getting a job in an academic humanities department,” she said. And ultimately, she said, how can the length of time taken by a Ph.D. be justified if the person has to reinvent or retool at the end to be employed?

The discussions should not only be about new career paths and the time taken to graduate, but about how to implement change without affecting the quality of the programs, Satz said. “Many ideas have been floated: creating paths for our humanities Ph.D.s to high school teaching, creating paths to the high technology industry, thinking about careers in public history, and so on,” she said.

And while it is too early to see definite results from these institutions, many believe that the timing is right.

Anaïs Saint-Jude, director of the BiblioTech program – which seeks to bridge the gulf between doctoral humanities candidates at Stanford and jobs outside academe, including those in the tech world -- believes that all this is happening because this is a pivotal moment in higher education. “It was kindling that was ready to be ignited…. We started talking about it, and it created such momentum that we were able to create a veritable program,” Saint-Jude said, referring to the BiblioTech program that began in 2011. Part of the program’s vision includes trying to change the mindset of academics and non-academics alike. “It is about garnering the trust of industry leaders, and trying to break apart and think differently,” she said. The program’s annual conference last week included venture capitalists as well as executives from Google and Overstock.com.

Continued in article

Jensen Comment
Suppose Karen Smith enters into a customized PhD program at XXXXX State University with a goal of getting into a history tenure track position in the Academy. Wishing it so just is not going to make it so. When she graduates with her PhD diploma in hand, there will probably be over 100 qualified applicants wherever she applies in North America. The competition is keen.

"Where the Fortune 500 CEOs Went to School:  These schools awarded at least 10 college and graduate degrees to America’s leading executives," by Menachem Wecker, US News, May 14, 2012 ---
http://www.usnews.com/education/best-graduate-schools/top-business-schools/articles/2012/05/14/where-the-fortune-500-ceos-went-to-school

 

Institution	Total degrees	Undergraduate degrees	MBAs	Other graduate degrees	US News undergraduate rank	US News business school rank
Harvard	65	11	40	14	1	1
Stanford	27	11	10	6	5	1
Pennsylvania	24	7	13	4	5	3
Columbia	18	3	4	11	4	8
Michigan	14	6	5	3	28	13
Notre Dame	14	10	1	3	19	25
Virginia	14	4	4	6	25	13
Cornell	13	8	3	2	15	16
Dartmouth	12	9	3	0	11	9
Indiana	11	5	6	0	75	23
Northwestern	11	2	6	3	12	4
Rutgers	11	5	3	3	68	63
MIT	10	3	0	7	5	4

 

Jensen Comment
For years I've preached that students seek prestigious universities for much more than book learning. The top universities provide networking opportunities and alumni relations that probably exceed most anything students learn from the books. Of course, networking experiences are highly variable.

But there also is a well-known problem of correlation versus causation going on here. There may be underlying causal factors such as the attributes of students who gain admission to prestigious schools that a subset of those students may rise to the top irrespective of where they graduate.

If you annually track the backgrounds of CPAs admitted into the Big Four partnerships in the United States you will be surprised the proportion that graduated as accounting majors for Podunk College. Cream rising to the top is a fundamental attribute of molecular chemistry.

But we cannot deny the fact that a degree from a prestigious university is a key that unlocks doors. This is especially the case when it comes to PhD graduates seeking tenure track positions. A Podunk College PhD generally does not stack up well with a doctorate from Harvard, Stanford, and Penn. There are exceptions of course, but these are rare in the Academy.

"Empathy: The Most Valuable Thing They Teach at HBS,"  by James Allworth, Harvard Business School Blog, May 15, 2012 --- Click Here
http://blogs.hbr.org/cs/2012/05/empathy_the_most_valuable_thing_they_t.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date

These probably aren't words that you were expecting to see in the same sentence — Harvard Business School and empathy. But as I reflect back on my time as a student there, I've begun to realize that more than anything else, this is one of the the most valuable things that the school teaches.

It starts on day one. You're put into a "section" with 90 incredibly smart folks, people with whom you quickly become good friends. Then the moment arrives when you step into class, prepared for a case discussion with what you're sure is the right answer — but just before you're able to stick your hand up and get in on the discussion, a good friend — someone who you deeply respect and admire — jumps in to the conversation with an opinion that's exactly the opposite of yours. And it begins to dawn on you...that what they've expressed is right.

It's a humbling moment. It's valuable not just in reminding you that you're not always right (though that's always valuable), but also in teaching you to step out of your own shoes, and to put yourself into those of someone else.

It's a trait that is sorely lacking at the moment. There's a case to be made that the American political system is suffering at present because empathy has been almost entirely exorcised from within its walls. Politicians are being elected on the back of their ability to vilify those with whom they don't agree. These are not people who come to office with questions, or who seek to understand; instead, many are dogmatists, able to see the world through their own eyes. Their interest in conversation runs only one way — many seem capable of only talking at, not with, those with a different point of view on the world. The jettisoning of compromise is a direct result of this state of affairs; why would you give an inch of your position to someone whose perspective you can't even bring yourself to entertain?

The place for me, however, where an appreciation of empathy is most undervalued, is in business. The potential upside for those in business who are able to be empathetic is huge, and is eloquently described in Professor Clay Christensen's jobs-to-be-done theory. Understanding that people don't buy things because of their demographics — nobody buys something because they're a 25-30 year old white male with a college degree — but rather, because they go about living their life and some situation arises in which they need to solve a problem... and so they "hire" a product to do the job. This is a big "ah ha" to many folks when they first hear it; but when you really boil it down, the true power of this is in giving people in business a frame with which to exercise empathy. In fact, both Akio Morita of Sony and Steve Jobs were famous for never commissioning market research — instead, they'd just walk around the world watching what people did. They'd put themselves in the shoes of their customers.

And for those businesses whose executives are incapable of it? Well, they are subject to the ultimate stick — disruption. No better example of this exists than the story of Blockbuster and its competitive tangle with Netflix.

Blockbuster saw the rise of Netflix in the very early 2000s, and chose not to do anything about it. Why? Well, its management couldn't see the world from any perspective other than from the vantage point from which they sat: atop a $6 billion business with 60% margins, tens of thousands of employees and stores all across the country. Blockbuster's management couldn't bring itself to see Netflix's perspective: that while Netflix was only achieving 30% margins, Netflix wasn't comparing its 30% to Blockbuster's 60%. Netflix was comparing it to no profit at all. And Blockbuster's management certainly couldn't see the world from their customers' perspective: that late fees were driving folks up the wall, and that their range of movies eschewed anything that wasn't a new release. While Blockbuster knew it could invest to create a Netflix competitor, that would be an expensive proposition, it might not work, and even if it did, it would probably cannibalize its existing business. With that being their perspective, they saw two choices: creating a disruptive entrant with all the pitfalls of cost, and risk; or just continuing with the existing business. Thinking those were their options, continuing with the existing business looked like a pretty obvious choice.

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